In general, overdraft programs work like a type of loan: If a customer spends more money than they have, they can choose the bank to process the transaction anyway. If they do, consumers must pay back the rest they owe, plus fees, which average about $26 per overage nationally, according to Bankrate, a publication that tracks the industry.
The exact mechanisms vary by bank and program, but the fees have historically hit poorer Americans the hardest while enriching the big banks. In 2022, overdraft fees generated nearly $9 billion in industry revenue, according to data provided this week by the CFPB, which has repeatedly penalized banks for imposing excessive penalties to boost their profits.
Under the agency’s new draft proposal, banks would be subject to strict credit card-like rules on overdraft programs unless they agree to reduce fees for customers. The fees would be capped, either at the amount necessary for the bank to cover its losses, or at a federal maximum, which could range from $3 to $14.
The exact amount has not been determined, nor have the rest of the office’s rules, as the agency plans to seek public comment in hopes of enacting its proposal by October 2025.
“For many of those charging overdraft fees, the market is not working in their favor, even if they are happy for the bank to process a transaction rather than reject it,” CFPB Director Rohit Chopra said, calling the fees “an unwanted fee harvesting machine.”
Top CFPB officials say the regulations, which apply only to larger banks, could still save consumers about $3.5 billion a year in fees. But big banks have already signaled strong opposition to any new regulation, even though Bank of America, Wells Fargo and others have cut their fees in response to political pressure in recent years. Some industry lobbyists are expected to sue the agency if it issues any final rules, which could deprive Americans of relief who have demanded the CFPB’s action.
“We don’t think this is something that needs to be regulated or legislated,” said Lindsey Johnson, president of the Consumer Bankers Association, a group whose board includes executives from Capital One, JPMorgan Chase and Wells Fargo. In an interview last week, she said the group would “take a look” at the proposal before deciding its next steps.
The CFPB’s proposal reflects a broader push across the Biden administration to eliminate what it calls “junk fees,” or fees charged to consumers for services they previously received for free. For more than a year, the president has publicly criticized airlines, credit card giants, concert venues, hotels, Internet service providers and landlords for their profiteering, while the White House looks for ways to lower prices in a difficult election year.
“When companies sneak families’ bills with unwanted fees, it can take hundreds of dollars a month out of their pockets and make it harder to make ends meet,” Biden said Wednesday in a statement. “This is about companies ripping off hardworking Americans just because they can.”
This heightened interest has unleashed a barrage of lobbying, as companies seek to avoid even basic rules that would require them to be more transparent about their practices. Reactions have been particularly sharp at the CFPB, which banks and other financial institutions have regularly sued in attempts to weaken its powers or abolish the agency altogether.
When banks first offered widespread overdraft services nearly 30 years ago, they offered them to customers as a way to avoid the embarrassment and hassle of bounced checks. However, by 2019, banks had significantly monetized the practice, taking advantage of lenient federal rules to collect nearly $12 billion that year in fees, according to the CFPB.
“There are families struggling, paycheck to paycheck, (that) are getting hammered, and this is a real tax on access to their deposit money,” said Michael Calhoun, president of the Center for Responsible Lending, which has advocated for such rules. .
Amidst the horror stories, the US government has stepped up its actions in response. The CFPB, in particular, recently penalized TCF Bank, TD Bank, and Regions Bank for various charges related to the way they process transactions, market overdraft services, or fees they charge.
As part of a nearly $4 billion settlement with Wells Fargo in 2022, the office found the company’s overdraft practices unlawful, alleging that the bank charged customers fees even in cases where consumers had sufficient funds in their accounts. Meanwhile, the Treasury Department fined Bank of America last July for charging overdraft fees multiple times on a single transaction.
Eventually, the increased scrutiny prompted some banks to rethink their overdraft policies entirely. Before the federal fine, Bank of America reduced the amount it charges for overdrafts to $10 from $35. Likewise, Wells Fargo overhauled its policies in 2022, joining some banks in establishing a grace period during which a customer can make their account full before incurring any fees. Capital One has eliminated overdraft penalties entirely, provided customers make regular deposits.
But the changes still dissatisfy the CFPB, which reported in December that more than a quarter of Americans surveyed said they faced overdraft fees or other similar fees in the past year. Of those affected customers, nearly 4 in 10 said they were surprised they were charged a fee, leading Chopra to conclude at the time that “American families are paying fees they don’t expect, even when they have access to cheaper forms of credit.”
In a sign of intense opposition from the industry, the release of the CFPB’s analysis sparked sharp opposition from the banking industry last month. Rob Nichols, president of the American Bankers Association, has criticized the US government and claimed that overdraft fees are “clearly disclosed, strictly regulated, and provide a service that the vast majority of consumers find valuable.”
“Next time we hope the CFPB recognizes the value Americans say they receive from overdraft programs rather than denigrating a financial product that consumers clearly value,” he said in a statement.
In a statement this week, the American Bankers Association — the banking industry’s top lobbying group — said it had not yet reviewed the details of the CFPB’s new proposal. But a company spokesperson added: “We know that the office’s efforts to discredit a financial product that many Americans value and rely on are misguided.”