House mulls bill to curb "insane" overdraft fees

A bill that would limit banks' ability to charge overdraft fees is gaining ground in the House. The Overdraft Protection Act, introduced last year — scheduled for a markup, the final step before legislation is advanced to the House floor this week — despite strong opposition from the industry.

Why it matters: These fees, often $35 for spending or withdrawing more money than you have in your account, are a big profit center for banks — one bank CEO even named his boat Overdraft a few years ago — but a political football often kicked by legislators and consumer advocates.

• They're also a massive pain for a small segment of financially strapped customers who often don't realize they're in the red.

Big picture: In 2019, the last full year before the pandemic, bank revenue from overdraft and non-sufficient fund fees topped $15 billion, according to the CFPB. That revenue declined by 26% last year as Americans fattened their bank accounts with stimulus money, but is likely to pick back up as inflation starts to eat into savings.

• Most of the revenue banks earn from overdraft comes from a very small slice of financially vulnerable Americans.
• A few small banks derive more than half their profits from these fees, a study from Brookings found last year.
• Some banks have voluntarily stopped charging for overdraft, including Citi, Ally bank and Capital One. That halt was partly a response to pressure during the COVID crisis, and a result of increased competition from financial technology companies.

Details: Sponsored by Rep. Carolyn Maloney (D-NY) in the House, the bill would permit only one overdraft charge a month, and no more than six a year. After that banks could either let you continue to overdraft, without a charge, or cut you off.

• The bill also says fees should be reasonable and proportional — for example, no more $35 fees for buying a $3 cup of coffee.

• Though advocates are hopeful the bill makes it out of committee to a House vote, its chances in the Senate are seen as limited.

Zoom out: Post financial-crisis regulation addressed this issue by requiring customers to "opt-in" to overdraft protection, but didn't limit how much banks could charge.

The other side: "We don't think the legislation is necessary," said Bill Hulse, vice president for Capital Markets Competitiveness at the Chamber of Commerce.

• Consumers benefit from overdraft protection, and the bill would harm banks' ability to offer it, he said.

In complaints filed with the CFPB, bank customers complain about onerous fees, often for accidentally overdrawing their account — forgetting an autopay feature is turned on, or not moving funds between accounts.

• "Since COVID I have probably paid $2000.00 if not more in fees," one consumer writes. "How does that not seem insane?"