Biden administration proposes changes to reduce overdraft fees at big banks
January 18, 2024
The Consumer Financial Protection Bureau on Wednesday proposed a rule to rein in excessive overdraft fees charged by the nation’s biggest financial institutions. It would close an outdated loophole that exempts overdraft lending services from provisions of the 1968 Truth in Lending Act.
About 23 million households pay overdraft fees each year. The CFPB estimates that this rule may save consumers $3.5 billion or more in fees each year. That’s about $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 Joe Biden said in a statement. “Banks call it a service – I call it exploitation.
The proposed rule would apply to financial institutions with more than $10 billion in assets, which covers about the 175 largest banks in the country, the CFPB said. These institutions usually charge $35 for an overdraft loan, even though the majority of consumers’ debit card overdrafts are for less than $26, and are repaid within three days.
The agency expects to finalize the rule in 2024 with it going into effect in October of 2025.
The proposed overdraft rule is part of a continued effort by the Biden administration to rein in junk fees and spur competition in the marketplace.
“This is about the companies that rip off hardworking Americans simply because they can,” Biden said.
Under the proposal, large banks could extend overdraft loans if they complied with lending laws, including disclosing any interest rate. Or, banks could charge a fee to recoup their costs at an established benchmark – as low as $3, or at a cost they calculate, if they show their cost data.
The CFPB has proposed benchmarks of $3, $6, $7, or $14 and is seeking comment on the amount.
The agency has been looking into bank fees for several years.
In 2022, it asked Americans about junk fees, which generated more than 80,000 responses. The overwhelming majority were complaints about overdraft fees.
The CFPB issued guidance to rein in surprise overdraft fees in October 2022. It also took enforcement actions against Wells Fargo, Regions Bank, and Atlantic Union to return to consumers $205 million, $141 million, and $5 million in unlawful fees, respectively.
In a separate action, the CFPB ordered Bank of America to pay a fine for illegally charging junk fees and other violations.
“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 CFPB Director Rohit Chopra. “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.”
Public Citizen, a consumer advocacy organization, applauded the agency’s proposal.
“The new overdraft rule will ensure that banks are no longer using predatory overdraft fees to profit from consumers,” said Candace Milner, racial equity policy associate for Public Citizen. “Most overdraft fees are taken from low-income households when they can least afford it.”
Commonsense regulations on these fees would protect consumers from surprise charges and fees that often exceed the amount borrowed, Milner said.
“Enormous overdraft fees that burden low-income consumers should no longer line the pockets of bank CEOs,” she said.
The banking industry is against the proposed regulation and is expected to fight it with a multimillion-dollar marketing and lobbying campaign.
Comments