Biden administration unveils proposed changes to major banks’ overdraft fees

Since 2000, American consumers have paid an estimated $280 billion in bank overdraft fees, according to CFPB data. During that period, major banks’ annual revenues 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 hurt the most vulnerable Americans, all while banks cover their bottom lines,” President Joe Biden said in a statement Wednesday about the new rules. “. “Banks call it a service, I call it exploitation.”

The CFPB said the new regulations would apply only to banks with assets of more than $10 billion, a total of about 175 institutions nationwide. Combined, these banks typically account for more than 80% of overdraft fees charged in any given year.

CFPB officials said they expect the rule to be finalized next year and to take effect in October 2025.

Banking trade groups that strongly oppose any changes to overdraft rules have begun to mobilize opposition, which is expected to grow. Earlier this month, the Consumer Bankers Association launched a website to promote “the value of overdrafts, and why government mandates are misguided.”

The proposal is part of a larger effort by the Biden administration to eliminate what it calls “junk fees,” many of which are charged to consumers without advance notice and do not reflect the true cost of the service.

“This is about companies ripping off hardworking Americans just because they can,” Biden said.

The proposed rule would offer major banks two options for how to handle business overdraft coverage.

Under the first option, large banks can offer overdraft loans for a profit, provided that the banks treat the funds they provide as line of credit loans, subject to all Truth-in-Lending Act regulations.

“For example, consumers will apply for credit and institutions will undertake to determine the consumer’s ability to repay. Consumers will be able to manually repay credit if they prefer manual repayment to automatic payment. Institutions will have to adhere to limits on penalty fees and fees charged during the first year,” According to a fact sheet from the CFPB.

These protections could result in fewer consumers being surprised by overdrafts and resulting fees, an issue detailed in a CFPB report in December.

The second option is for large banks to continue offering overdraft coverage to consumers as a courtesy service, rather than an income-generating line of credit. As a courtesy, the funds will remain exempt from TILA regulations.

But in exchange for this continued relief, banks that offer free overdraft coverage will be allowed to charge fees only “in line with their costs or in accordance with a specified standard,” the CFPB fact sheet explained.

The agency suggested several possible reference rates, ranging from $3 to $14 per transaction. The final amount will be released when the rule is published, likely sometime next year.

Instead, banks that choose to charge fees in line with their costs will be required to calculate those costs based largely on losses incurred from accounts that were never brought back into the black, the CFPB said.

Given the relatively low capital and high repayment rates to check account overdraft coverage, losses recorded under this standard can be minimal.

“Most consumers’ debit card overdrafts are less than $26 and are paid off within three days,” CFPB Director Rohit Chopra told reporters on Tuesday.

In 2021, average overdraft fees were higher than the average overdraft, at about $35 per transaction, according to a report from the Federal Deposit Insurance Corporation.

“Since loans are so profitable, many financial giants have sought ways to increase revenue from their deposit account customers,” Chopra said. “This required us to invest a lot of resources into preventing illegal activity, and the result was a game of cat and mouse.”

The CFPB has been examining 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 last year to pay $191 million for surprise overdraft fees on some ATM withdrawals and debit card purchases.