Biden hails offer to cut bank’s ‘junk fees’ as boon to consumers
(Bloomberg) – President Joe Biden has touted a new U.S. push to crack down on overdraft fees that banks charge on checking accounts, as the White House seeks to address voter concerns about skyrocketing costs ahead of November 8 midterm elections.
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The guidelines announced by the Consumer Financial Protection Bureau on Wednesday could be a blow to banks that earned nearly $8.5 billion from the charges last year. The CFPB said some overdraft penalties amounted to “junk fees,” which are often borne by poorer Americans with less money in their checking accounts.
“These measures will immediately save Americans collectively billions of dollars in unfair fees,” Biden said Wednesday at the White House, pointing to an estimate of more than $1 billion a year.
According to the CFPB, nearly three-quarters of overdraft fees are paid by people who are charged the penalty more than 10 times a year and who typically have no more than a few hundred dollars in their account.
The CFPB said on Wednesday that its guidelines focused on recorded overdraft fees even if consumers had enough money in their account at the time of a debit, and “the practice of indiscriminately charging depositor fees to any person who deposits a bouncing cheque”.
“It’s real money in the pockets of American families,” Biden said.
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Greg Baer, director of the Bank Policy Institute, criticized the agency’s action, saying the CFPB relied on “invective-filled guidance” and “threats of enforcement action”, instead of appropriate regulation.
“Banks remain committed to serving their customers by offering the best products at competitive prices, and would welcome a return to a regulatory world where rules are clear and transparent, and applied universally,” Baer said in a statement Wednesday.
Lenders are likely to react proactively to agency guidelines, which warn that the practice of surprise overdraft fees may be considered illegal, said Christopher Willis, a partner at Atlanta-based law firm Troutman Pepper.
“Today’s announcement is a clear signal from the CFPB that it considers certain overdraft and deposit fee practices to be in violation of the law, and the Bureau is very prescriptive about exactly how banks should assess these fees. in order to avoid a breach. This seems likely to prompt banks to review their practices against the guidance provided by the Bureau,” Willis said.
Consumer complaints and new pressure from digital banks have led some of the nation’s largest financial institutions to already cut the overdraft fees they charge on checking accounts.
Capital One Financial Corp. and Citigroup Inc. announced plans to eliminate fees, while Wells Fargo & Co. said it would stop charging consumers a penalty when they write a check and it bounces.
“While the financial industry touts overdrafts as a service that saves customers money and incentivizes consumers to monitor and manage their finances, the practice continues to target low-income consumers, who often live on low incomes. ‘paycheck to paycheck, with outrageous fees,’ said Liz Zelnick of the progressive consumer advocacy group Accountable.US.
The White House hopes the announcement can give Biden some political momentum, as the president seeks to combat perceptions that he hasn’t done enough to rein in rising costs.
Some 46% of Americans polled by Monmouth University this month said inflation was an extremely important issue for them – up from 37% in September and far exceeding any other issue. In the same poll, 63% of Americans said they wish Biden would pay more attention to issues important to their family.
“No one believes the lies of Biden and the Democrats – families are worse off because everything costs more and their paychecks are worth less,” Republican National Committee Chair Ronna McDaniel said in a statement.
Wednesday’s announcement follows a broader CFPB crackdown on what the agency calls “junk fees,” a catch-all for overdrafts, credit card late payment fees, check fees without provision and other costs.
In September, Regions Financial Corp. announced that it will pay $191 million in penalties following allegations by US watchdogs that it charged customers illegal overdraft fees for nearly three years.
Banks and credit unions earned more than $15 billion in overdraft and related fees in 2019 and $12 billion in late credit card fees in 2020, according to CFPB estimates. The agency says lenders have become too dependent on these fees.
In June, the CFPB published a proposal that would assess whether late fees on credit cards are “reasonable and proportionate”, as it steps up scrutiny of such charges in a bid to spur competition.
Industry groups argue that the CFPB is wrong to suggest that banks do not offer competitive services and that these fees, charged primarily to cover a lender’s processing, are clearly disclosed. But advocates say advances in technology should reduce processing costs for banks.
The CFPB said in its policy objectives that financial institutions have begun to compete more on fees and Wednesday’s decision is intended to “provide some examples of potentially illegal surprise overdraft fees, including the imposition of penalties on purchases made with a positive balance”.
–With help from Akayla Gardner and Nancy Cook.
(Updates with industry reaction in paragraphs 7-8)
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