Last week, the country’s largest banks released their quarterly results, squeezing estimates and expectations almost across the board. It was another surprisingly profitable quarter in what has been quite a run since the coronavirus outbreak in the US over a year ago. To no one’s surprise, banks were among the first American institutions to recover, and they have done so dramatically. Millions of workers are left behind.
One of the unannounced profit centers that drove this money train is the repayment of overdraft fees. In the final three months of 2020, 12 of America’s 15 largest banks, all of which were consumer banking, generated massive revenues by imposing overdraft fees on needy and vulnerable Americans during the worst days of the pandemic.
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JPMorgan Chase, for example, made a staggering $ 1.5 billion According to recent FDIC records, overdraft revenue was generated in 2020 alone. During the same period, Bank of America made $ 1.1 billion in profits and Wells Fargo made $ 1.3 billion in profit. The last three months of 2020, when the pandemic was most widespread and deadliest, were also the most profitable of the year. All three banks only deducted overdraft fees of over $ 300 million. While Americans suffered the worst wave of our worst public health crisis in 100 years, with sky-high unemployment and intermittent federal benefits, the country’s largest banks have eroded the poorest Americans for billions of dollars in fines.
“Banks could have capped overdraft fees for a number of months or had no fees during the pandemic, but they didn’t want to give up a dollar in overdraft proceeds in any formal way,” said Rebecca Borné, senior policy counsel at the Center for Responsible Lending. “What we are seeing now is a return to normal business operations, with our largest banks each pulling over a billion dollars from people’s checking accounts in one of the worst years in our history. It’s an incredible amount of money. “
Over-subscription is essentially a forced high-cost payday loan. If a bank customer overdraws their account, they can still pay for anything that got them over the limit. However, an overdraft fee is typically charged around $ 35 for the privilege. This is often imposed on an overdrawn amount of money, which is much smaller, and can be repeated every day if an account remains overdrawn. The other option would be to refuse transactions that are based on insufficient funds, but that would not make money for the bank.
This uniquely profitable part of the banking sector is aimed almost exclusively at the poorest. According to a 2017 study by the Consumer Financial Protection Bureau, 5 percent of all accounts have over 20 overdrafts per year, making 63.3 percent of all overdraft fees paid by consumers. Another 4.2 percent of bank accounts have more than 10 overdrafts per year and account for more than 15 percent of the fees paid by consumers.
Overdrafts are a particularly harmful form of predatory financial activity that is functionally more exploitative and expensive than the so-called “alternative” financial sector for payday loans and check cashing businesses. As the University of California, Irvine professor Mehrsa Baradaran writes in her book Like the other half banks“If you think of the fee as a payment made by the customer to renew the balance on the overdraft, a 2008 study by the Federal Deposit Insurance Corporation (FDIC) showed that these fees had an APR greater than Have 3,500 percent! “
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Over the past three decades, collecting overdraft fees on financially insecure companies has become an increasingly large part of the business strategy of American banks and has more than doubled as a source of income during that period. Total overdraft fees have risen steadily since the Great Recession, peaking in 2019 when banks generated $ 11 billion in revenue from overdrafts alone, accounting for nearly 5 percent of total bank revenue.
At the start of the pandemic, Senate Democrats urged the banking sector to stop charging overdraft fees. Sens. Cory Booker (D-NJ) and Sherrod Brown (D-OH) even introduced a bill temporarily suspending such fees for the duration of the pandemic. But the bill didn’t move and the overdraft persisted.
Over the months, it seemed that the problem might have resolved itself as overdraft proceeds fell. However, this was not an expression of a more forgiving banking sector that has taken voluntary action. Rather, it was the result of the substantial short-term financial aid from the CARES Act with its economic reviews and the increased federal unemployment insurance.
Over the past three decades, collecting overdraft fees on financially insecure companies has become an increasingly large part of American banks’ business strategy.
Banks issued press releases sympathizing with the economic troubles – they even suggested that customers could call for an overdraft, which would be refunded if it was “pandemic-related”. But that was never a serious commitment. There are millions of overdrafts in the United States each year, and the establishment of a bulk refund program would have required massive hiring and staffing of call centers to handle that volume. They never meant it and it was never much.
Speaking of CARES, there were concerns that low interest rates and the economic conditions sparked by the recovery efforts and lockdowns would cripple banks. CARES made them complete by, among other things, leading the entire program to protect paychecks through them, for which the big banks were then allowed to charge a lucrative percentage for mechanical, risk-free administration. Some of the program was specifically designed to make the banks a whole. Banks made $ 25 billion just managing PPP loans.
Meanwhile, the Federal Reserve announced shortly after CARES was signed to “suspend unsecured intraday credit limits” and “waive overdraft fees for institutions eligible for the primary lending program,” literally waived major bank overdraft fees in the first few months of the pandemic to help with liquidity problems. While the federal government excused banks from paying overdraft fines in times of crisis, those same banks turned and continued to charge strict overdraft fees to their most vulnerable customers.
Of course, the banks were made more than whole and in record time. And because no warranties or pledges were ever required, the overdraft numbers quickly skyrocketed. By the end of 2020, banks were once again making huge profits, and overdrafts skyrocketed, almost doubling just six months after the nadir in early 2020. The overdraft trend that was interrupted in 2020 has returned.
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BECAUSE YOUR RECOVERY did so well last December the Federal Reserve allowed banks to go back to the old tradition of buying back their shares. JPMorgan Chase, Bank of America, and Wells Fargo are all committed to buying back billions of dollars in stock to help boost the share price and do good to their investors.
This makes for a decent comparison. In JPMorgan’s case, nearly 50 percent of its $ 3.2 billion share buyback obligation can be paid off through the year of overdraft fees alone. For Bank of America, the $ 1.1 billion overdraft fees in 2020 are good for 38 percent of its $ 2.9 billion share buyback program. And for Wells Fargo, the overdrafts from 2020 will be almost twice as high as the commitment to buy back shares. That makes a portrait as neat as any way the poor pay the rich in modern finance. The fact that JPMorgan Chase, whose CEO Jamie Dimon proclaimed in his Letter to the shareholders In early April, the urgent need to tackle racial and economic crises in the United States exacerbated by COVID and outperforming all other banks in overdrafts that are disproportionately imposed on poor colored people is just the cherry on top.
There are numerous ways for both Congress and the Biden government to curb overdrafts, and regulation has been successful in the past. Obama’s Bureau of Consumer Financial Protection has set some important transparency standards. But under Trump, overdraft regulation lost momentum and nothing was done. There are currently proposals in both the House and Senate from Rep. Carolyn Maloney (D-NY) and Sen. Booker that would curb the most exploitative aspects of the overdraft, but neither have been seriously addressed.
In the meantime, both the CFPB and the Office of the Currency Auditor have non-legislative powers to regulate the practice as well. It is hoped that the appointment of Rohit Chopra as director of Biden’s CFPB means the organization will make the issue a priority; The aforementioned Baradaran has been rumored to be the likely appointment as head of the OCC, though Biden still hasn’t gotten around to making an official announcement from her or anyone else for the role. The Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve could also regulate overdrafts.
What is clear is that the wishful thinking surrounding overdrafts has been thoroughly dispelled by this latest round of financial reporting. The most predatory aspects of the overdraft are back and won’t self-regulate.
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