What's 'Abusive'? A $34 Fee for a $5 Overdraft

Dodd-Frank forbade abusive conduct by financial institutions.  (Previously, there was no law against it.) The law mandates that the Consumer Financial Protection Bureau decide which bank behavior is "abusive." After almost a year of searching, the CFPB hasn't found any. Well, here's one.

Suppose you decide to make a few purchases at a mom and pop grocery, for $5.23. But you forgot your wallet. You have your checkbook, though, and Pop accepts your check for $5.23—after pointing to a notice about bad check fees.

Unfortunately, the bank rejects your check. You then receive a letter from Pop: you owe him not only the $5.23, but also a $34 bad-check fee. 

Would you be surprised?  Would you consider Pop's fee abusive?

Relax, you'll be spared such abuse. State law won't let Pop charge the $34 bad-check fee. Even if it did—he's not fool enough to treat a customer that way. There's a competing small grocery across the street. And strangely enough, bad check fees are not a major profit center for him—just for banks.

Banks such as JPMorganChase – which doesn't have to comply with state laws limiting fees. It charges a $34 overdraft fee.

Before Dodd-Frank, banks were prohibited from unfair or deceptive practices. Dodd-Frank added "abusive" to the prohibitions, leaving it to the CFPB to decide how to make this stick—through rule-making and/or enforcement case-by-case. Which way is better?

CFPB Director Rich Cordray thinks bankers, instead of being provided with bright-line rules, "should be thinking carefully about whether they're taking unreasonable advantage of their customer." A banking lawyer quoted by Roll Call disagrees: CFPB rules defining "abusive" would "create some certainty," without which "we may end up spending millions of dollars in litigation over something that has been fairly standard in the industry for 100 years."

Those whopping $34 overdraft fees haven't been around for 100 years. Not even 10. Yet, after nearly a year of operation, the CFPB has neither taken enforcement action nor announced rule-making to suppress any abusive practices. 

Why do I pick on JPMorganChase? It's the biggest. Also, the bank was "among a handful of banks that have been forced to pay monetary penalties" last year "for violations related to unfair or deceptive practices."  Maybe JPM's abusive as well.

Until July 22, this bank imposes the $34 fee even on small overdrafts—perhaps a penny overdraft. The change to not charging for overdrafts under $5.01 was decided in connection with a class-action settlement.  According to its court filing, this change will cost the bank $170 million. 

In other words, the bank was going to make $170 million from $34 fees on overdrafts under $5.01. Is $170 million just chicken feed for them?

In around six and a half years as CEO, Jamie Dimon has been paid $149 million. (For this period, shareholders have received, including dividends, a negative return on their investment.) 

So, $170 million would be a lot of money to make on just one abusive practice—more than the bank has paid its frequently-praised CEO. How much will JPMorgan continue to make from charging $34 for $6 and $10 overdrafts? And is the $34 charge abusive? 

Dodd-Frank says a practice can be banned by the CFPB as abusive if it "takes unreasonable advantage of the reasonable reliance by the consumer on a covered person to act in the interests of the consumer" (Section 1031(d)(2)(C)). Charging $34 for placing $5.23 at risk takes unreasonable advantage. Expensive groceries! Nobody's forcing the bank to place $523 at risk for an overdraft.

Unreasonably high taxes generate less, not more revenue. Banks might make more money with lower fees, and become more compliant and less hated.

Banks refuse or close checking accounts for people at risk of making overdrafts they won't pay back. The risk of a small overdraft not being repaid should be less than 5%, perhaps justifying a $1 overdraft fee on a $10 overdraft. But on a $10 overdraft maintained for one week, Chase's $34 charge means an effective annual percentage rate over 15,000%. The bank charges an additional $15 if an overdraft balance, even if less than $5, continues beyond five business days.

A few years ago, with credit card issuance now dominated by a handful of banks, Congress delegated to the Federal Reserve Board the power to put a ceiling on late fees. After inquiring into costs, the Fed placed a limit substantially below what these big issuers were charging. Dodd-Frank now mandates the CFPB to put a stop to the rest of the unreasonable, abusive gouging.

More than half of U.S. bank deposits are in a few megabanks, with limited and diminishing competition. It was timely for Dodd-Frank to prohibit and punish abusive fees on these services, because the market can no longer discourage them. The CFPB should execute this major mandate now, without fear or favor.

Andrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was the founding chief executive of First Deposit, later known as Providian.