COLUMBIA — In the final months of the Biden administration, federal consumer watchdogs implemented a rule capping overdraft fees for major banks, cutting down on a practice opponents said cost their lowest-income consumers billions of dollars in excess fees.
South Carolina Sen. Tim Scott is one of the leading figures pushing to bring those fees back.
On Feb. 13, Scott — the newly minted chairman of the Senate Banking Committee — announced an effort with House Financial Service Committee Chairman French Hill to overturn the rule, saying it harmed consumers and eliminated policies they believed promoted “financial discipline and responsibility.”
“Many consumers rely on overdraft services to make ends meet and limiting this practice will push Americans to riskier financial products,” Scott, R-S.C., said in a statement.
“I’m proud to lead the effort to overturn this misguided rule and protect Americans’ access to important financial services,” he added.
On Feb. 13, Sen. Tim Scott announced an effort with House Financial Service Committee Chairman French Hill to overturn a Biden-era cap on overdraft fees.
The policy, imposed by President Joe Biden’s Consumer Financial Protection Bureau in December, was part of a larger effort by Democrats to crack down on alleged junk fees imposed by financial institutions with more than $10 billion in assets.
It capped most credit card late fees at $8. It also imposed a cap on overdraft fees for debit accounts at just $5, an amount the CFPB said would be sufficient for most banks to cover costs associated with administering a courtesy overdraft program.
The banks, they argued, didn’t depend on the money. The past two years, a report by consulting firm McKinsey noted last autumn, had been “the best for banking since before the global financial crisis,” with financial services retaining its position as the single largest profit-generating sector on the planet.
And the fees being charged by those banks — estimated at approximately $32 per overdraft sector-wide — represented a relatively small segment of those companies’ balance sheets.
Those fees were also disproportionately borne by the industry’s lowest-earning customers. A 2022 report by the CFPB found approximately 90 percent of frequent overdrafters have typically no more than a few hundred dollars in their accounts at the end of any given day. Another analysis, by the Rand Corporation, found those fees created barriers to low-income individuals’ ability to access traditional banking services.
Scott has fought to preserve them. In April 2023, he led a letter slamming then-CFPB Director Rohit Chopra for demonizing “commonsense incentives that promote financial responsibility,” arguing those caps might force creditors to limit exposure to those “less likely to make timely repayments.”
And in December, Scott led a last-ditch effort to block the rule change, earning scorn from the Democratic National Committee which claimed he was “pushing to rig the economy for the ultra-wealthy and big corporations.”
Scott contends the policy would be detrimental to the same low-income customers it alleges to help. On his side one study from the Federal Reserve Bank of New York said banks might actually increase other deposit fees and tighten terms in response to forcibly lowered fee caps.
Others, like the American Banking Association, noted a $5 billion overall decline in overdraft fee revenues seen between 2019 and 2022, which the industry attributed to changes ranging from sending low balance alerts, to introducing overdraft grace periods to avoid fees.
Scott’s office focused on potential banking ripples that would surface elsewhere in the industry.
“As the son of a single mother who grew up mired in poverty, Senator Scott knows firsthand the struggles of Americans working paycheck to paycheck and has worked tirelessly to promote financial inclusion and increase access to important financial services for all Americans,” his office said in a Feb. 18 statement.
“Capping overdraft charges, which will ultimately limit the services offered, will push Americans to riskier financial products and Senator Scott is working to protect access for Americans who rely on these services,” the statement said
Critics disagree. By imposing a cap, the administration sought not to eliminate the fees entirely, but to simply to eliminate the practice of banks profiting off of low-income earners.
“This is about balancing the interests of consumers so that they can have affordable lending and not be gouged, versus the profit margins of large banks and corporations,” Sue Berkowitz, policy director for advocacy organization SC Appleseed said in an interview.
Others argue there is a better way. South Carolina-based Self-Help Credit Union Regional President Kerri Smith, whose company primarily caters to low-income earners, noted most instances where customers overextend their accounts typically come in the several days preceding their paychecks.
By processing payroll two days earlier, she said, they have managed to significantly reduce customers over-drafting on their accounts. Most banks don’t do that, she said.
“For us, it was a business decision,” said Smith. “Our mission is to help low-wealth individuals build wealth. It made good business sense for us. Our bottom line is not driven by fees.”
