Lawmakers spar over government intervention in overdraft

WASHINGTON — Lawmakers clashed Wednesday over the government's role in the future of overdraft programs — specifically, whether reining them in will protect account holders from being gouged or have unintended negative consequences for consumers and small banks.

Democrats, who contend overdraft fees have disparate impact on poor consumers of color, praised efforts from banks and regulators to curb or eliminate them. Yet Republicans said overdraft fees are a valuable and affordable source of short-term credit for consumers who may have few options otherwise.

“The current scale and growth of overdraft and nonsufficient fund fees has caught the attention of consumer groups, this committee and the regulators,” said subcommittee Chair Ed Perlmutter, D-Colo. “In an average year, consumers in the United States pay around $10 [billion] to $12 billion in overdraft fees and nonsufficient fund fees, and just 9% of consumers take up 80% of those overdraft fees.”

Republicans raised concerns that the elimination of overdraft options would likely drive borrowers with low credit scores toward unregulated predatory lenders, and could disproportionately harm smaller banks that rely more heavily on these customers than larger financial institutions.

“The actions of this committee, of financial regulators, aim to reduce consumers' ability to access short-term liquidity financial products,” said Rep. Blaine Luetkemeyer, R-Mo. “I ask my colleagues, where are the 40% of American consumers supposed to go when they need a $40 loan?”

Coinciding with the hearing, House Financial Services Committee Chair Maxine Waters, D-Calif., on Wednesday issued a discussion draft of legislation that would require banks with more than $10 billion of assets to offer accounts without overdraft fees.

According to the draft, large banks with over $10 billion of assets would be required to offer customers the option of accounts with a no-fee debit card, minimum deposit requirements no greater than $25, nonwaivable maintenance fee no greater than $5, no overdraft fees, no account activation fees, a limit of $2.50 on out-of-network automated teller machine fees, and more.

The Waters plan and another bill — the Overdraft Protection Act , reintroduced by Rep. Carolyn Maloney, D-N.Y. in June — were highlighted during the hearing. The Maloney bill would amend the Truth in Lending Act to provide new guardrails for banks’ marketing of overdraft programs, including a requirement that banks only charge overdraft fees “if the consumer has consented” to the program.

Meanwhile, House Republicans led by Rep. Patrick McHenry, R-N.C., sent a letter to the Consumer Financial Protection Bureau on Wednesday urging the agency to proceed cautiously on its mission to crack down on what it calls “junk fees.”

“We agree consumer education and simplification of disclosures should be a priority. There is, however, always a cost associated with providing financial services and access to credit,” the Republicans wrote. “Any attempts by the CFPB or other financial regulators to stifle financial inclusion or consumer choice or undermine the safety and soundness of particular financial institutions or the financial system as a whole would be imprudent."

The CFPB unveiled its campaign against junk fees in late January, when Director Rohit Chopra announced that the agency would begin the “process of breaking banks’ reliance on these exploitative income streams” — an effort that leading financial trade associations have described as “misguided.”

In a letter to the subcommittee Wednesday, the American Bankers Association said that consumers have access to “widely available” overdraft free accounts. Bank On, a program launched by the Cities for Financial Empowerment Fund to help banks offer certified low-cost accounts, announced it had reached its 200th account at a bank or credit union on Wednesday.

“Consumers who do not seek access to overdraft services can open an overdraft-free option, which are widely available at banks across the nation,” the ABA wrote in its statement. “Congress should not limit the choice of consumers who wish to have overdraft services when overdraft-free accounts are so widely available.”