Federal regulators have introduced a ban on one of banks’ most blatant profit grabs: nonsufficient funds fees. Even though most don’t charge those fees now, financial institutions are fighting the rule to preserve their future right to.

Joe Biden speaks about protecting consumers from junk fees at the White House in Washington, DC, on June 15, 2023. (Andrew Caballero-Reynolds / AFP via Getty Images)

Of all the various “junk fees” financial institutions use to pocket ever more of your money, the most blatant profit grab might be the fees they can charge you for purchases that are instantly declined due to inadequate account funds — since banks face no costs at all when such a transaction is immediately rejected.

According to a little-covered new proposal, federal regulators want to ban these non-sufficient funds fees as part of President Joe Biden’s ongoing fight against predatory junk fees, which he touted in last week’s State of the Union address. But the banking lobby is already attacking the move, even though banks and credit unions insist they mostly don’t charge — and don’t even want to charge — such fees.

The opposition suggests that in the face of a regulatory crackdown, banks want to preemptively preserve their future rights to extract profits from the most desperate borrowers. Indeed, as federal regulators aim to limit more commonly charged fees — like overdraft penalties and credit card late fees — banks may look to recoup their profit margins by expanding their use of non-sufficient funds fees.

Such fees, experts say, are particularly egregious, even compared to the myriad other junk fees that bring big financial institutions billions in profits every year. Non-sufficient funds fees are penalties charged when a transaction is rejected, like when a debit card purchase is declined because there’s not enough money in the account to cover it. The penalty is $32 on average, similar to the average overdraft fee.

But unlike overdrafts, in which banks pay for a transaction that exceeds the account balance, banks incur no cost at all when transactions are quickly declined — because the money never leaves the customer’s account. Such fees aren’t covering any loss for the bank. They’re just bringing in profits.

Thanks to previous efforts by federal regulators to limit these fees and mounting public pressure, nearly two-thirds of large banks have stopped collecting all kinds of non-sufficient funds fees, according to an October analysis. It’s even less common for banks to charge the penalties for transactions that are instantly declined, regulators say, even among the big banks and credit unions that continue to collect the fees for other transactions.

But even when these fees are limited, experts say they are harmful.

“These [fees] tend to hit people who can least afford it the most,” explained Ruth Susswein, the director of consumer protection at advocacy group Consumer Action.

“There’s a lot of money to be made, and clearly, unless they are publicly embarrassed or a rule is put in place to stop them, financial institutions are going to choose to make as much profit as possible — and often off the people who can least afford it,” she continued.

“The CFPB Has Found Banks Guilty Without Accusation”

The Consumer Financial Protection Bureau (CFPB), the federal consumer protection agency, announced the proposed new rule on non-sufficient funds charges for instantly declined transactions in January. Under the new policy, which is now open for public comment, such fees “would constitute an abusive practice under the Consumer Financial Protection Act.” It would apply to debit card transactions, ATM withdrawals, and some transactions on apps like Venmo — but non-sufficient funds fees that take a few days to process would not be included.

Most large banks do not currently charge a fee when a card is instantaneously declined, regulators said. The proposal, they emphasized, was meant to prevent banks from charging them in the future.

“The CFPB is proposing this rule primarily as a preventive measure,” regulators wrote in their proposal. “Financial institutions have ongoing incentives to generate revenue, and [non-sufficient funds] fees may become increasingly appealing as a revenue source in the absence of this proposal.”

That might be especially true, regulators noted, as the federal crackdown on overdraft fees, credit card late fees, and other such charges begins to eat into banks’ revenue. Right now, banks earn billions from overdraft fees, money that comes straight from the pockets of disproportionately low-income and financially vulnerable households.

And banks, credit unions, and the rest of the finance industry have indeed lined up to oppose the CFPB’s new proposed ban, public comments on the new proposal show.

“It appears that the CFPB has found banks guilty without accusation or due process,” complained the president of a state bank in Nebraska, claiming that his bank had no plans to charge such fees.

letter from the trade group National Federation of Independent Businesses, meanwhile, urged the CFPB to rescind the rule and instead “focus its energies on solving existing problems that have a material adverse effect on consumers, a category that does not include non-sufficient fund fees.”

Mike Litt, the consumer campaign director at the advocacy organization US Public Interest Research Group (PIRG), said it was revealing that banks and other business interests were opposing the new proposal, while at the same time claiming they had no intention to charge such fees.

“If they’re saying that they’re not doing it or that they’re not making money off it, then they shouldn’t really have a problem with it being officially prohibited, I would think,” Litt said.

“The Banks and Credit Card Companies Don’t Like It”

The CFPB has been waging its fight against junk fees for years, and they have become a cornerstone of the Biden administration’s agenda, as the president highlighted during the State of the Union address last week.

“The banks and credit card companies don’t like it,” Biden said. “Why? I’m saving American families $20 billion a year with all of the junk fees I’m eliminating.”

Earlier regulation by the CFPB in the 2010s on non-sufficient funds fees, regulators say, contributed to many banks dropping the fees entirely — most notably Capital One in December 2021.

Capital One’s announcement that it would no longer charge any fees for declined transactions or overdrafts came the same day the CFPB released a landmark report finding that banks were raking in more than $11 billion annually from both kinds of fees. Other major banks quickly fell in line as public pressure mounted.

Regulators have also been taking aim at what they call “double-dipping” of the fees, in which banks collected multiple fees for a single declined transaction. In July 2023, regulators issued Bank of America a $150 million penalty for the practice, among other predatory behavior. The bank is no longer collecting penalties from declined transactions.

“What we’ve seen after all of this work from the CFPB is that a vast majority of [non-sufficient fund] fees have been eliminated, which the CFPB estimates is saving consumers nearly $2 billion a year,” Litt explained, referencing the CFPB’s January announcement.

Now, with its new proposal, the CFPB wants to prevent the fees from returning by banning them outright. The agency is declaring them illegal under the Consumer Financial Protection Act, the landmark consumer protection legislation passed in 2010.

“It’s a really good move that many [banks] have eliminated the [non-sufficient funds] fee voluntarily, but there’s nothing to say tomorrow that a new CEO doesn’t come in and try to reinstate it,” Susswein said.

Ed Mierzwinski, the senior director of the federal consumer program at US PIRG, echoed that sentiment.

“[Big banks] pretend they’re not doing these abusive things,” he said. “But if they weren’t doing these abusive things, there would be no problem. And the CFPB wouldn’t act.”

The banking industry — and its “phalanx of lobbyists,” Mierzwinski said — is readying for a fight against CFPB regulation on several fronts. Commercial banks spent $67 million lobbying federal lawmakers in 2023.

For the proposal barring fees on instantly declined transactions, public comment will remain open until March 25, and after that, regulators will begin to finalize the rule. Regulators have also proposed a rule limiting overdraft fees, which will force banks to charge either a low-benchmark fee set by regulators or prove that higher overdraft penalties are necessary to recoup their own losses.

And last week, the CFPB announced a new final rule capping most credit card late fees at $8. It took only two days for the US Chamber of Commerce and big banks to file a lawsuit to block the rule, which they did in federal court on Thursday.

“The CFPB is trying to stop abusive practices that harm particularly low-income people with the least money in their accounts,” Mierzwinski said. The new proposal on fees for declined transactions, he emphasized, “is really just a part of a much larger package that addresses all these unfair practices.”

You can subscribe to David Sirota’s investigative journalism project, the Lever, here.

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