US proposes new rule to end high overdraft fees in crackdown

The U.S. government unveiled a long-awaited regulation that could slash the biggest banks’ overdraft fee income by as much as $3.5 billion each year.

Under the new rule proposed by the Consumer Financial Protection Bureau in conjunction with the White House, banks would only be able to charge overdrawn customers what it costs for them to break even for covering an overdraft – or abide by a specific cap set by the agency. That would effectively eliminate the average $35 charge customers currently pay for overdrawing their bank accounts. The agency is considering caps of $3, $6, $7 or $14, according to the proposal released Wednesday.

The new rule would apply to firms with more than $10 billion in assets, meaning about 175 of the country’s largest banks and credit unions would have to comply, according to the CFPB.

While the regulation wouldn’t ban overdraft fees outright, it would regulate how banks can levy them. Banks would still be able to charge customers who overdraft to recoup their costs, but wouldn’t be able to make steep profits on the service. Instead, they would have to charge a so-called “breakeven standard” that would equal the bank or credit union’s cost to write off an overdraft.

“For too long, some banks have charged exorbitant overdraft fees – sometimes $30 or more – that often hit the most vulnerable Americans the hardest, all while banks pad their bottom lines,” President Joe Biden said in a statement. “Banks call it a service – I call it exploitation. Today’s proposal would cut the average overdraft fee by more than half, saving the typical American family that pays these fees $150 a year.”

Along with fee limits, the CFPB is considering subjecting overdraft programs to enhanced standards required by the Truth in Lending Act. The Federal Reserve, which oversaw overdraft programs until the CFPB’s creation in the 2010 Dodd-Frank Act, exempted overdrafts from the federal financial disclosure law in 1968 – a discrepancy that has earned large financial institutions billions of dollars in revenue, according to the CFPB.

“Today, we are proposing rules to close a longstanding loophole that allowed many large banks to transform overdraft into a massive junk fee harvesting machine,” CFPB Director Rohit Chopra said in the statement.

Under the proposal, banks and credit unions above that $10 billion threshold would have to disclose the interest rate of overdraft loans and determine a person’s ability to repay an overdraft loan.

For many average American consumers, overdraft fees aren’t consequential to their overall financial health, but for others, they can be disastrous. The charges have come under persistent scrutiny, prompting some banks such as Capital One Financial Corp. and Citigroup Inc. to do away with them altogether, while others have lowered their fees.

Even so, banks still collect around $9 billion per year in the charges, according to the CFPB. The agency estimates that policy changes among the largest banks have already saved consumers around $3.5 billion per year.

Underbanked consumers

The proposal has faced resistance. Banks are already gearing up for a fight against the restrictions, including a potential lawsuit once a final rule is released. And on Wednesday, the Consumer Bankers Association argued that the proposal risks further harm to underbanked consumers, while the rule’s costs and its impact on consumer access to financial products haven’t been adequately considered, it said.

“This one-size-fits-all approach from Washington threatens to undo years of progress while also freezing innovation and competition,” CBA Chief Executive Officer Lindsey Johnson said in a statement. “If enacted, this proposal could deprive millions of Americans of a deeply valued emergency safety net while simultaneously pushing more consumers out of the banking system.”

The CFPB foreshadowed the regulation by bringing enforcement actions against Wells Fargo & Co. and Regions Financial Corp. in 2022, both over the banks’ use of monetary penalties. Public comments on the proposal are due April 1, after which the CFPB will put forth a final rule. The CFPB anticipates that the regulation will take effect in October 2025.