AN ANALYSIS OF BANK

OVERDRAFT FEES
A REPORT BY THE OFFICE OF SENATOR CORY A. BOOKER

August 2018
I’m a single mother of three, and for as long as I can remember overdraft fees have always been one of the most
difficult and challenging parts of my life. Overdraft fees put me in the arena of living paycheck to paycheck, and
sometimes without a paycheck. The reason for this is that these exorbitant fees left me, many times, in the
negative. How could I run a household in a constant downward spiral? Every money moment in my life was
shared with the fear of a dreaded overdraft fee.

I remember a time when I was working at JC Penney’s but struggling to cover rent and groceries. I got hit with
two overdraft fees, $60 or $70 in total in one week. I am a responsible adult but did not understand why these
fees would accumulate. I may have been off 15 cents or a bill came in early. So, the banks became who I worked
for. At one point I ended up making cloth diapers for my children out of t-shirts and an old sweater for liners,
not because I wanted to but because I had no choice. It felt like the banks legally stole my money.

Over time, I’ve probably paid over $2,500 in overdraft fees. At times I’ve gotten hit with three fees in one day –
how can they charge you three times in one day?

Eventually I’ve lost account after account and been reported to Chexsystems. I worked so hard to get a better
job but the better paying and better benefit jobs I could not get. Those employers would not give me a chance.

For me, overdraft fees meant missing work because I couldn’t get a bus pass because my account was overdrawn.
To the banks I say: While you get rich off of overdraft fees, I still hear my son complain and moan of hunger,
and I feel guilty, yet defenseless because the money is gone. I still see my newly walking toddler cringe with pain
because of a diaper rash. $15-$35 is a momentous amount for a low-income family.

As the matriarch of a family, feeling unable to provide for my family due to overdraft fees worsened my
depression and sometimes made it hard to get out of bed in the morning. They just made it feel impossible to get
ahead.

The saga continues -- My oldest daughter has a bank account now, and I see the banks doing the same thing to
her.
--Stacy, Connecticut

While my granddaughter “Alice” attended community college in Jersey City, she worked odd jobs, babysitting,
walking dogs, and house sitting to earn spending money and pay some expenses related to school. She did not
earn much, but she maintained a bank account, her first without her parents as co-account holders. She does
not really remember when or how it happened, but she ended up with overdraft coverage on the account.

At some point, “Alice” set up automatic bill pay for her cell phone account. The cell phone company told her it
would be cheaper if she did. She usually had the same charges every month. However, one month her bill was
more than usual. The bill payment was deducted from her account and took her balance down to about $40. She
had not looked at her balance that day and used her debit card to buy things at a drug store, the supermarket,
and a coffee shop. By that night, she was overdrawn by about $15 and got a $35 overdraft fee. Her father gave
her $100 to cover the fee, and to bring her balance up until she could make a deposit.

The next day “Alice” deposited a check for babysitting of a little more than $200. At that point, she thought she
had $50 cash on hand and $200 soon to clear. The check bounced. She got a $35 fee and her balance went down
to about $15. Not aware of the bounced check or the fee it generated, she used her debit card at the school
bookstore. Instead of denying the purchase, the bank let the sale go through and “Alice” spent over her account
balance again.

Finally, “Alice’s” parents got involved, had her cancel the automatic bill pay and gave her some tough talk
about making sure she knows her exact balance and about keeping a minimum amount in her account at all
times. My granddaughter is 19 and not used to more than a savings account. She was lucky she did not end up
owing more money or having to close her account. The debit card and overdraft was confusing to her and if she
did not have her parents’ advice and support, she could have gotten in a lot more trouble.
--Betty, New Jersey

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THE HIGH COSTS OF OVERDRAFTS
Financial institutions often charge an overdraft fee—typically $35—when they “cover” a customer’s attempted
transaction even though the customer’s account lacks sufficient funds. Overdraft fees can be triggered by point-
of-sale (POS) transactions (i.e., payments typically made at the register using a debit card), ATM withdrawals,
recurring electronic bill payments, and paper checks. In the event of an overdraft, the bank deducts the fee and
the amount of the overdraft from the account holder’s next deposit.

The average overdraft fee is charged on relatively small

transactions and is repaid soon after the overdraft is
incurred; in 2012 the median debit card transaction
amount that triggered an overdraft fee was just $20 and
was repaid within two days.1 In these cases, overdraft
services function as a very high-interest short-term loan: a $35 overdraft fee on a $20 debit card overdraft repaid
after seven days results in a 9,125 percent Annual Percentage Rate (APR).

Research has consistently found that overdraft fees are disproportionately borne by a small portion of account
holders. Nearly 10 percent of all account holders pay 10 or more overdraft fees each year,1 and for many
households, overdraft fees over the course of the year consume nearly a full week’s worth of their annual
incomes.2 Since overdraft programs do not consider the borrower’s ability to repay and because repayment is
done as a lump sum, a consumer who is struggling financially frequently cannot repay the overdraft charges along
with daily expenses like food and prescription drugs.

In addition to exacerbating often desperate financial situations, excessive overdraft fees have been shown to push
low-income consumers away from banking products altogether. A 2013 survey by the Federal Deposit Insurance
Corporation (FDIC) indicated that approximately 778,800 households, and well over 1 million adults, who once
had bank accounts chose to opt out of the banking sector and go unbanked primarily because of high or
unpredictable fees.3

Although commercial banks have traditionally collected most of their revenue from mortgage, auto, and credit
card lending, overdraft services have emerged as a major component of their business model. A 2013 Consumer
Financial Protection Bureau (CFPB) white paper noted that Non-Sufficient Fund (NSF) and overdraft fees
constituted a “substantial share” of revenue on checking accounts and a significant portion of overall revenue—
especially for banks which rely on consumer lending and services. The paper highlighted FDIC call report data,
which showed that financial institutions’ service charge revenue had grown from $6.6 billion in 1984 to $34.2
billion in 2012—a substantial portion of which, the CFPB observed, stemmed from growth in NSF and overdraft
fee revenue. This growth has provided a boon to the top 10 U.S. retail banks. According to FDIC Call Report
data, the top three largest banks alone collected $5.2 billion in overdraft fees in 2017.4

1 http://responsiblelending.org/sites/default/files/uploads/8-overdrafts.pdf
2 http://www.pewtrusts.org/-/media/assets/2016/04/heavyoverdrafters.pdf
3 http://www.responsiblelending.org/sites/default/files/nodes/files/research- publication/crl_broken_banking_may2016.pdf
4 https://cdr.ffiec.gov/public/

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THE EVOLUTION OF OVERDRAFT PROGRAMS
In the past, financial institutions enrolled consumers in overdraft services to protect them from the prospect of a
“bounced” check, which could trigger hefty NSF fees and prevent the completion of rent payments or other
important transactions.

However, overdraft services have evolved significantly over the last few decades. Financial institutions’ use of
overdraft programs grew in tandem with the expansion of the global ATM network, which provided consumers
with new and more convenient ways to access cash. In the 1990s, financial institutions expanded on the benefits
of traditional ATMs by replacing ATM-only cards with debit cards that enabled electronic payments from
checking accounts. Gas stations, grocery stores, and other merchants quickly adopted networks to support debit
card payments. According to the CFPB, the average number of monthly non-cash payments per household
increased by over 50 percent between 2000 and 2011.5

With this growing number of payment mechanisms, along with greater consumer preference for non-cash
payments, came a wave of consumers unintentionally overdrawing their accounts. This increase in overdrafts
presented financial institutions with a new opportunity to generate revenue. Equipped with sophisticated
software to automate the process of handling those transactions, financial institutions enrolled most customers
into high-cost overdraft programs, charging a high fixed fee for each overdraft the bank paid and, often,
additional fees on accounts that remained overdrawn. These amounts have been grossly disproportionate to
estimates of the actual cost to banks of covering overdrafts. The 2013 CFPB white paper found that the most
significant cost to banks of covering overdrafts was the loss that the bank incurs when an account holder does
not repay a negative account balance and the bank closes the account. The CFPB estimated that the amount of
these losses represented just 14.4 percent of net overdraft fees.6

In response to massive ramp-up in banks’ use of overdraft fees, and attendant confusion among consumers, after
a lengthy comment period, the Board of Governors of the Federal Reserve in 2010 implemented overdraft
regulations under Regulation E of the Electronic Funds Transfer Act (EFTA). Among several consumer
protection measures, the Board’s new regulations required that financial institutions obtain customers’
affirmative “opt-in” to overdraft services for ATM transactions or one-time debit card transactions before
institutions could charge overdraft fees on those transactions. Today, in the event of an overdraft, consumers
who are not opted-in typically have their debit card purchases and ATM transactions declined immediately and
do not incur an NSF fee. For consumers who are opted-in, the bank will pay the transaction but also charge a
fixed overdraft fee, typically $35. This is often accompanied by additional fees if the account holder does not
make a deposit in short order to restore the account balance. Opt-in requirements do not apply to checks and
ACH transactions. Banks typically default customers into overdraft programs on these transactions and charge
a $35 fee when the service is used; if the bank declines the transaction instead, it will charge an NSF fee, also of
about $35.

5 https://files.consumerfinance.gov/f/201306_cfpb_whitepaper_overdraft-practices.pdf
6 Ibid

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CONCERNING PRACTICES CONTINUE
After the revisions to Regulation E took full effect in 2010, consumer advocates and the news media reported
troubling trends in the implementation of the opt-in rule. Several financial institutions were found to be
aggressive and misleading in marketing their overdraft services. For example, many opt-in campaigns
inappropriately targeted financially-vulnerable account holders who frequently overdrew their accounts, and
consumers received inadequate and potentially deceptive information on which to base their decision.7 Some
institutions were found to steer consumers towards costly overdraft services even when lower-cost options such
as linked savings accounts or overdraft lines of credit were available.8

In 2013, the CFPB published a report that affirmed many consumer advocates’ concerns. Based on data collected
from banks possessing “a significant amount” of U.S. checking accounts, the CFPB discovered notable
differences between the rates at which account holders at different institutions had opted-in. For example, the
share of new account holders who opted-in ranged from single-digit percentages at some banks to over 40 percent
at others. The CFPB concluded that much of the variation may be due to known differences in the marketing of
overdraft services.

A more recent 2014 Pew Charitable Trusts survey raised

additional concerns that financial institutions were marketing
overdraft coverage in a confusing and deceptive manner. It
found that 52 percent of all overdrafters who were charged a fee
on a debit card transaction in the previous year did not recall
opting into overdraft services.9 In other words, a majority of
account holders who were opted-in and had overdrafted were nonetheless unaware of their designation. This
finding suggested that consumers were not benefiting from federal regulations aimed at facilitating consumer
choice in overdraft services.

In 2017 the CFPB sued TCF National Bank for misleading consumers into enrolling in overdraft coverage. The
Bureau’s investigation uncovered that TCF Bank relied on overdraft fee revenue to a greater extent than most
banks and that TCF took aggressive action to protect the $182 million in annual revenue it received from
overdraft fees. These measures included financial bonuses for branch managers who obtained high opt-in rates for
new checking accounts, staff quotas for opt-in rates, and the threat of termination for bank employees who failed
to reach certain opt-in benchmarks. As a result of these practices, nearly two-thirds of TCF Bank customers had
opted in by mid-2014—nearly three times the opt-in rate of consumers at other banks. The strategy was so
successful that the then CEO of TCF Bank even named his boat “Overdraft.”

Despite scrutiny in the press and by regulators, problems with

overdraft services persist. A 2017 survey by The Pew Charitable
Trusts found that consumers continued to lack understanding of
overdraft coverage and available alternatives. It found that nearly
3 in 4 people who overdraft do not understand that they have the
right to have transactions declined without a fee if their account
does not have sufficient funds. According to the survey, even
customers who reported having had a conversation with their bank
about overdrafts had limited understanding of their rights related to overdraft programs.10

7 http://www.responsiblelending.org/overdraft-loans/policy-legislation/regulators/CRL-OD-Survey-Brief-final-2-4-25-11.pdf
8 http://www.responsiblelending.org/state-of-lending/reports/8-Overdrafts.pdf
9 http://www.pewtrusts.org/~/media/post-launch-images/2014/consumer-finance/safe-checking-overdraft-
survey_report.pdf
10 http://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2017/12/overdraft-does-not-meet-the-needs-of-
most-consumer
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In addition to aggressive practices to boost opt-in rates, some banks seek to maximize overdraft revenue through
non-sequential posting of transactions. A 2016 survey of the 50 largest banks by the Pew Charitable Trusts found
that more than 40 percent process some transactions from the largest to smallest dollar amount.11 By processing
a larger payment first, regardless of the actual timing of the transaction, a bank account is depleted more quickly,
which can lead to numerous overdraft fees on the smaller transactions that are reordered to be posted afterwards.
For example, a consumer with $100 in his account makes two $10 purchases in the morning with his debit card,
followed by a $150 debit card purchase in the evening. If posted chronologically, he would be charged a single
overdraft fee—for the larger transaction that exceeded his account balance. However, if a bank reorders the
transactions and processes the $150 payment first, he would be charged for three overdrafts: first for the large
payment that exceeded his balance, and then for the two smaller transactions.

INFORMATION REQUEST
After examining troubling overdraft practices, rising overdraft revenue, and widespread consumer confusion,
Senator Cory Booker sent a letter on July 17, 2017 to the 13 U.S. banks12 with over $2 billion in assets that took
in the most overdraft and NSF revenue per account, as identified by an analysis by U.S. PIRG. This included very
large national banks such as Bank of America and JP Morgan Chase, each with more than $2 trillion in assets in
2016, as well as much smaller banks like BankPlus, a smaller regional bank serving the Mississippi Delta with
just $2.6 billion in assets in 2016.13 Senator Booker requested institutional information regarding each bank’s
overdraft revenue, opt-in marketing, employee incentive programs related to opt-in rates, and any alternatives to
excessive overdraft penalties.

FINDINGS
All 13 financial institutions responded to Senator Booker’s letter, though many responses were incomplete. Below
is a summary of findings, based on their written responses, as well as relevant data from banks’ publicly available
disclosures and quarterly financial filings with the Federal Financial Institutions Examination Council.

11 http://www.pewtrusts.org/en/about/news-room/press-releases-and-statements/2016/12/20/most-large-banks-fail-to-meet-overdraft-
best-practices
12 Banks receiving letters were JP Morgan Chase Bank, Wells Fargo, Bank of America, TD Bank, PNC Bank, SunTrust Bank, Regions
Bank, Branch Banking and Trust (BB&T), Woodforest Bank, Ameris Bank, Bank Plus, U.S. Bank, and Ocean Bank.
13 https://uspirg.org/sites/pirg/files/reports/USP%20Overdraft%20Fees%20Report%20Dec16%201.1.pdf

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 Overdraft Fees Charged Per Bank14

Overdraft fees ranged from $29 to $36 per overdraft. Most banks have a “limit” on the number of fees they will
charge per day, but even a limit of three fees permits over $100 to be charged in a single day; a limit of five fees
results in charges of approximately $175 in a single day.

Two of the banks studied limit their use of overdraft services for ATM withdrawals and debit card transactions:
JP Morgan Chase Bank does not charge overdraft fees on ATM withdrawals and Bank of America does not charge
overdraft fees on everyday debit card purchases.

Bank Overdraft Fee Extended Overdraft Fee

- $35 per overdraft - Additional $35 overdraft fee after an
Ameris Bank - Maximum of five overdraft fees per account account has been overdrawn for five
per day consecutive business days
- $35 per overdraft - Additional $35 fee per day after an account
- Maximum of four overdraft fees per account has been overdrawn for five consecutive
Bank of America per day business days
- Overdraft fees are not charged on debit
card transactions
- $36 per overdraft - Additional fee of 0.02191% of overdraft
BankPlus - Maximum of five overdraft fees per account amount per day
per day
- $36 per overdraft - Additional $8 fee per day after an
BB&T - Maximum of one overdraft fee per account account has been overdrawn for seven
per day consecutive calendar days
- $34 per overdraft - Additional $15 fee each time an account is
JP Morgan Chase - Maximum of three overdraft fees per overdrawn for five or more consecutive
Bank account per day business days (even if the overdraft is less
- Overdraft fees are not charged on ATM than $5)
withdrawals
- $35 per overdraft - No extended overdraft fee but an account
Ocean Bank - The number of overdrafts per account per will be charged 17% interest per day on
day is determined by the local branch the overdraft amount for up to 90 days
- $36 per overdraft - Additional $7 each day after an account
PNC Bank - Maximum of four overdraft fees per account has been overdrawn for five consecutive
per day calendar days
- $36 per overdraft - No penalty for extended overdraft
Regions Bank - Maximum of six overdraft fees per account
per day
- $36 per overdraft - One-time fee of $36 after an account has
SunTrust Bank - Maximum of six overdraft fees per account been overdrawn for seven consecutive
per day calendar days
- $35 per overdraft - Additional $20 Fee for every 10 days an
TD Bank - Maximum of five overdraft fees per account account is overdrawn
per day

14 Data gathered from bank public disclosures and queries with individual banks

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 Bank Overdraft Fee Extended Overdraft Fee
- $36 per overdraft - $36 extended overdraft fee after an
US Bank - Maximum of four overdraft fees per account per account balance is negative for seven
day consecutive days
- $35 per overdraft - No penalty for extended overdraft
Wells Fargo Maximum of three overdraft fees per account per
day
$29 per overdraft Monthly overdraft fee equal to the
Woodforest - Maximum of three overdraft fees per account per amount of an account’s overdraft limit
Bank day

Revenue Generated By Overdraft Fees

Of the 13 banks, annual overdraft revenue ranged from $1.4 million to $1.9 billion. The average total overdraft
revenue during 2015-17 was more than $587 million per bank per year.15

15 Data gathered from Federal Financial Institutions Examination Data accessed at https://cdr.ffiec.gov/public/
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 Does the institution engage in non-sequential transaction processing?

Several reports document the practice by financial institutions of reordering transactions to increase the number
of overdraft fees. The FDIC, which generally regulates smaller state-chartered institutions, has advised against
reordering transactions in a high to low manner, arguing instead for transactions to “be processed in a neutral
order that avoids manipulating or structuring processing order to maximize customer overdraft and related
fees.”16 The majority of banks questioned in Senator Booker’s information request stated that they did not engage
in this practice. Those banks, rather, noted that they post transactions sequentially within categories (e.g. credits,
ATM withdrawals/debit card transactions, ACH transactions, checks, bank teller transactions, etc.) JP Morgan
Chase, Bank of America, and PNC Bank did reorder some transactions in a high to low manner. JP Morgan
Chase maintained that this reordering served clients’ interest in prioritizing high dollar transactions. BankPlus
and SunTrust Bank did not provide an answer.

Were employees evaluated or given bonuses based on the number or

percentage of account holders who opted in to overdraft programs?
Some banks have been found to financially reward employees based on overdraft revenue and/or overdraft opt-
in rates. Such incentives likely discourage frontline employees from offering less costly alternatives to
consumers or from presenting a balanced rationale for whether or not to opt-in to overdraft programs. Of the
banks questioned, nine responded that they did not reward employees based on participation in overdraft
programs. TD Bank and JP Morgan Chase responded that they consider a number of factors when determining
employee compensation, including sales targets and/or revenue, of which overdraft fees can be one component.
It is possible that other banks may have similar practices, but may have been less clear in their written responses.
BankPlus did not provide an answer.

16 https://www.fdic.gov/news/conferences/overdraft/faq.html
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 Does the institution offer an alternative small-dollar credit product?

A slim majority of banks questioned (54 percent) reported that they did not offer alternative small-dollar credit
products. Although this study did not examine the small-dollar credit products offered by the other 46 percent,
the cost and structure of those products along with the degree to which banks actually market those products are
important considerations when evaluating their merits.

CONCLUSION
While overdraft programs might have begun as a convenience to help consumers bridge the gap when an account
is short of funds, they have evolved into extraordinarily high-cost, punitive programs that exacerbate already
desperate financial situations. The Federal Reserve’s 2010 rulemaking, which required that financial institutions
obtain a consumer’s affirmative “opt-in” before charging overdraft fees on some transactions, was an
improvement for low-income and vulnerable consumers; however, data and anecdotal evidence suggest that
many consumers are still harmed by overdraft practices. A number of concerning practices persist, including a
disproportionately high fee per overdraft; multiple fees per day; financial rewards for employees based on
overdraft revenue and/or overdraft opt-in rates; and non-sequential ordering of transactions. As a result, financial
institutions continue to generate substantial revenue from overdraft fees, which further discourages the
development of low-dollar credit alternatives. Despite years of research revealing the harms of overdraft fees,
the CFPB has recently dropped plans to take regulatory action.17

In the face of continued troubling practices, new consumer protections are required. Policymakers should
consider legislation that would bring long-overdue transparency and fairness for account holders: require
overdraft charges on ATM withdrawals and debit card transactions be in the form of traditional interest rather
than high fees per transaction; limit the number and size of overdraft fees for checks and recurring payments to
a reasonable amount that is proportional to the institution’s cost of covering the overdraft; and end the troubling
practice of non-sequential ordering of transactions. In enacting these reforms and others, we can empower
American consumers and take one small step towards an economy that works for all.

17 https://www.booker.senate.gov/?p=press_release&id=811
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