Bank customers who have benefited from more lenient overdraft and other fees during the coronavirus pandemic may find themselves in a deeper financial hole when the charges eventually return.
Overdraft fees, which can range as high as $35 per transaction, typically fall on bank customers who have low account balances and uneven income. Consumer advocates fear that once banks stop providing breaks, the impact of mounting fees are likely to fall hardest on black and Latino borrowers who are suffering disproportionately from job losses due to coronavirus shutdowns.
“They really divert a great deal of money from the people that are most vulnerable,” Peter Smith, a researcher with the Center for Responsible Lending, said of overdraft fees.
Banks turned to overdraft fees as a revenue generator in recent years with profits pinched by low interest rates since the 2008 financial crisis.
According to the Federal Deposit Insurance Corp., banks with more than $1 billion in assets collected $11.68 billion in overdraft and non-sufficient funds fees in 2019.
Banks say that overdraft fees allow consumers to make necessary purchases, and enable banks to offer free checking accounts. Overdraft service can serve as a bridge for cash-strapped customers who might otherwise turn to payday or other high-cost lenders.
But overdraft fees hit bank customers with balances of around $350 hardest, with 9% of account holders paying 84% of overdraft and NSF fees, according to a June report from the Center for Responsible Lending.
Overdraft fees can quickly pile up for customers that can least afford them, with the typical fee coming in at $35. Many banks limit the number of overdraft fees they charge, that limit can be as high as six charges, or as much as $210, per day, according to the Center for Responsible Lending.
Some banks record transactions in ways that increase the fees customers pay. And most transactions resulting in overdraft charges are smaller than the $35 fee, with the average transaction coming in at $20, the Center for Responsible Lending said.
While federal banking regulators don’t collect data on how fees fall on different racial and ethnic groups, it is possible to extrapolate based on unemployment and other measures, Smith said.
A January study from Bankrate.com found that on average, black account holders paid an average of $12 per month in bank fees, including overdraft and ATM fees and Latino account holders paid $16 per month. White account holders paid an average of $5 in fees per month, Bankrate found.
The unemployment rate in May was 16.8% for blacks,17.6% for Latinos, and 12.4 % for whites. Blacks and Latinos also have lower levels of wealth, leaving them more vulnerable to overdraft fees, and have experienced higher Covid-19 infection and death rates than white communities, said Smith, one of the authors of the CRL report.
“You’re effectively charging people who don’t have money for not having money,” said Syed Ejaz, a policy analyst with Consumer Reports.
Because banks have direct access to accounts, they often can collect on fees before a customer can use their money to pay for necessities like rent, food, and medical or childcare expenses, he said.
“Their bank can just muscle that money out of their hands,” Ejaz said.
Federal banking regulators encouraged banks to work with customers that saw job losses and reduced work hours when state and local economies shuttered to combat the spread of Covid-19, and many did.
“Banks have taken proactive steps to help customers by waiving fees and penalties or working to modify loan terms during this pandemic,” said Richard Hunt, the president and CEO of the Consumer Bankers Association.
A few banks stopped charging fees altogether, while others, like Wells Fargo & Co. and Capital One, have said they will work with consumers and waive fees when requested.
Bank of America Corp. and JPMorgan Chase & Co. said they would suspend and refund fees if requested.
None of those banks gave a firm timeline for how long they would continue offering breaks on fees, however.
Jim Seitz, a Wells Fargo spokesman, said the bank continues to work with consumers affected by the pandemic.
“We will continue to closely monitor our customers’ pandemic-related impacts and evaluate the support we offer,” he said.
Chase spokesman Paul Lussier said the bank continues to offer the same assistance to clients who ask.
Representatives for Bank of America and Capital One did not respond to a request for comment.
‘They Just Did It’
Consumer advocates caution that the relief banks are providing is temporary, and puts the onus on consumers to ask for help rather than simply offering it.
Some state regulators, like the New York Department of Financial Services, mandated a halt to overdraft fees during the pandemic. Federal regulators have chosen not to require banks to ease up on fees.
Banks could also find other ways to cover small overdrafts for consumers, or simply stop offering it as a service. That would prevent fees from piling up and help vulnerable people escape pandemic-related hardships, Smith said.
“A world where people’s payments are denied isn’t perfect, but it’s better than people falling deeper into the hole,” he said.
The coronavirus has shown that banks can survive without overdraft fees, Ejaz said.
“They’re acting like this is something they can’t do. And they can. They just did it,” he said.