Last week, the Senate Banking Committee’s Subcommittee on Financial Institutions and Consumer Protection held a hearing entitled “Review of Overdraft Fees and Their Effects on Working Families.” A recording of the hearing is available here.

Following opening statements from Subcommittee Chairman Raphael Warnock (D-GA) and Ranking Member Thom Tillis (R-NC), three witnesses testified and answered questions from Subcommittee members. The following witnesses appeared at the hearing:

  • Aaron Klein, Senior Fellow in Economic Studies, Brookings Institution
  • Jason Wilk, Founder and CEO, Dave
  • David Pommerehn, Senior Vice President and General Counsel, Consumer Bankers Association

President Warnock kicked off the hearing by saying that onerous and opaque overdraft fees keep people in cycles of debt and poverty and have a disproportionate impact on people of color. He observed that many banks have decided to eliminate overdraft fees and applauded these banks for doing the right thing to benefit these communities. In his opening remarks, Ranking Member Tillis acknowledged the enormous choice available to consumers today as the financial services industry has developed new products. Responding to Warnock, Tillis said the industry has already embraced consumer-friendly overdraft products and practices through competition and innovation and regulation is not needed. In a nod to the CFPB’s recent request for information regarding fees charged by providers of consumer financial products or services, Tillis concluded that overdraft fees should not be characterized as “unwanted fees.”

The testimony discussed the volume of overdraft fees charged – up to $30 billion per year according to Aaron Klein of Brookings – as well as the concentration of the impact on the most economically vulnerable people. Both President Warnock and Senator Warren cited a CFPB study that found that 80% of overdraft fees were charged to 9% of consumers. However, it was noted throughout the hearing that overdraft fee revenues have declined, in many cases due to voluntary actions within the financial services industry, including the elimination of overdraft fees by many banks.

Aaron Klein said banks have already made sweeping changes to their products without regulation or legislation that will dramatically reduce the use of overdrafts and overall costs for consumers, quantifying the impact of these voluntary changes at $5 billion a year. year. David Pommerehn of the Consumer Bankers Association noted that overdraft products are based on necessity, due to limited dollar lending options, and provide one of the last viable sources of short-term cash for many consumers, pointing out also the choice and transparency that already surround the product. based on the opt-in requirement. Highlighting some of the innovations in the space, Jason Wilk discussed the products his company, Dave, offers to help consumers in its mission to “disrupt overdraft”, including linking with their bank accounts to help customers have better visibility on upcoming invoices that may lead to an overdraft.

While everyone acknowledged the steps taken within the industry to address overdraft concerns, witnesses suggested additional policy changes. Klein put forward five recommendations, including (1) revising security and soundness rules to target a small number of banks that derive all of their profits from overdraft fees, (2) requiring credit unions to disclose their overdraft data as banks do, (3) have the Fed use its regulatory authority under the Accelerated Funds Availability Act to implement real-time payments to address system sluggishness payments, thereby reducing reliance on payday lenders, (4) new regulations prohibiting banks from showing debits before credits and reorganizing payment flows from largest to smallest when processing transactions , and (5) Universal Bank-On type accounts (no overdraft, low cost basic accounts). Pommerehn argued for more short-term liquidity products and encouraged policymakers to explore alternatives, including small dollar loans.

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