The Consumer Financial Protection Bureau headquarters in Washington.
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American consumers have paid an estimated $280 billion in overdraft fees since 2000, according to CFPB data. During this period, major banks' annual revenue from overdraft fees soared, helped by the boom in consumer debit cards linked directly to checking accounts.
“For too long, some banks have charged exorbitant overdraft fees — sometimes $30 or more — that often hit the most vulnerable Americans hardest, while at the same time banks are boosting their profits,” President Joe Biden said in a statement about the new rules on Wednesday. “Banks call it a service – I call it exploitation.”
(Left to right) Tobi Parks, CEO of xBk, US President Joe Biden and Lael Brainard, Assistant to the President and Director of the National Economic Council, attend a consumer protection event in the East Room of the White House in Washington. DC, June 15, 2023.
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The new rules would only apply to banks with more than $10 billion in assets, a total of about 175 institutions across the country, the CFPB said. Combined, these banks typically account for more than 80% of the overdraft fees charged in a given year.
CFPB officials said they expect the rule to be finalized next year and take effect in October 2025.
Banking sector groups deeply opposed to changes to overdraft rules have already begun mobilizing opposition, which is expected to grow. Earlier this month, the Consumer Bankers Association launched a website to promote “the value of overdraft services and the reasons why government regulations are misunderstood.”
The proposal is part of the Biden administration's larger effort to crack down on so-called “junk fees,” many of which are charged to consumers without notice and do not reflect the true cost of the service.
“This is about the companies ripping off hard-working Americans simply because they can,” Biden said.
The proposed rule would essentially provide major banks with two options for approaching commercial overdraft coverage.
The first option would allow the major banks to offer overdrafts at a profit, provided that the banks treat the funds they provide as line of credit loans, subject to all provisions of the Truth in Lending Act.
“For example, consumers would apply for the loan and institutions would provide a guarantee to verify the consumer’s ability to repay. Consumers could repay the loan manually if they prefer manual repayment to automatic payment. And institutions would have to comply with restrictions on penalties and fees charged in the first year,” according to a CFPB fact sheet.
These protections could result in fewer consumers being surprised by overdrafts and the resulting fees, a problem the CFPB detailed in a December report.
The second option would be for major banks to continue offering overdraft protection to consumers as a service rather than as a profitable line of credit. As a courtesy, the funds would continue to be exempt from TILA regulations.
But in exchange for that continued relief, banks that offer goodwill overdrafts would be permitted to charge only fees “that are commensurate with their costs or meet an established benchmark,” a CFPB fact sheet says.
The agency suggested several possible reference interest rates, ranging from $3 to $14 per transaction. The final amount will be announced when the rule is published, probably sometime next year.
Alternatively, banks that choose to charge fees commensurate with their costs would have to calculate those costs largely based on the losses incurred by accounts that never return to the black, the CFPB said.
Given the relatively low principal amounts and high repayment rates for checking account overdraft coverage, losses recognized under this standard could be minimal.
“Most consumers' overdrafts on debit cards are less than $26 and are paid off within three days,” CFPB Director Rohit Chopra told reporters on Tuesday.
According to a report from the Federal Deposit Insurance Corporation, the average overdraft fee in 2021 was higher than the average overdraft fee, at around $35 per transaction.
“Because the loans are so profitable, many financial giants have been looking for ways to increase revenue from their deposit customers,” Chopra said. “As a result, we had to invest a lot of resources to prevent illegal activities, which led to a game of cat and mouse.”
The CFPB has been investigating banks' overdraft fee practices for several years. In December, the agency ordered Atlantic Union Bank to pay $6.2 million for illegally enrolling thousands of customers in checking account overdraft programs. Regions Bank was ordered to pay $191 million last year for surprise overdraft fees on certain ATM withdrawals and debit card purchases.