Regulators are moving to crack down on overdraft fees.
The Consumer Financial Protection Bureau proposed a rule on Wednesday that would require financial institutions to offer more disclosures about overdraft fees and potentially limit the charges to as little as $3.
The average overdraft fee right now is $26.61, according to a Bankrate study. But the majority of consumers’ debit-card overdrafts are for less than $26, the CFPB said, and are repaid within three days — effectively making an overdraft fee a high-cost loan for consumers, they argue.
“We’re proposing a rule that would establish clear, bright lines and ensure customers know what they are getting when it comes to overdraft loans,” CFPB Director Rohit Chopra said in a call with reporters Tuesday.
The proposed rule would save bank customers an estimated $3.5 billion per year, the agency said. It’s a part of a broader campaign by the CFPB and the Biden Administration targeting so-called junk fees, which regulators say inflate prices without adding value and unnecessarily harm consumers.
When the CFPB launched its campaign against junk fees in 2022 and gathered public comment, the “overwhelming majority” of the responses were about overdraft fees, the agency said.
“Banks may call this a service, but it amounts to squeezing the hardest-hit families to benefit the bottom line,” Lael Brainard, the head of President Biden’s National Economic Council, said on the call.
How would the CFPB rule change overdraft fees?
The new rule proposed by the CFPB would require financial institutions with more than $10 billion in assets — roughly 175 of them — to limit the fees they bill customers who overdraft their accounts and be more transparent about the charges.
Banks would have to treat overdraft loans more like other forms of lending, by offering disclosures such as those required when you open a credit card.
Under the proposed rule, banks could charge an overdraft fee “in line with their costs” — doing their own math to come up with a breakeven number — or charge a benchmark amount set by the CFPB, according to the agency’s statement. The CFPB has proposed potential benchmarks of $3, $6, $7 or $14, and is seeking comment on the appropriate amount, it said.
Why are regulators targeting overdraft fees?
Overdraft services began as a convenience offered to customers who lacked the funds in their account to cover a check, the CFPB outlined in a statement — back when many consumers banked with paper checks sent through the mail, and it took much longer to settle a discrepancy on an account.
But in the age of digital banking, the CFPB argued, overdrafts have evolved into a “routine, expensive loan product.”
The fees have been criticized for years for boosting banks’ profits at the expense of those who can afford it the least, said Teresa Murray, who directs the consumer-watchdog office for U.S. PIRG.
“A lot of lawmakers, consumer advocates and regulators feel like overdraft fees and other kinds of junk fees are very egregious and predatory,” Murray said. “It’s stomping on people who aren’t equipped to bounce back.”
Many banks — including Ally, Bank of America and Citigroup — have responded to that criticism by shrinking their fees or canning them entirely in recent years. But that doesn’t mean they’ve disappeared entirely: 91% of checking accounts still charge overdraft fees, according to Bankrate.
In a report issued last month, the CFPB said that low-income Americans are hit hardest by overdraft fees and that many bank customers are surprised when they’re faced with the charges.
In a statement, the American Bankers Association called the report “misleading” and said it “ignores the fact that overdraft-protection fees are clearly disclosed, highly regulated, and provide a service that an overwhelming majority of consumers find valuable.”
“The Bureau’s efforts to demonize a financial product that many Americans value and rely upon is misguided,” an ABA spokesperson said in an email to MarketWatch on Tuesday, regarding regulators’ overall approach to the fees. “National surveys consistently show that a strong majority of consumers appreciate and value bank-overdraft programs which are optional, already highly regulated and fully disclosed by law.”
When will overdraft fees be limited?
It could be a while before consumers see the agency’s proposed overdraft regulations potentially go into effect.
The CFPB is now requesting public comment on the proposal, and the potential rule isn’t expected to go into effect until October 2025.
Murray said she expects some form of the agency’s proposed regulations to eventually come into effect.
“I do think banks have had a lot of warning. I’m talking years, and it’s not just this administration,” she said.
Regulators aren’t just taking aim at overdrafts. The CFPB is expected to finalize another rule later this month that could limit the fees that lenders charge customers for late credit card payments.
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