(Bloomberg) -- President Joe Biden touted a new US push to clamp down on overdraft fees banks charge on checking accounts, as the White House looks to address voter concerns about spiraling costs ahead of the Nov. 8 midterm elections.
The guidance announced Wednesday by the Consumer Financial Protection Bureau could deal a significant blow to banks that earned nearly $8.5 billion from the charges last year. The CFPB has said some overdraft penalties amount to “junk fees,” which are often shouldered by poorer Americans with less money in their checking accounts.
“These steps will immediately start saving Americans collectively billions of dollars in unfair fees,” Biden said Wednesday at the White House, adding that the steps would save consumers 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 per year, and typically have no more than a few hundred dollars in their account.
The CFPB said Wednesday that its guidance was focused on overdraft fees registered even though consumers had enough money in their account at the time of a charge, and “the practice of indiscriminately charging depositor fees to every person who deposits a check that bounces.”
“This is real money back in the pockets of American families,” Biden said.
Read more: Myth of ‘Free’ Checking Costs Consumers Over $8 Billion a Year
Banks are likely to proactively respond to the agency’s guidance, which warns that the practice of surprise overdraft fees may be viewed as illegal, said Christopher Willis, an Atlanta-based partner at law firm Troutman Pepper.
“Today’s announcement is a clear signal from the CFPB that it considers certain overdraft and deposit fee practices to violate the law, and the Bureau is being very prescriptive about exactly how banks must assess those fees in order to avoid a violation. It seems likely to trigger banks to examine their practices against the guidance the Bureau has provided,” Willis said.
Consumer complaints and new pressure from digital banks have led some of the nation’s larger financial institutions to already scale back overdraft fees they charge on checking accounts.
Capital One Financial Corp (NYSE:COF). and Citigroup Inc (NYSE:C). have announced their intention to eliminate the fees, while Wells Fargo (NYSE:WFC) & Co. said it would stop charging consumers a penalty when they wrote a check and it bounced.
“While the finance industry lauds overdraft 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 are often living paycheck-to-paycheck, with exorbitant fees,” said Liz Zelnick from the progressive consumer advocacy group Accountable.US.
Soaring Inflation
The White House is hoping that the announcement can provide Biden some political momentum, as the president seeks to combat perceptions that he hasn’t done enough to curb rising costs.
Some 46% of Americans surveyed by Monmouth University this month said inflation was an extremely important issue to them - up from 37% in September and far outpacing any other issue. In the same poll, 63% of Americans said they wished Biden would give more attention to the issues important to their family.
“Nobody believes Biden and Democrats’ lies – families are worse off as everything costs more and their paychecks are worth less,” said Republican National Committee Chairwoman Ronna McDaniel in a statement.
Wednesday’s announcement follows a broader CFPB crackdown on what the agency calls “junk fees,” a catch-all for overdraft, credit card late-payment fees, bounced check fees and other changes.
Regions Financial Corp (NYSE:RF). in September said it would pay $191 million in penalties over allegations by US watchdogs that it charged clients illegal overdraft fees for almost 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 reliant on such fees.
In June, the CFPB issued a proposal that would assess whether credit card late fees are “reasonable and proportional,” as it steps up scrutiny of these fees in a bid to boost competition.
Industry groups argue that the CFPB is wrong to suggest banks are not offering competitive services and that such fees, mostly charged to cover a lender’s processing, are clearly disclosed. But advocates say technological advancements should be lowering processing costs for banks.
The CFPB said in its guidance aims that financial institutions have started to compete more when it comes to fees and Wednesday’s move aims to “provide some examples of potentially unlawful surprise overdraft fees, including charging penalties on purchases made with a positive balance.”