Jan 17, 2024 - Politics & Policy

Biden admin proposes new rule to cut bank overdraft fees to as low as $3

Debit and credit cards stacked on top of each other.

Photo: Olivier Douliery/AFP via Getty Images

The Biden administration on Wednesday proposed reining in big banks' overdraft fees, in a move that could lower them to as little as $3.

Why it matters: If enacted, the introduced rule from the Consumer Finance Protection Bureau (CFPB) could eliminate billions of dollars of annual revenue that banks rake in from fees charged to consumers who overdraft their accounts.

  • The fees disproportionately affect households already struggling financially, the CFPB said in a release.
  • The proposal is a part of the Biden administration's effort to clamp down on "junk fees" in a wide range of industries.

How it works: Overdrafts occur when customers spend or withdraw more money than they have available in their checking accounts.

  • Many banks will cover the transaction or withdrawal as an extension of credit but will a charge fee for each overdraft.
  • Even though they are loans, overdrafts were exempted from consumer financial protection laws, like the Truth in Lending Act, in the late 1960s because at the time they were used infrequently and were a modest cost.
  • That changed with the rise of debit cards. Overdrafts became extremely common as swiping cards for payment became more popular.

By the numbers: Often, these fees are larger than the overdraft amount. Many institutions charge $35 for an overdraft loan, even though the majority of overdrafts are for less than $26, according to the CFPB.

  • The CFPB estimates that about 23 million households pay overdraft fees each year.
  • Those fees translate to massive revenue for banks, with institutions making $12.6 billion in revenue from overdraft fees in 2019, the CFPB estimated.

The agency said the proposed rule could collectively save consumers roughly $3.5 billion in fees annually, or a projected $150 for households that pay overdraft fees.

  • It would require 175 of largest depository institutions to treat overdraft loans similar to credit cards and other loans.
  • It would still allow banks to charge overdraft fees, though the charge will have to either be enough for the institution to break even on providing overdraft services or a benchmark yet to be decided.
  • The CFPB proposed blanket fee benchmarks of $3, $6, $7, or $14 and will gather industry and public comment on the most appropriate amount before finalizing the rule change.

What they're saying: "Decades ago, overdraft loans got special treatment to make it easier for banks to cover paper checks that were often sent through the mail," said Rohit Chopra, the CFPB's director.

  • "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," he added.

Consumer Bankers Association (CBA), which represents financial institutions that would be affected by the new rule, said it is an "unnecessary" regulation because recent changes to banks' penalty systems, like grace periods for overdrafts, have resulted in a reduction in annual fee revenues.

  • "This proposal on overdraft price setting is just the latest in a myriad of unnecessary and costly regulations by this Administration that seems guided by political polling, rather than by sound policy created by what should be independent agencies," CBA President and CEO Lindsey Johnson said in a statement.
  • Johnson also said it "could deprive millions of Americans of a deeply valued emergency safety net while simultaneously pushing more consumers out of the banking system."

Of note: The proposed rule would not block customers from accessing overdraft loans, nor would it prevent institutions from charging lower fees or recouping losses from overdrafts.

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