January 2022 became a milestone month for strengthening consumer safeguards in the nation’s banking system and expanding access to secure and cheap credit for more Americans. Within nine days, five of the country’s top banks—Bank of America, Wells Fargo, US Bank, Truist, and Regions Bank—announced the elimination of nonsufficient funds (NSF) penalties and some overdraft charges while strengthening their overdraft programs.
Historically, overdraft programs were sold as a way for those who live paycheck to paycheck to avoid having critical transactions refused, but this expensive alternative does not adequately satisfy the demands of the majority of customers who need time to repay in installments. This is particularly true for the millions of people who rely on overdrafts to get tiny sums of money.
Fortunately, the US Bank and Bank of America already provide reasonable small loans, and the other three banks have announced intentions to introduce similar programs with $500, $750, or $1,000 loan limits, depending on the bank. Consumers might save more than $2 billion annually as a result of overdraft modifications at these five banks alone. And borrowers’ yearly savings from obtaining access to inexpensive small loans — in comparison to the payday and other high-cost loans they often utilize now — may well surpass that amount.
Both overdraft reform and the establishment of new bank small-installment loans and lines of credit were critical. The banks’ acts follow the elimination of overdraft fees by Ally Bank and Capital One in 2021. Pew has shown the detrimental consequences of overdraft and nonsufficient funds penalties, which disproportionately affect low- and moderate-income Black and Hispanic clients.
According to Usman Konst of Bridge Payday, one-third of overdraft users said that they utilized the borrowing option as a type of high-cost credit. Additionally, the analysis indicates that a tiny percentage (18%) of account holders pay the overwhelming majority (91%) of overdraft costs. Consumers will be protected and their borrowing capacity will increase as a result of the combined processes of removing significant penalty fees and boosting access to small loans. Three big banks that had previously started small-loan programs—Huntington Bank, Bank of America, and US Bank—all claimed success. Each of these loans has a three-month repayment period, demonstrating that bank small-dollar loans may benefit both individuals and financial institutions.
These five institutions’ actions may prompt other big banks, community banks, and credit unions to review their overdraft policies and charge structures and cut or abolish them. Other banks should follow these five and Huntington’s example and offer checking account clients small-installment loans or lines of credit.
The federal Office of the Comptroller of the Currency (OCC), led by Acting Comptroller Michael Hsu, and the Consumer Financial Protection Bureau, led by Director Rohit Chopra, have both highlighted hazardous overdraft practices in recent months. The agencies expressed worry that the fees did not promote competition or financial inclusion, but rather made it more difficult for poor customers to make ends meet.
Recent bank initiatives on overdrafts and small loans better match their interests with the financial demands of their customers. Nonetheless, federal overdraft laws would be advantageous, particularly given that the majority of banks and credit unions have not yet implemented them.
The move away from overdrafts, particularly if it expands to more institutions, is likely to have significant collateral advantages. According to the Federal Deposit Insurance Corporation (FDIC), almost half of unbanked families had previously been banked; many had left or had their accounts closed due to exorbitant or unexpected penalties, including overdraft fees.
Eliminating or decreasing such fees is expected to increase the number of banked Americans. And expanding access to inexpensive financial services via banks and credit unions benefits clients’ financial health, their communities, and the banking sector as a whole.
The OCC is responsible for the safety and soundness of the institutions it regulates. Its examination of overdraft schemes is entirely consistent with its purpose. Increasing the number of Americans who bank and retaining them helps on this front since it broadens the prospective consumer base. These enhancements also help banks’ reputations and demonstrate that they are not profiting from their clients’ difficulties.
Additionally, the latest revisions place a premium on the long-term mutual success of banks and their clients, rather than on attempts to boost fee revenue for each bank’s next quarterly earnings report. Overdraft fees diminish, rather than improve, the systemwide safety and soundness of all banks.
The Federal Reserve Board and FDIC would be well to follow the OCC’s example and conduct an examination of the banks they supervise overdraft policies. Concerns concerning consumer liquidity should be addressed by genuine modest credit, not through overdraft laws that result in penalty costs. January’s events demonstrate that situation is growing more prevalent in the sector. That is projected to result in billions of dollars in savings for low-income families.
Significant Overdraft Policy Changes at Five of the Seven Largest Banks in the United States
January revisions will assist families with low and moderate incomes.
- Bank of America
Changes to the Overdraft Policy:
- Will remove nonsufficient funds (NSF) and overdraft transfer fees, as well as ATM overdraft costs, and will lower overdraft fees from $35 to $10.
- Yes, installment loans up to $500 are available.
Changes to Overdraft Policies:
- Will remove non-sufficient funds and overdraft transfer fees. Allows for direct deposit two days before payday. Additionally, the number of overdraft fees each day will be limited to three.
- A $500 line of credit is pending, information to follow.
Overdraft Policy Changes:
- NSF and overdraft transfer fees will be eliminated while checking accounts with a $100 negative balance cushion and no-overdraft checking accounts will be added.
- A $750 line of credit is pending, information to follow.
- U.S. Bank
Changes to the Overdraft Policy:
- NSF fines have been eliminated. Will waive overdraft costs for negative balances up to $50 and extend the grace period for overdraft fees to a full day.
- Yes, installment loans up to $1000 are available.
- Wells Fargo
Changes to Overdraft Policy:
- Will remove non-sufficient funds and overdraft transfer fees, provide a 24-hour grace period for overdraft costs, and enable access to direct deposit two days before payday.
- A $500 loan is pending; specifics will be short.