The Consumer Financial Protection Bureau (CFPB) finalized rules on Thursday to significantly limit overdraft fees charged by banks, potentially impacting a key revenue stream for the industry and addressing long-standing consumer complaints. This move, however, has drawn sharp criticism from banking industry groups and faces potential repeal under the incoming Trump administration.
The new regulation, initially proposed earlier this year, mandates that large banks and credit unions either charge a maximum of $5 for overdrafts or set a fee no higher than the actual cost of providing overdraft protection. Current overdraft fees typically range from $30 to $35. Banks opting to maintain higher fees would be subject to stricter regulations similar to those governing credit cards and loans, requiring increased transparency and disclosures about associated costs.
CFPB Director Rohit Chopra stated, “For far too long, the largest banks have exploited a legal loophole that has drained billions of dollars from Americans’ deposit accounts. The CFPB is cracking down on these excessive junk fees and requiring big banks to come clean about the interest rate they’re charging on overdraft loans.”
Banks argue that overdraft protection, allowing customers to overdraw their accounts for a fee, provides a crucial safety net for unexpected expenses. Conversely, consumer advocates criticize these fees as predatory, disproportionately affecting lower-income customers.
A 2023 Pew poll revealed that 71% of Americans consider a $35 overdraft fee unfair, while 75% found a $10 fee acceptable. This regulation aligns with the Biden administration’s broader “junk fee initiative,” targeting various hidden charges across industries.
In September, the CFPB issued guidance to prevent banks from implementing “phantom” opt-in agreements, charging overdraft fees without explicit customer consent. The agency has also compelled banks to refund millions in nonsufficient fund fees charged when transactions are declined due to insufficient funds.
Responding to regulatory and consumer pressure, some banks have proactively reduced overdraft fees. Bank of America, for example, lowered its fee from $35 to $10 in 2022. Overall, bank revenue from overdraft and nonsufficient fund fees decreased to $5.83 billion in 2023, compared to nearly $12 billion in 2019.
The new CFPB rules, applicable to institutions with assets exceeding $10 billion, are projected to further reduce these revenues. The agency estimates potential annual savings of up to $5 billion for consumers.
However, banking industry groups contest the CFPB’s authority to regulate overdraft plans under the Truth in Lending Act. American Banking Association president Rob Nichols criticized the regulation as exceeding the CFPB’s legal mandate and suggested potential legal challenges.
Congressional Republicans, aligned with the incoming Trump administration, may also leverage the Congressional Review Act to overturn the rule. They previously expressed concerns that the proposed rule would restrict access to essential short-term liquidity options for millions of Americans. The future of these regulations remains uncertain, contingent on potential legal challenges and political action.
