Overdraft fee reform has a big, small-bank flaw

Overprotected. A quirk of American banking industry is that curbs imposed on big lenders often spare small ones. reasons are practical, but not always helpful. latest example is a proposal to limit fees that banks charge for overdrafts. It’s meant to close a loophole, but inste creates anor.

Overdrafts can be punishing for customers whose accounts go into red unexpectedly. Many banks charge around $35 for a cushion to cover overdraft shortfalls. Consumer Financial Protection Bureau wants to force roughly-130 banks it defines as “very large” to charge no more than what service costs m, or a flat fee of $14 or less, or face onerous disclosure and protection standards like those imposed on credit cards.

Not all banks need this dose of regulatory medicine. Citigroup scrapped overdraft charges two years ago, while Bank of America cut its fees to $10. But y are outliers. While mega-bank run by Brian Moynihan me just over $100 million in overdraft fees in first nine months of 2023, according to regulatory filings, Wells Fargo me nearly seven times that, and JPMorgan eight times.

Yet small banks charge high fees too, and often to less affluent consumer bases. Lenders who fall outside of new rule levy almost twice as much in fees per dollar of deposits than ir bigger rivals, extrapolating from CFPB’s own calculations that banks covered by rule charged 68% of all overdraft fees but have 80% of deposits.

Analysis by Brookings Institution presented to Congress highlighted five banks new rule wouldn’t cover, that in 2021 squeezed out at least four times fees per account that mega-banks do. It showed that Armed Forces Bank, which makes loans to military personnel, me all of its profit from se fees in preceding three years. Small banks serve communities bigger banks don’t, but that also means ir customers may be more vulnerable to vicious circle of unexpected fees.

Why leave overdraft problem only partly solved? One explanation is that CFPB has rules of its own to follow, and must do extra work to justify rules affecting small businesses. That’s unhelpful for CFPB boss Rohit Chopra as he helps President Joe Biden fight his war on “junk fees” so close to November’s election.

or reason is that small banks have a special place in politicians’ hearts. Even though ir financial returns are often higher than at bigger rivals, y tend to demand, and get, special regulatory treatment. With economy softening and property loans creaking, a curb on fees could push some local lenders under. No wonder Chopra has chosen to stay within his means.