New York (CNN Business)The banking industry's $11 billion overdraft-fee gravy train could get derailed if Joe Biden wins the White House.
Wall Street analysts are warning that Biden-appointed regulators could crack down on overdraft fees, which critics say unfairly punish society's most vulnerable.
"Overdraft fees are one of the biggest risks to the banking industry under a Biden presidency," said Nathan Dean, senior analyst at Bloomberg Intelligence.
Even if the US Senate remains under GOP control, a Biden administration may take aim at overdraft fees through new rules from the Consumer Financial Protection Bureau.
"There will be real pressure from progressives to get tough on banks. This is the easiest way to do that," said Dean.
Cowen Washington Research Group warned clients last week that a Biden win will likely result in restrictions on how often banks can charge overdraft fees and other limitations.
"If Donald Trump wins, we see no risk to overdraft fees," Jaret Seiberg, policy analyst at Cowen, wrote in the note to clients.
Biden has not explicitly promised to take action on overdraft fees. And the Biden campaign did not respond to a request for comment. But if he wins the election and pushes to eliminate overdraft fees, it would serve as another example of how a win for Democrats in November could hurt banks. Not only is there the specter of more regulation, but Biden has called for unwinding Trump's corporate tax cuts.
Biden's proposed tax plan, which would need to get through Congress, could lead to a combined $7 billion increase in corporate taxes annually for the top 10 US banks alone, according to S&P Market Intelligence.
9% of accounts pay 79% of overdraft fees
Each year, banks haul in more than $11 billion worth of overdraft and related fees when customer accounts go negative, according to FDIC stats on banks with more than $1 billion of assets.
These fees represent about 5% of non-interest income at banks, according to Cowen. And that doesn't include the overdraft fees collected by thousands of small banks and credit unions -- a total that likely rivals or even exceeds the $11 billion from bigger banks.
JPMorgan Chase (JPM) alone brought in $2.1 billion of income last year from overdraft and insufficient funds fees, according to the Center for Responsible Lending, a nonprofit that pushes for policies aimed at curbing predatory lending.
Wells Fargo (WFC) and Bank of America (BAC) collected an additional $1.7 billion and $1.6 billion of overdraft fees, respectively. At TD Bank (TD), overdraft fees represented about one-third of the lender's non-interest income, according to CRL.
While overdraft fees pad the bottom lines of banks, they can burden customers, especially lower-income households.
Consider that just 9% of all accounts pay for a staggering 79% of all overdraft and non-sufficient fund fees, according to a 2017 report by the Consumer Financial Protection Bureau.
And these "frequent overdrafters" tend to have lower credit scores and be more "credit constrained" than other bank customers, the CFPB report said.
"The most vulnerable customers are getting absolutely hammered," said Rebecca Borné, senior policy counsel at the Center for Responsible Lending.
'Unreasonable practices'
Minorities pay a disproportionate share of overdraft fees. African-Americans and Hispanics each represented 19% of those who paid three or more overdraft-related fees in 2014, even though they only represented 12% and 17% of the US population as a whole, according to a 2016 report by the Pew Charitable Trusts.
The Center for Responsible Lending cited a laundry list of "unreasonable" common practices, including high fees (typically $35/per overdraft transaction), multiple fees per day, sustained fees until accounts are brought back into balance and "often manipulative" practices involving deposit clearing.
In 2009, when Biden served as Barack Obama's vice president, regulators announced rules that prevent banks from charging consumers overdraft fees on ATMs and debit card transactions -- unless consumers opt in to overdraft services.
Customer complaints
Still, overdraft fees are among the most complained-about bank practices at the CFPB, the financial watchdog created by the 2010 Dodd-Frank law.
"I have been charged overdraft fees for overdraft fees!" a Wells Fargo customer from New Jersey complained to the CFPB last month, according to the agency's online complaint database. "Looks like Wells Fargo is back at it -- robbing people blind."
A Truist Bank customer from Florida cited a medical hardship caused by the pandemic.
"My partner lost his job due to Covid," the customer said. "As a result of the change in income my account was over drafted and subsequently closed."
Mike Townsend, a spokesman at the American Bankers Association, said that banks offer customers multiple tools to prevent overdrawing their accounts, including text alerts about low balances and online account monitoring.
"As always, banks are committed to ensuring their customers are able to understand and make informed choices about their overdraft options," Townsend said in a statement.
How regulators could crack down
If Biden wins the White House, he would likely move swiftly to replace CFPB Director Kathy Kraninger with a Democrat who would be more sympathetic to calls to crack down on bank fees.
"The CFPB has teeth, no matter who the director is," Borné said. "It's long overdue to do something about abusive overdraft practices."
Cowen thinks Biden-appointed regulators are likely to take several steps, including preventing banks from charging more than one overdraft fee per day, requiring lenders to process transactions in a way that minimizes overdraft fees and making banks waive overdraft fees if a customer is waiting for a deposit to clear. There is also talk of forcing banks to lower the amount of the fee, especially for relatively small overdrafts.
Democrats in Congress have also proposed giving customers the flexibility to overpay overdrafts over time, instead of the very next deposit.
"This is to avoid trapping a consumer in a negative cycle," Cowen's Seiberg said, "where the repaying of a prior overdraft triggers a new overdraft."
