The Biden administration unveiled a new rule Wednesday aimed at slashing bank overdraft fees to as low as $3, a move the president said would help end abusive practices by financial institutions.
Under the proposal, banks could continue to charge fees when a customer’s account falls below zero, but either at a price in line with the bank’s actual costs to administer the overdraft or at an established benchmark created by the new rule.
The Consumer Financial Protection Bureau (CFPB) proposed potential fees of $3, $6, $7 or $14 and is seeking feedback from banks and the public on what would be appropriate. Current overdraft fees often push $30 or more, taking a significant bite out of low-income accounts.
“Banks call it a service – I call it exploitation.”
- President Joe Biden
Rohit Chopra, the CFPB’s director, said in a statement that banks had turned overdraft fees into a cash cow that they were never intended to be, especially with the rising popularity of debit cards over the years.
“Decades ago, overdraft loans got special treatment to make it easier for banks to cover paper checks that were often sent through the mail,” Chopra said. “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.”
President Joe Biden was more blunt about overdraft fees in a statement released by the White House.
“Banks call it a service – I call it exploitation,” he said.
The new rule would apply to roughly 175 large banks that have at least $10 billion in assets. The CFPB said these banks “typically” charge an overdraft fee of $35, even though most of the debit card transactions involved are for $26 or less and are quickly repaid.
The agency estimates the rule would save consumers a total of $3.5 billion or more per year, or an average of $150 to households that get hit with overdraft fees.
Such federal rules must go through a public-comment period before they can be finalized and implemented, and they often face legal and political pushback. The overdraft proposal may face court challenges by the powerful financial services industry.
Overdraft fees have generally been on the decline in recent years, in part because of increased regulatory scrutiny of the practice. The Financial Health Network released research in June showing that overdraft revenue for banks dropped 6% in 2022 versus the previous year, though the percentage of households paying the fees remained steady.
According to the group’s survey, half of the customers who paid the fees said their overdraft was unintentional.