Last week, the Senate Banking Committee’s Subcommittee on Financial Institutions and Consumer Protection held a hearing entitled “Examining Overdraft Fees and Their Effects on Working Families.” A recording of the hearing is available here.
After opening statements from Subcommittee Chairman Raphael Warnock (D-GA) and Ranking Member Thom Tillis (R-NC), three witnesses offered testimony and responded to questions from the Subcommittee members. The following witnesses appeared at the hearing:
- Aaron Klein, Senior Fellow in Economic Studies, Brookings Institution
- Jason Wilk, Founder & Chief Executive Officer, Dave
- David Pommerehn, Senior Vice President and General Counsel, Consumer Bankers Association
Chairman Warnock kicked off the hearing by stating that onerous and opaque overdraft fees keep people in cycles of debt and poverty, and disproportionately impact people of color. He observed that many banks have moved to eliminate overdraft fees, and applauded those banks for making the right choice to benefit these communities. In his opening remarks, Ranking Member Tillis recognized the tremendous consumer choice available today as the financial services industry has developed new products. Responding to Warnock, Tillis stated that the industry has already adopted consumer-friendly overdraft products and practices through competition and innovation and regulation is not needed. In a nod to the recent CFPB Request for Information Regarding Fees Imposed by Providers of Consumer Financial Products or Services, Tillis concluded that overdraft fees should not be characterized as “junk fees.”
The testimony discussed the volume of overdraft fees charged – up to $30 billion a year according to Aaron Klein from Brookings — as well as the concentration of the impact on the most economically vulnerable individuals. Chairman Warnock and Senator Warren both cited a CFPB study that found 80% of overdraft fees were charged to 9% of consumers. However, it was noted throughout the hearing that overdraft fee revenue has been on the decline, in many instances due to voluntary actions within the financial services industry, including eliminating overdraft charges by many banks.
Aaron Klein testified that banks have already made sweeping changes to their products without regulation or legislation that will substantially reduce usage of overdrafts and overall costs for consumers, quantifying the impact of those voluntary changes at $5 billion a year. David Pommerehn from the Consumer Bankers Association noted that overdraft products are based on necessity, due to limited small dollar loan options, and provide one of the last viable sources of short term liquidity for many consumers, also highlighting the choice and transparency already surrounding the product based on the requirement to opt-in. Highlighting some of the innovation in the space, Jason Wilk discussed the products his company, Dave, offers to assist consumers in its mission to “disrupt overdraft,” including linking with their bank accounts to help customers have better visibility into upcoming bills that may lead to an overdraft.
While everyone acknowledged actions taken within the industry to address concerns about overdraft, the witnesses proposed additional policy changes. Klein highlighted five recommendations, including (1) revising safety and soundness rules to target a small number of banks that make a totality of their profits off of overdraft fees, (2) making credit unions disclose their overdraft data like banks do, (3) having the Fed use its regulatory authority under the Expedited Funds Availability Act to implement real-time payments to address the slow payment system, thereby decreasing the reliance on payday lenders, (4) new regulation to prohibit banks from posting debits before credits and reordering payment flows from largest to smallest when processing transactions, and (5) universal Bank-On-style accounts (no overdraft, low-cost, basic accounts). Pommerehn advocated for more short term liquidity products, and encouraging policymakers to explore alternatives, including small dollar lending.