Under regulators' continuing campaign against overdraft fees, two new enforcement actions show that banks will still be subject to penalties even if they reduce those fees.
The Office of the Comptroller of the Currency (OCC) and the Consumer Financial Protection Bureau each fined Bank of America Corp. for practices related to the bank's overdraft and nonsufficient funds practices, among other things. The actions came despite recent
With the move, the agencies are signaling that banks can still come under regulatory scrutiny for their overdraft practices even if they reduce their reliance on that source of income.
"This shows that you're not off the hook, so to speak, even if you've been making efforts to reduce your reliance on junk fees and/or you've already provided some, but not full, consumer redress," said Eamonn Moran, senior counsel at Norton Rose Fulbright and a former CFPB official. "Officials are expanding their focus so that they are not necessarily looking at the worst offenders, but at problems big and small, at large and small institutions."
The announcement of the fines came nearly one year after another CFPB and OCC fine in July 2022 related to Bank of America's delivery of unemployment benefits. The back-to-back fines are "consistent with the CFPB's focus on 'repeat offenders,'" according to Jonathan Engel, a partner at Davis Wright Tremaine LLP and a former CFPB enforcement attorney.
Sharp drop in fee income
Similar to many other large financial institutions facing both regulatory and competitive pressure to cut overdraft fees, Bank of America recently tweaked its overdraft and nonsufficient funds fee practices. At the beginning of 2022, the company announced it would reduce its overdraft fee amount to $10 from $35 and eliminate nonsufficient funds fees.
"We voluntarily reduced overdraft fees and eliminated all non-sufficient fund fees in the first half of 2022. As a result of these industry leading changes, revenue from these fees has dropped more than 90 percent," spokesperson William Halldin said in a statement provided to S&P Global Market Intelligence.
According to data compiled by S&P Global Market Intelligence from the fourth quarter of 2020 through the first quarter of 2023, that income declined 89.9% at Bank of America, the third-largest drop among the top 20 banks with assets above $50 billion. Just Citigroup Inc. and Capital One Financial Corp. had larger drops, with declines of 96.0% and 99.7%, respectively.
Bank of America also had the third-largest drop in overdraft fee income year over year, also behind Citigroup's and Capital One's nearly 97% year-over-year drops.
Bank of America's 86% year-over-year decrease also vastly outpaced the industry, which had a 34.1% drop from the first quarter of 2022.
In announcing the enforcement action, the CFPB acknowledged the bank "has generally reduced its reliance on junk fees."
Minimal financial impact
The sharp drops in the company's overdraft fee income did not stop the agencies from bringing down the hammer.
The OCC imposed a penalty of $60 million due to multiple overdraft and nonsufficient funds fees against customers in a single transaction. Separately, but in conjunction, the CFPB levied a $90 million penalty, partly due to "double-dipping" on overdraft and nonsufficient funds fees. The CFPB also ordered Bank of America to pay over $100 million in restitution to its customers.
In their respective announcements, the CFPB took a tougher stance against the violations than the OCC, according to Davis Wright Tremaine's Engel.
"It's notable that the CFPB characterized the alleged harm to consumers as 'unavoidable,' suggesting that no disclosure would mitigate the risk to consumers," Engel said. "This is a different approach than the OCC's, which alleged that the ... conduct was 'deceptive.'"
This implies that in the OCC's view, such risks could potentially be mitigated through proper disclosure, Engel said.
Still, the fines were not punitive and will not have a big impact on Bank of America's bottom line, as they only equate to 2 cents less per share for the company, making up less than 1% of earnings per share and tangible book value, Scott Siefers, managing director at Piper Sandler, wrote in a note.
On the company's second-quarter earnings call, CFO Alastair Borthwick said the company's $16 billion in total expenses for the quarter was impacted by $276 million in litigation expenses, which was boosted by the OCC and CFPB matters.
While "the headline is of course bad," and could lead to some near-term underperformance, "we are hopeful the penalties/restitution put an end to it," Piper Sandler's Siefers wrote.
Unauthorized account opening
The CFPB's fine also alleged that Bank of America illegally withheld promised credit card account bonuses and illegally applied for and enrolled consumers in credit card accounts without their knowledge or authorization, to reach "sales-based incentive goals and evaluation criteria," illegally accessing consumers' credit reports in the process.
On the company's second-quarter earnings call, an analyst questioned "how is such a thing possible in the post-Wells Fargo era?" In 2016, Wells Fargo & Co. fell into regulatory hot water over opening millions of fake accounts, amid other regulatory issues that are still weighing on the company's expenses and hindering its growth.
According to Bank of America Chairman, President and CEO Brian Moynihan, the accounts in question were from before 2017 and found during a "horizontal review" by the OCC after the Wells Fargo scandal.
"It started in the Obama administration after Wells and then led into the early part of the Trump administration with Comptroller Otting. And you can go look at that, that was cleared up, but we've made the changes in those processes at that time," Moynihan said.