The Consumer Financial Protection Bureau has proposed a rule that reduce the overdraft charges that banks can asses to between $3 and $14, a move that is projected to save consumers as much as $3.5 billion a year. The proposed rule will be open for comments and is not expected to go into effect until late 2025. It will apply to banks with at least $10 billion in assets, which represents that nation’s largest 175 financial institutions.
What’s Going On: The proposed rule would close a loophole that has exempted overdraft fees from consumer protection laws.
- Under the proposed rule, banks would still be able to extend overdraft loans, but would be forced to comply with consumer protection laws when doing so, such as disclosing the applicable interest rate.
- If they wanted to remain exempt from the Truth in Lending Act, the banks can charge a flat fee for overdraft payments. The fee would be equal to a benchmark set by the CFPB, which is expected to range between $3 and $14 or the bank can calculate a fee of its own that is in line with its costs for providing the service.
By The Numbers: The CFPB estimates that 23 million households per year pay at least one overdraft fee. The average overdraft fee has been $35. The proposed rule is expected to save the average household $150 per year.
The Reaction: As can be expected, Democrats and consumer advocates lauded the proposed rule while Republicans and banks blasted it.
- “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,” said Lindsey Johnson, president and chief executive of the Consumer Bankers Association in a statement. “If enacted, this proposal could deprive millions of Americans of a deeply valued emergency safety net while simultaneously pushing more consumers out of the banking system.”
- “Overdraft fees are not so much a useful service as a lucrative profit center that’s largely underwritten by the most economically vulnerable consumers,” said Carter Dougherty, a spokesman for Americans for Financial Reform, in a published report. “This reform is a step in getting banks back to providing good service and away from gotcha fees.”
