The Consumer Financial Protection Bureau (CFPB) is enhancing its enforcement scrutiny of banks that are “heavily dependent” on overdraft and non-sufficient funds (NSF) fees after research by the government watchdog found banks pulled in an estimated $15.47 billion in 2019 via these penalties.
According to a Wednesday report from the CFPB, three banks in particular—JPMorgan Chase, Wells Fargo, and Bank of America—brought in 44% of that total.
“Rather than competing on quality service and attractive interest rates, many banks have become hooked on overdraft fees to feed their profit model,” said CFPB Director Rohit Chopra. “We will be taking action to restore meaningful competition to this market.”
From the beginning of reporting in 2015, overdraft and NSF fee revenues reported in Call Reports for banks with assets over $1 billion saw a small but steady annual increase of around 1.7% per year to $11.97 billion in 2019. Before 2015, banks did not break out information about their consumer overdraft and NSF fee revenues. Instead, banks reported that information within a broader measure of fees called service charges on deposit accounts.
These overdraft and NSF fees have made up close to two-thirds of reported fee revenue since 2015, emphasizing banks’ heavy reliance on such penalties, the CFPB stated in a Wednesday release.
In a media call, Chopra told the press that the CFPB will take action against larger financial institutions whose overdraft practices violate the law. In their investigations, the CFPB will also seek to uncover the individuals who devise and direct any illegal conduct. Chopra said the CFPB is also considering additional policy guidance outlining unlawful practices.
“Law abiding institutions should not be disadvantaged by the practices of law-breaking competitors. I’ve asked CFPB bank examiners to prioritize examination of banks that are heavily reliant on overdraft. Financial institutions that have a high share overdraft or a higher average fee burden for overdrafting should expect us to be paying close supervisory attention on their deposit accounts,” Chopra said during the call.
“Ultimately, we plan to inform institutions of where they stand relative to their peers when it comes to overdraft. We believe sharing that information will increase transparency and help against the race to the bottom we have seen in this market,” Chopra added.
The CFPB director pointed to open banking as a viable solution to these fees as over time it will be more difficult for banks to “trap customers” in to an account for the purpose of harvesting.
Previously, the CFPB ordered TD Bank to pay $122 million in penalties and customer restitution, and ordered TCF Bank to pay $30 million in penalties and restitution as a result of failure to obtain consumer consent for overdraft charges.
Following the CFPB’s release, Capital One announced it will completely eliminate all overdraft fees and NSF fees for its consumer banking customers.
“The bank account is a cornerstone of a person’s financial life,“ said Richard Fairbank, Capital One’s founder and CEO. “It is how people receive their paycheck, pay their bills and manage their finances. Overdraft protection is a valuable and convenient feature and can be an important safety net for families. We are excited to offer this service for free.”
Fairbank continued, “Long ago, we set our sights on reimagining banking. Our award-winning checking accounts already feature no monthly fees and no minimum balance requirements. Eliminating overdraft fees is another step in our effort to bring ingenuity, simplicity and humanity to banking.”
Capital One is America’s 6th-largest retail bank and the only top-10 retail bank to make this move for all of its consumer bank products.