“For too long, some banks have charged exorbitant overdraft fees — sometimes $30 or more — that often hit the most vulnerable Americans hardest at the same time banks are boosting their profits,” President Joe Biden said in a statement. “Banks call it a service – I call it exploitation.”
But banking groups and some on Capitol Hill believe the rules would limit a service that many financially vulnerable Americans rely on.
The proposal now faces a lengthy regulatory approval process in which the public can provide feedback. Currently, the proposed changes are scheduled to come into force in October 2025.
Here's what it means for you.
The move is part of the Biden administration's larger effort to rein in so-called “junk” fees charged to everyone from retirement plans to ticket sellers, an initiative generally supported by both parties.
About 23 million households are affected by overdraft fees each year, and the proposed cuts would save Americans about $3.5 billion annually, the CFPB said. Much of that money would theoretically go back into the pockets of lower-income bank customers: According to Consumer Reports, 8% of bank customers generate nearly 75% of banks' revenue from such fees.
The new rules, which only apply to banks with assets of $10 billion or more, would force financial institutions to treat overdrafts the same as credit cards and other loans. This means that if a consumer can overdraw the account, the bank must provide clear information about the rules and limit fees in the first year.
The rule would also limit the amount banks could charge. Fees can either be proportionate to the costs banks pay to provide these fees, or they can be a guideline fee of between $3 and $14 – instead of the current $35 that some banks charge. The average overdraft fee is about $26, according to Bankrate.
Not everyone believes the new rules would be a win for consumers. A website funded by the Consumer Bankers Association called the proposal “misguided” and argued that many Americans living paycheck to paycheck use overdrafts to make ends meet.
Republican congressmen Patrick McHenry and Andy Barr struck a similar tone.
“The proposed rule issued today by the CFPB would undermine the bureau’s consumer protection mission,” the lawmakers said in a statement. “The Biden Administration’s attempts to mandate one-size-fits-all consumer financial products and services reduce financial inclusion, limit consumer choice, stifle innovation, and ultimately increase banking costs for all consumers.”
In fact, an overdraft fee can be the lesser of two evils for struggling consumers, says Greg McBride, chief financial analyst at Bankrate.
“There are a number of consumers who essentially use overdrafts as a form of credit,” he says. “It's cheaper to pay a $35 overdraft fee than to turn off your power and then pay $100 to get it back on, or pay a $150 late fee on your mortgage.”
If such a service were eliminated altogether, some Americans seeking emergency cash through an overdraft could find themselves in financial trouble.
But most Americans don't intentionally overdraw their accounts. According to a CFPB survey, only 22% of households expected their most recent overdraft. And many of the consumers accused would have access to a cheaper alternative, such as available credit on a credit card, the agency said.
“The CFPB wants to ensure that consumers who either make a mistake or are careless are not unduly impacted by overdraft fees,” said Ken Tumin, senior industry analyst at LendingTree and founder of DepositAccounts. com.
Lower fees should help consumers avoid a scenario where an overdraft could leave them saddled with high fees that could lead to further overdrafts, he says. “And then the consumer essentially gets caught in a cycle that they can’t get out of.”
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