If your bank account regularly flirts with negative balances, or you’re just bad at keeping track of your debit card swipes, you’ve probably felt the sting of one of the banking industry’s favorite charges: overdraft fees.
Thanks to a rule finalized Thursday by the federal Consumer Financial Protection Bureau, those fees could drop sharply next year — provided the rule isn’t overturned by Congress or the courts before it goes into effect Oct. 1.
U.S. banks and credit unions opposed the rule, and four of their trade groups filed suit to block it hours after the final rule was announced. One of the groups, the American Bankers Assn., asserted the rule will prompt banks to offer less overdraft protection, which prevents overdrawn checks from bouncing and debit card transactions from being declined.
That protection comes at a price, though, in the form of overdraft fees of about $27 each time a customer withdraws more than their checking account could bear, Bankrate.com reported in August. Last year, according to the CFPB, banks collected about $5.8 billion worth of fees for overdrafts and non-sufficient funds — that is, when a check bounces or a payment is declined.
The CFPB rule is one of several efforts by the Biden administration to attack the estimated $90 billion collected annually in “junk” fees, or hidden charges that have no relation to the costs incurred. Others include a CFPB rule to cut late fees on credit card payments, a Transportation Department rule limiting fees on airline tickets and a Federal Trade Commission proposal taking broad aim at fees charged by ticketing companies, hotels and other service providers.
Under the overdraft rule, large banks and credit unions would have three options when setting fees: They could charge an amount based on the cost of the service, including losses from it; they could charge $5 per overdraft; or they could charge an amount that would generate a profit, but only if they disclosed the interest rate and other terms in advance and sent periodic statements to customers. The third option treats overdraft protection as a form of short-term lending, which technically it is.
Banks and credit unions with $10 billion or less in assets are exempt from the rule.
According to the CFPB, overdraft protection began decades ago as a courtesy that banks offered to customers who had to wait days for paper checks to clear. But as debit cards became more prevalent, banks and credit unions started generating significant profits from those charges. In California, state data show that some credit unions generate more than half their net income from overdraft fees.
A view of the U.S. Consumer Financial Protection Bureau in Washington, D.C., on April 3, 2021.
(Graeme Sloan / Associated Press)
Consumer advocates have been pushing for limits on “predatory” overdraft fees for decades. The fees are coming “overwhelmingly from low-income and a little bit from moderate-income consumers,” who are “by and large living paycheck to paycheck,” said Robert Herrell, executive director of the Consumer Federation of California. “That’s what we find just wholly unacceptable.”
The CFPB has found that less than 10% of consumers pay nearly 80% of the fees, incurring 10 or more charges a year. Since the pandemic began in 2020, though, banks’ revenue from those fees and “non-sufficient funds” charges — incurred when a bank refuses to cover an overdraft — has dropped sharply, partly because of regulators’ scrutiny.
All the same, the bureau estimates that the rule could save consumers up to $5 billion a year, or $225 per household that incurs overdraft fees.
“In practice, overdraft fees have functioned as high-cost credit, so it only makes sense to regulate excessive fees as such,” said Mike Litt, director of the Public Interest Research Group’s consumer campaign. “The CFPB’s rule makes overdraft fees more reasonable and in line with the actual costs to banks.”
The bankers association was not so sanguine, saying the bureau should have held off until the Trump administration takes over. In former President Trump’s first term, his appointees at the CFPB vastly scaled back its rulemaking efforts.
“By taking this action, the Bureau has once again chosen to prioritize demonizing highly regulated and transparent bank fees over its mission to help consumers,” Rob Nichols, president and chief executive of the American Bankers Assn., said in a statement. “This rule, and the government price controls that accompany it, will make it significantly harder for banks to offer this valuable service to their customers, including those who have few other options to cover essential payments.”
Treasury Secretary Janet Yellen speaks to American Bankers Assn. President and Chief Executive Rob Nichols on March 21, 2023.
(Manuel Balce Ceneta / Associated Press)
Nichols said Americans have made it clear in surveys that they don’t want overdraft protection to go away. He also argued that the bureau didn’t have the legal authority to cap the price of overdraft fees, adding that the rule “should not be allowed to go into effect.”
Nadine Chabrier, senior policy and litigation counsel at the Center for Responsible Lending, responded that banks can continue offering overdraft protection as a form of credit, but they’ll have to comply with the same rules that apply to other types of credit. According to Chabrier, the new rule keeps pace with the change in overdraft protection as paper checks have been replaced with instant debits.
The lawsuit from the banks and credit unions, which was filed in Mississippi, claims the CFPB exceeded its statutory authority in applying the federal Truth in Lending Act to overdraft protection services. It also argues that several key aspects of the rule are arbitrary and capricious, and asks the court to declare the rule illegal in its entirety.
Another test for the CFPB rule is likely to be from the Republican-controlled Congress. Under the Congressional Review Act, members will have 60 days after the rule is formally submitted to introduce a resolution to disapprove it. The resolution cannot be filibustered, and needs just a simple majority in the House and Senate to pass.
Other protections previously adopted by the CFPB will remain in place regardless of what happens to the new rule. An important one is that consumers must opt in to overdraft protection, so they will know that overdrafts will be allowed — but will carry a fee. Another is guidance issued in 2022 instructing banks not to process debit-card transactions and deposits in an order that would generate unexpected overdrafts.
California lawmakers enacted two measures this year to provide further protection for consumers against overdraft and non-sufficient funds fees. Senate Bill 1075 limits state-chartered banks and credit unions from charging overdraft fees larger than the amount set by the CFPB or $14, whichever is lower. If the CFPB’s rule is blocked, that law will continue to apply to state-chartered institutions.
Another law, Assembly Bill 2017, bars state-chartered banks and credit unions from charging non-sufficient funds fees on debit-card transactions that are declined because the account is overdrawn.