2023 Bank Fees and Overdrafts

Where you live may determine whether you get hit with sky-high interest rates and junk fees. A new report from the National Consumer Law Center (NCLC) calls out the states with the most lax consumer protections and salutes the states that have increased consumer protection.

The report says residents of North Carolina, Alabama and Oklahoma are the most vulnerable. NCLC says Alabama recently amended its consumer lending laws to allow new junk fees while North Carolina increased both the allowable interest rate and the amount of a junk fee for “processing” a loan. 

In Oklahoma, borrowers taking out a two-year loan of $2,000 could now pay a maximum annual percentage rate (APR) of 54%, an increase from 34%. NCLC says the state also increased the interest rates allowed under its more general consumer loan law.

The report says residents of Colorado, Connecticut and Minnesota recently got stronger protections. All three states have “significantly” strengthened protections against lenders that violate consumer lending laws.

For example, Minnesota eliminated triple-digit rates on payday loans and Colorado reduced the allowable APR on certain small short-term loans.

>> Need cash for the holidays? See your best loan rate now.

Most states are moving in the right direction

The good news is 45 states and the District of Columbia now cap interest rates and loan fees for at least some consumer installment loans, depending on the size of the loan. 

“We recommend an airtight 36% APR cap for small loans and lower limits for larger loans,” said Carolyn Carter, NCLC’s deputy director and one of the authors of the report. “High-interest loans add to debt, increase families’ financial struggles, drive borrowers out of the banking system, and exacerbate existing disparities.”

Without those limits, Carter says exploitative lenders will set up shop in a state, “overwhelming the responsible lenders and pushing abusive loan products that trap low-income consumers in never-ending debt.”

Recommendations 

NCLC recommends that state regulators take these steps to protect borrowers:

• Cap APRs at 36% for smaller loans, such as those of $1,000 or less, with lower rates for larger loans.

• Prohibit loan fees or strictly limit them, to prevent fees from being used to undermine the interest rate cap and acting as an incentive for loan flipping.

• Include all payments in the APR calculation, whether or not they are deemed “voluntary.” Some lenders have tried to disguise fees as purportedly voluntary “tips,” expedited fees, or donations.

• Prevent loopholes for open-end credit. Rate caps on installment loans will be ineffective if lenders can evade them through open-end lines of credit with low interest rates but high fees.

• Ban the sale of credit insurance and other add-on products, which primarily benefit the lender and increase the cost of credit.

• Examine consumer lending bills carefully. Predatory lenders often propose bills that obscure the true interest rate, for example, by presenting it as 24% per year plus 7/10ths of a percent per day instead of 279%. Or the bill may list the per-month rate rather than the annual rate. Get a calculation of the full APR, including all interest, all fees, and all other charges, and reject the bill if it is over 36%.

• Include anti-evasion provisions to prevent lenders from laundering their loans through out-of-state banks to evade state rate caps or disguising their loans as sales, wage payments, or other devices.

Consumers who find themselves in a financial bind have a growing number of options. Personal loans usually have interest rates that are lower than many credit cards. ConsumerAffairs analyzed 24 lenders and picked the seven best here.

Is there a worse consumer gnat than an overdraft fee? You miscalculate the timing of a deposit, and before you know it, you’ve been charged $34 for being overdrawn $5.

It’s a mistake you think is worthy of a mulligan, but one the bank seems to relish, especially when more transactions come in before you get the matter settled and the dominoes start to fall everywhere.

Regions Bank had its hands slapped for illegal surprise overdraft fees by the Consumer Finance Protection Bureau (CFPB) a year ago. Other banks probably sat up and took notice, becoming less aggressive than they were pre-pandemic and the haul on fees was greatly reduced.

But the candy jar of overdraft and non-sufficient funds (NSF) revenue is still tempting enough for banks to charge an estimated $7.7 billion for those consumer indiscretions in 2022.

The number of overdraft-related complaints quadrupled at the CFPB earlier this year and a new research study by PYMNTS’ research found that 39% of consumers who live paycheck-to-paycheck and struggle to pay bills suffer transaction declines and overdrafts, compared to 6.3% of those not living paycheck to paycheck. 

And where it stops, nobody knows…

The study says that a lot of the pain fell on the shoulders of millennials and the “credit marginalized” — consumers who experienced at least one credit rejection in the past year.

Baby boomers stay out of harm's way, but interestingly enough, nearly 25% of those making $100,000 or more a year found themselves guilty of attempting transactions without sufficient funds. And they, along with Gen X’ers wound up paying overdraft fees at a higher rate than other consumers.

There are ways around this, but you’ll need to get clarifications

Overdraft fees can cut two ways. PYMNTS said the average flat fee consumers faced was $29, but when every dollar counts, that $29 can go a long way.

The other knife wound is that 90% of consumers who experienced overdrafts faced even further hardship, with nearly 66% of overdrafts leading to broader credit accessibility issues like impaired credit scores or the lack of funds to pay other charges if things start to snowball.

How can you avoid the overdraft quicksand? ConsumerAffairs reached out to some financial experts to get their two cents on how consumers can avoid overdraft and NSF issues. 

“It can be challenging as a consumer to avoid fees completely,” said Joel Schwartz, founder and co-CEO of DoubleCheck, a fintech helping financial institutions provide consumers’ transparency and control for NSF fees. 

“Some financial institutions offer “free checking” which sounds like a fantastic value, right? Turns out that the people who developed the ‘free checking’ concept knew that the consumers who were most interested in free checking would be the ones most likely hit with overdraft and other account fees,” he said.

To that end, avoiding fees might mean you have to jump through your bank’s fee requirements hoops. Those can vary bank-to-bank, but most general requirements include maintaining a minimum balance of a specified amount, setting up direct deposit, etc.

Schwartz says you can pore through the fine print if you want but it may be easier just to call your local branch and ask them what the lowdown is. He also suggests setting up low-balance alerts.

Overdraft Protection can be a good idea depending on the situation, but there may be fees associated with overdraft protection and the perception that it covers everything is misguided. Before signing up for that, you’d be wise to learn what’s covered and what’s not.

So can “automatic Transfers,” says Investment analyst and banking guru Young Pham. “Set up automatic transfers from your savings account to your checking account to cover any potential shortfalls. This proactive approach can prevent overdrafts and related fees.”

'I promise, I’ll never do it again!'

Pham says that some banks offer Overdraft Forgiveness (aka “Overdraft Courtesy”) programs, where they waive the first overdraft fee or provide a grace period to replenish your account without penalties. Be sure to check if your bank provides such options.

But be careful because these things may look like a duck but they may not walk like a duck.

For example, FindABetterBank (FABB) says that when you choose Overdraft Forgiveness – which works for both checks and debit card purchases – your bank will cover the cost of purchases that cause your account to go below zero.

What this will do is help prevent your checks from bouncing, but what it won't do is keep you from paying a fee if you don't have enough money in your account. 

“While this feature can be useful in emergencies, it can also lead you to racking up fees for debit card purchases that you wouldn’t make if you knew they’d overdraft your account. Cue the infamous $35 cup of coffee,” FABB warned.

Perhaps you’ve worked hard to improve your credit score because it can make all sorts of improvements to your financial situation. But then you’ve begun to hear that the government has changed some fees to increase costs for people with good credit scores.

What’s up with that? Well, that’s not exactly the case.

It is true that back in January the Federal Housing Finance Agency (FHFA) announced that beginning in May, mortgage fees on low-down payment loans would rise for some borrowers, while others with less-than-perfect credit would see costs go down. The fees, imposed by the government enterprises Fannie Mae and Freddie Mac, are designed to mitigate the risk of the borrower defaulting.

The fees are based on a percentage of the mortgage amount. People with high credit scores generally pay a lower rate than people with lower scores. That was the case before the change and FHFA says that’s still the case, even though there have been media reports to the contrary.

What’s changing is the gap between the rate for good credit scores and not-so-good scores has shrunk a bit. Someone with a 760 credit score putting down 5% will pay a fee of around 0.5% of the loan amount. Someone with a 660 credit score, making the same down payment and borrowing the same amount, would pay a rate of 1.625%.

FHFA statement

 FHFA Director Sandra Thompson issued a statement, with these bullet points, in an effort to explain the change.

• ​Higher-credit-score borrowers are not being charged more so lower-credit-score borrowers can pay less. The updated fees, as was true of the prior fees, generally increase as credit scores decrease for any given level of down payment.

• Some updated fees are higher and some are lower, in differing amounts. They do not represent pure decreases for high-risk borrowers or pure increases for low-risk borrowers. Many borrowers with high credit scores or large down payments will see their fees decrease or remain flat.

• Some mistakenly assume that the prior pricing framework was somehow perfectly calibrated to risk – despite many years passing since that framework was reviewed comprehensively. The fees associated with a borrower’s credit score and down payment will now be better aligned with the expected long-term financial performance of those mortgages relative to their risks.

Fees are paid by buyers making small down payments

Thompson says the new fee structure does not provide incentives for a borrower to make a lower down payment to benefit from lower fees. Borrowers making a down payment smaller than 20% of the home’s value typically pay mortgage insurance premiums, so these must be added to the fees charged by Fannie and Freddie when considering a borrower’s total costs.

The changes also mostly affect borrowers who are making smaller down payments since the whole idea is to reduce the risk for the lender. Still, there are critics of the change.

David Dworkin, CEO of the National Housing Conference, says he thinks there should be more assistance to expand housing access but that he also believes the changes are not in keeping with the purpose of the fees. 

“It’s no longer risk-based pricing, it’s income redistribution,” Dworkin told Forbes. “It’s picking who’s going to pay [more] so someone else’s mortgage is cheaper.”

Excessive credit card late fees that cost consumers about $12 billion a year may soon be a thing of the past.

A proposed rule from the Consumer Financial Protection Bureau (CFPB) is designed to help ensure that over-the-top late fee amounts are illegal, reducing late fees by as much as $9 billion per year.

Credit card companies, according to CFPB Director Rohit Chopra, “have exploited a regulatory loophole that has allowed them to escape scrutiny for charging an otherwise illegal junk fee.”

The proposal, he said, “seeks to save families billions of dollars and ensure the credit card market is fair and competitive.”

Gouging the consumer

Regulators point out that if you miss a payment due date, you may be hit with a fee that far exceeds the credit card company’s costs to collect late payments -- even if you pay a few hours after the deadline.

The CFPB adds that these late fees also may be on top of other consequences of paying late, such as a lost grace period on paying interest or a lower credit score.

As an example, companies currently charge people as much as $41 for each missed payment, resulting in billions of dollars in annual junk fee revenue for credit card companies.

Financial and emotional damage

These excessive fees can have a number of consequences for consumers who are hit by them.

“Right now, the max late fee is $29 for a first offense and $40 for any others within the next six months,” said LendingTree Chief Credit Analyst Matt Schulz.

Any change would be good news for consumers. Shultz said “even if you can’t pay in full, you have to make sure that you pay at least the minimum required by your issuer each month. Otherwise, it can do real damage to your credit. You can avoid that by using tools like autopay.”

It isn't just the extra out-of-pocket expense that's damaging.

"The financial stress and difficulties associated with late fees and increased debt can put strain on personal relationships," Levon Galstyan, a Certified Public Accountant at Oak View Law Group, told ConsumerAffairs. "This can make it difficult to maintain strong and supportive personal connections."

What the proposed rule would do

The changes proposed by the CFPB would amend regulations implementing the Credit Card Accountability Responsibility and Disclosure Act of 2009 and ensure that late fees meet the Act’s requirement to be “reasonable and proportional” to the costs incurred by issuers to handle late payments.

Specifically, the proposed rule would lower the immunity provision for late fees to $8 for a missed payment as well as end the automatic annual inflation adjustment.

It would also ban late fee amounts above 25% of the consumer’s required payment.