On December 19th, the Consumer Financial Protection Bureau (CFPB or Bureau) issued a report highlighting consumers’ experiences with overdraft and nonsufficient funds (NSF) fees. The report found that roughly a quarter of consumers are still being charged these fees despite the CFPB’s hostility towards so called “junk fees,” which has led many banks and credit unions to eliminate such fees. The report further found that many consumers who were charged overdraft and NSF fees had access to an alternative asserted to be cheaper by the CFPB, such as available credit on a credit card.

Since 2021, in response to the CFPB’s “war on fees,” many institutions have made changes to their overdraft and NSF policies, including the elimination or reduction of such fees, limits on the number of fees consumers can be charged in a day, the introduction of grace periods for consumers to bring account balances positive before being charged a fee, the institution of warnings to consumers when account balances fall below a certain threshold, and the introduction of de minimis thresholds below which consumers are not assessed fees. In fact, a recent CFPB analysis of large banks and credit unions found that nearly two-thirds of such banks and one-quarter of such credit unions have eliminated NSF fees. Additionally, an analysis of banks’ overdraft fee policies at the 20 banks that reported the most overdraft/NSF revenue during 2021 indicates that seven of the 20 have reduced or eliminated overdraft fees.

Despite these industry trends, yesterday’s report using data from the CFPB’s Making Ends Meet survey and credit bureau data from the Consumer Credit Panel found that more than a quarter (26.5%) of consumers reside in households that were charged an overdraft or NSF fee in the past year. Overdraft fees are somewhat more prevalent than NSF fees (23.6% versus 20%, respectively). There is substantial overlap in the populations charged overdraft and NSF fees. Among consumers in households charged an NSF fee in the past year, 85% were also charged an overdraft fee. The report also found that many consumers charged an overdraft or NSF fee were surprised by the fee. Specifically, 43% were surprised by their most recent account overdraft, 35% thought it was possible, and 22% expected it. According to the report, some consumers “appear to use overdrafts often and intentionally” as a source of credit.

The report also found that consumers who are more likely to be economically disadvantaged are more likely to reside in households charged an overdraft and/or NSF fee in the past year. Consumers’ overdraft experience generally aligns with their overall credit history such that consumers who experience frequent fees have lower average credit scores, are the most likely to have a subprime credit score, no available credit on a credit card, and delinquent debt. For example, while roughly 10% of consumers with an annual household income above $175,000 were in households charged an overdraft or NSF fee in the past year, the share is more than three times higher (34%) for consumers with an annual household income below $65,000.

Our Take:

As noted in the CFPB report, many financial institutions have made significant changes to their overdraft and NSF practices, including eliminating or reducing overdraft and NSF fees. Despite these unprecedented changes to financial institutions’ deposit-related fees, the Bureau continues to press for further changes to overdraft and NSF fees as part of its war on “junk fees.” We view the issuance of this report and its timing as the CFPB building its case for its proposed rules on overdraft and NSF fees that will be issued imminently. As noted in the CFPB’s Fall 2023 rulemaking agenda, the Bureau plans to issue a proposed rule later this month to consider whether fees charged for overdraft services are finance charges, which would subject such fees to the requirements of the Truth in Lending Act and Regulation Z. The Fall 2023 rulemaking agenda also indicates that the CFPB plans to issue a proposed rule in December that would preliminarily identify the assessment of NSF fees “in certain circumstances” as an unfair, deceptive or abusive practice (UDAAP) under the Dodd-Frank Act “and impose requirements to prevent such UDAAPs.” Given the CFPB’s aggressive stance on “junk fees” as an attempt to control product costs, we expect to see continued CFPB overdraft and NSF fee hostility and scrutiny of potential fair lending/fair deposit issues related to these fees.