Bank overdraft fees, pricey penalties charged to customers who overdraw their accounts, face a $5 cap under new rules released by federal regulators.
The cap on bank overdrafts continues a campaign against “junk fees” in the waning days of the Biden administration, targeting everything from credit card late fees to hidden charges on concert tickets.
Banks that don’t want to cap their overdraft fees have two other options, according to a final rule released by the Consumer Financial Protection Bureau on Thursday.
They can charge a fee equal to what it actually costs them to cover overdrafts. Or, they can treat an overdraft as a loan, giving customers a choice on whether to open a line of “overdraft credit.”
The rule applies to banks with more than $10 billion in assets. It takes effect in October 2025, assuming it survives any legal challenge from the banking industry.
“For far too long, the largest banks have exploited a legal loophole that has drained billions of dollars from Americans’ deposit accounts,” Rohit Chopra, director of the federal agency, said in a statement.
Regulators said the rule will generate up to $5 billion in overdraft-fee savings for bank customers a year, or $225 per household that pays the fees.
Bank industry leaders warn, however, that the cap could backfire on the most vulnerable bank customers, who rely on overdraft protection to keep them solvent.
"Overdraft services are a vital lifeline for millions of consumers – including the one in five Americans who lack access to credit," said Lindsey Johnson, president of the Consumer Bankers Association, in a statement. “The CFPB’s rule jeopardizes access to overdraft services when hardworking Americans face unexpected expenses, leaving them with worse alternatives like payday loans and pawnshops."
'Banks call it a service − I call it exploitation'
The Biden administration announced the crackdown on overdraft fees in January as part of a larger crusade against excessive fees in the banking industry.
“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,” Biden said in a statement at the time. “Banks call it a service − I call it exploitation.”
But the crackdown drew sharp criticism from the banking industry.
In a survey fielded by the Consumer Bankers Association this fall, more than 90% of banks said caps on overdraft fees would greatly reduce how much overdraft protection they could offer their customers.
“Given the average number of consumers who rely on these respondents’ overdraft services to make ends meet, the potential consumer harm appears to be substantial,” wrote David Pommerehn, senior vice president of the bankers association, in a letter to the federal agency in November.