WASHINGTON – The Consumer Financial Protection Bureau and the White House announced Wednesday an initiative cracking down on overdraft fees to increase transparency for consumers.
A new proposed rule would force banks and credit unions with more than $10 billion in assets to outline more disclosures as well as cap overdraft fees for these institutions.
The bureau is accepting comments on its proposed rule until April 1. If finalized, the rule would go into effect Oct. 1, 2025.
“Many of the nation’s largest banks morphed this market into a junk fee harvesting machine,” CFPB Director Rohit Chopra said in a press briefing on Tuesday before the announcement.
An overdraft fee today is around $35 per transaction, according to the FDIC, and often disproportionately affects low-income families that cannot maintain high bank balances. But the majority of consumers’ debit card overdrafts are less than $26 and are repaid within three days, the CFPB said.
Instead, the bureau is proposing a benchmark overdraft fee as low as $3 or up to $14 while seeking public comment to determine the appropriate amount. Alternatively, banks can set their own fees if they can show they are charging a breakeven amount, according to Chopra.
“Many financial giants have sought ways to ratchet up revenues from their deposit account customers,” said Chopra, calling their pursuit of these institutions over the years a “cat and mouse game.”
Several Republicans and banking industry representatives were quick to denounce the proposal.
“The proposal would make it significantly harder for banks to offer overdraft protection to customers, including those who have few, if any, other means to access needed liquidity,” said Rob Nichols, president and CEO of the American Bankers Association.
The rule “would undermine the Bureau’s consumer protection mission,” Rep. Patrick McHenry (R-N,C,), chairman of the House Financial Services Committee, and another committee member, Rep. Andy Barr (R-Ky.), said in a statement.
According to a CFPB report, banks generated $15.47 billion in revenue in 2019 from overdraft fees.
The proposed rule is part of the Biden administration effort to crack down on junk fees. It aims to close a regulatory loophole found in the 1968 Truth in Lending Act, which enables banks to lend money to consumers facing overdrawn accounts without issuing consumer protections that apply to other forms of credit.
“Banks call it a service – I call it exploitation,” President Joe Biden said in a prepared statement.
The proposal is expected to cut the average overdraft fee by more than half. The average American family that is subject to these fees would save an estimated $150 a year, while consumers as a whole could save $3.5 billion every year, according to White House’s National Economic Council Director Lael Brainard.
“Companies shouldn’t be able to sneak charges onto your monthly statement,” Brainard stated. “Not only do those hidden fees inflate prices, they make it difficult to accurately comparison shop and impede competition.”
In 2017, the CFPB sued TCF Bank for unfair junk fees, noting that a former bank CEO even named his boat “Overdraft.” At the time, TCF bank managers could rake in up to $7,000 for increasing overdraft fee activity.
“The result was tricks, traps, and bullying that resulted in an overdraft opt-in rate triple the rate at other banks,” Chopra said. “TCF was part of a broader trend–big banks using a lending carve out to build business models that root for their own customers to run out of money in order to extract more fees from them.”
The CFPB has since gone after several large banks such as Regions Bank and Wells Fargo on similar infractions.
“We’re not shutting banks from profiting or shutting consumers from credit,” said Chopra. “These overdraft loans will simply have to play by the rules.”
