Proposed Rule Would Limit Excessive Bank Overdraft Fees
Last updated January 24, 2024
The Consumer Financial Protection Bureau (CFPB) wants to limit how much financial institutions can charge customers for overdraft protection plans. The CFPB’s proposed rule, published on Jan. 17, would drive down overdraft fees, capping them at just $3, in some cases.
“Right now, overdraft fees are often assessed for reasons people do not expect or understand, chip away at needed income, and take a heavy toll on families living paycheck to paycheck,” said CFPB Director Rohit Chopra. “According to some data, these fees can drive people to leave the banking system altogether and limit their ability to get ahead financially.”
Last year, the average overdraft fee was $26.61, according to the 2023 Checking and ATM Fee Study by Bankrate.com. The CFPB said the majority of debit card overdraft amounts are less than $26, and are repaid within three days.
Overdraft fees have been a huge revenue source for the nation’s financial institutions. They have generated $280 billion since 2000, and nearly $9 billion in 2022, according to CFPB data.
“For many of those charged overdraft fees, the market is not working for them, even if they are happy a bank processed a transaction instead of declining it, Chopra said. “Compared to credit cards and other forms of credit, overdraft lending is very expensive.”
Closing a Loophole
By covering an overdraft—the difference between a customer’s debit and the amount in their account—financial institutions are making a short-term loan. And yet, due to a legal loophole created decades ago, overdraft lending is exempt from the Truth in Lending Act and other consumer financial protection laws.
The proposed rule would allow big banks to continue offering overdraft protection in one of two ways:
- If a bank profits from its overdraft protection program, the money provided to cover the shortfall would be considered a credit line loan, subject to the Truth in Lending Act. The customer would have to apply for that loan, the bank would have to determine the customer’s ability to repay. As with any other loan, the financial institution would be required to provide numerous disclosures, including the applicable interest rate.
- Banks could provide overdraft programs as a true “courtesy” to their customers. These loans would be exempt from the Truth in Lending Act, so long as the fee was “in line with their costs,” or set at an established benchmark price, which would be between $3 and $14. The CFPB said it will set the benchmark when it releases the final rule later this year.
The proposed rule would apply only to insured financial institutions with more than $10 billion in assets, which covers approximately the 175 largest depository institutions in the country, the CFPB said. These banks are responsible for more than 80 percent of all charges for overdrafts each year.
About 23 million households pay overdraft fees in any given year. The CFPB estimates that this rule may save consumers $3.5 billion or more in fees per year. The potential savings would translate to $150 for households that pay overdraft fees.
“For too long, some banks have charged exorbitant overdraft fees—sometimes $30 or more—that often hit the most vulnerable Americans the hardest, all while banks pad their bottom lines,” President Biden said in a statement. “Banks call it a service—I call it exploitation.”
A Victory for Consumer Groups
Consumer advocates, which have been working to eliminate or lower overdraft fees for decades, applauded the CFPB’s proposed rule.
Mike Litt, consumer campaign director at U.S. PIRG, called the CFPB action “long overdue” and said it would make overdraft fees “more reasonable and in line with the actual costs to the banks.”
Carla Sanchez-Adams, senior attorney at the National Consumer Law Center, said overdraft fees “punish families for being financially insecure.”
“Banks could cover overdrafts for free as a courtesy, which some do, or could offer and encourage their customers to choose lower cost overdraft coverage,” she said. “Instead, too many large banks use manipulative practices to push extremely high-cost overdraft fees that disproportionately impact their most vulnerable customers.”
Bankers Opposed to Any New Regulations
The nation’s bankers quickly challenged the CFPB’s proposed rule as misguided, unnecessary, and costly to consumers. If enacted, it would make it harder for them to offer overdraft protection, they said.
The American Bankers Association (ABA) said the CFPB does not have the legal authority to issue this rule or impose a price cap on overdraft fees.
Rob Nichols, ABA’s president and CEO, slammed the proposal as the CFPB’s “latest attempt to demonize and mischaracterize highly regulated and clearly disclosed bank fees for a service that surveys consistently show Americans value and appreciate.”
Lindsey Johnson, president and CEO of the Consumer Banking Association (a trade group that represents retail banks), characterized the CFPB rule as a “price-setting mandate” that would “deprive millions of Americans of a deeply valued emergency safety net while simultaneously pushing more consumers out of the banking system.” Johnson pointed to CFPB data that shows overdraft fees went down by $5 billion between 2019 and 2022. A nearly 50 percent drop since before the pandemic.
“The Bureau is not only late to the party with this misguided proposal, but this one-size-fits-all approach from Washington threatens to undo years of progress while also freezing innovation and competition,” he said.
Some Banks Have Already Made Changes
As federal regulators and some members of Congress started focusing on overdraft fees in 2021, four of the country’s largest banks changed their overdraft policies.
Capital One has eliminated all of its overdraft fees. For customers who enroll in the bank’s No-Fee Overdraft service, it will authorize and pay overdrafts at its discretion for certain transactions, such as automatic bill payments and recurring debit card transactions, with no fee.
Bank of America has dropped its overdraft fee to $10, down from $35 in 2022.
Wells Fargo gives account holders a 24-hour grace period before being charged overdraft fees.
Chase Bank doesn’t charge customers its $34 overdraft fee if they’re overdrawn by $50 or less at the end of the business day, OR if they’ve overdrawn by more than $50 and bring the account balance to overdrawn by $50 or less at the end of the next business day.
Many banks have also eliminated the fee to transfer money for overdraft protection that automatically transfers money from a customer’s savings account to their checking account to cover an overdraft that would trigger a fee.
Many online banks never charged overdraft fees, or eliminated them well before the biggest banks changed their policies.
Ally Financial, which never charged overdraft fees on debit card transactions, put an end to all overdraft fees in 2021.
Discover Bank ended all fees on checking and savings accounts in 2019.
Chime offers an overdraft service called “SpotMe” that allows qualifying members to make a debit card transaction that exceeds their balance by up to $200 with no fee.
What’s Next?
CFPB’s rulemaking is expected to be challenged in court. If the process continues, as planned, the Bureau said it expected the new rules to take effect in October 2025.
Another Proposed Rule Would Prevent New NSF Fees
To stop financial institutions from imposing new “junk fees,” this week the CFPB proposed a second rule that would ban non-sufficient funds (NSF) fees on transactions declined in “real time” as soon as customers swipe, tap, or click. The proposed rule would prohibit NSF fees on declined debit card purchases and ATM withdrawals, as well as some declined online transfers and peer-to-peer payments. It would cover banks, credit unions, and certain peer-to-peer payment companies.
The CFPB said financial institutions” almost never” charge fees for transactions that are declined in real time, but it was taking “proactive steps to ensure that financial institutions do not impose these fees, which can occur for a host of reasons that are out of the consumer’s control.”
Specifically, as technology advances, financial institutions may be able to decline more transactions right at the swipe, tap, or click. These transactions include ATM, debit or prepaid card, online transfer, in-person bank teller, and certain person-to-person transactions.
More Info:
- CFPB: Proposed rule with request for comment
- Bankrate: What is an overdraft fee and how can you avoid it?
- NerdWallet: Overdraft fees: compare what banks charge
Contributing editor Herb Weisbaum (“The ConsumerMan”) is an Emmy award-winning broadcaster and one of America's top consumer experts. He has been protecting consumers for more than 40 years, having covered the consumer beat for CBS News, The Today Show, and NBCNews.com. You can also find him on Facebook, Twitter, and at ConsumerMan.com.