Poverty is expensive in this country.
Few things illustrate that truism like overdraft charges and late fees, which are often little more than outrageous penalties for not having enough money. But there are plans in the works at the Consumer Financial Protection Bureau (CFPB) to rein in these abusive practices.
Overdraft fees occur when a customer attempts to withdraw more money from their account than is available, but the banking institution covers the transaction — for a fee. The CFPB is proposing rules to close loopholes in rules on overdraft fees by establishing a benchmark that banks cannot exceed.
Over a quarter of Americans live in a household that was charged an overdraft fee in the past year, but especially harmed are those who have the least to begin with. These overdraft fees are structured to prey on consumers already in a financially precarious position. The impact skews toward low-income households and people of color. Young people are also more likely to be affected.
When banks hit people with an overdraft fee, they end up further in the hole — to the benefit of the bank. “Overdraft fees are not so much a useful service as they are a lucrative profit center underwritten by the most economically vulnerable consumers,” said Kimberly Fountain, consumer field manager at Americans for Financial Reform.
Overdraft fees affect credit scores and can even lead to account closures, leaving people without access to banking services altogether. More than any other group, Black Americans tend to be underbanked or unbanked.
As with overdraft fees, banks foist the burden of late fees on people living paycheck to paycheck, low to moderate income consumers, and people of color.
More than 80 percent of adults have at least one credit card — and these cards are full of junk fees. Late fees alone cost consumers $14 billion a year — and low-income earners pay about twice as much in fees as higher-income earners.
These late fees are not based on any sort of need for the bank. The CFPB found that banks take a fee almost five times greater than the cost to the bank of a late payment.
These practices also reinforce the racial wealth gap. Data shows that banks have often charged those living in neighborhoods with populations of color a higher interest rate. And places with a higher Black or Hispanic population are charged on average more than $25 in late fees, while in places where the Black population is nearly zero, people pay less than $20.
In a new consumer protection action, the CFPB is limiting the amount companies can charge for a late fee to a more reasonable $8.
Fee reforms work. In 2009, Congress passed the Credit CARD Act, which required banks to give consumers enough time to pay their bills, eliminated retroactive rate increases, and curbed excessive marketing to young adults. Careful study of the CARD Act found that the market became more transparent and many fees went away. By 2013, the law was saving Americans $20.8 billion a year.
Consumers will appreciate strong action on these issues. And consumers vote! About 82 percent of U.S. adults support lowering the maximum late fee, 68 percent support the 15 day grace period, and 84 percent support requiring companies to remind consumers of late fees.
The CFPB should keep at it. Making ends meet in this country is hard enough without being charged for coming up short.
