- The Biden administration is continuing its crackdown on hidden fees, and targeting overdraft fees.
- The CFPB is proposing a rule to close a loophole that exempts those fees from certain standards.
Trying to buy something without enough money in your checking account can lead to a hefty surprise overdraft fee. If the Biden administration gets its way, those fees, which produce major profits for banks, could soon shrink substantially.
On Wednesday, the Consumer Financial Protection Bureau released its proposal for a new rule that would protect Americans from the consequences of overdraft fees by ensuring big banks — with over $10 billion in assets — are complying with consumer law. That limit covers about 175 of the largest banks in the country, per the CFPB.
Consumers are hit with overdraft fees when they withdraw more money from their accounts than what they have in it.
Specifically, the rule would close a loophole that exempts some banks' overdraft practices from provisions in the Truth in Lending Act, which was first passed in 1968 to prevent consumers from unfair billing practices. While the banks would still be able to offer consumer overdraft loans under the new rule, it would "establish clear bright lines and ensure customers know what they are getting when it comes to overdraft loans," CFPB Director Rohit Chopra told reporters on a Tuesday press call.
"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 in a statement. "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."
According to the CFPB's fact sheet, the rule could save consumers $3.5 billion in fees a year, or an average of $150 for each of the 23 million households who pay overdraft fees in any year.
Specifically, the CFPB would create standards for how much banks can charge. One of the options on the table is having banks charge just what they need to break even; the other is through using a benchmark fee, which the CFPB proposes could be $3, $6, $7, or $14. The CFPB will be taking comments on the rule until April 1.
Overdraft fees often come as a surprise for consumers, and many may have had credit available to cover a purchase without going into the red on their checking accounts. A December 2023 CFPB report found that just 22% of consumers who were charged an overdraft fee in the past year expected to receive the charge — and 43% were surprised by the overdraft.
And those hit by overdraft fees are often already financially vulnerable: Per that CFPB report, 81% of consumers who frequently overdraft say that they had difficulty paying a bill at least once over the past year. Overdraft fees can also be big business for banks: A paper from the Federal Reserve Bank of St. Louis found that several major banks raked in over $1 billion a year in overdraft fee income; however, overdraft fee revenue has fallen in recent years, especially as regulators like the CFPB have taken a closer look at the practice.
The Biden administration has long been holding junk fees under scrutiny for taking advantage of American consumers. For example, the Federal Trade Commission in December announced it had finalized a new rule that could save Americans $3.4 billion by requiring car dealers to be upfront about the prices they charge, including discounts and add-ons. And the Biden administration has moved to completely ban the hidden fees that pop up when you buy anything from plane to concert tickets.
"By closing the loophole, we're not shutting banks from profiting or shutting consumers from credit," Chopra told reporters. "These overdraft loans will simply have to play by the rules."