Federal Financial Watchdog Wants To Cut Overdraft Fees To As Little As $3

The all-too-common experience of overdrawing your bank account by a few dollars only to be hit with a $35 overdraft fee may become a thing of the past if a government banking regulator goes through with a proposed rule.

The Consumer Financial Protection Bureau (CFPB) proposed new rules Wednesday that would restrict what the country’s largest banks could charge customers who overdraw their bank accounts. Fees would drop to as little as $3, down from the typical $35 fee that many currently charge.

The move is the latest salvo in a crusade against what the administration of President Joe Biden calls “junk fees” in many areas of commerce, especially in consumer finance. Last year, the bureau proposed rules cutting credit card late fees to about $8.

Banks charge overdraft fees or nonsufficient fund fees to customers who write checks or make debit card purchases or ATM withdrawals that exceed the balance available in their accounts. If the customer has agreed to overdraft protection, the transactions go through, and a fee is incurred. Otherwise, the transaction is blocked. Regulators and consumer advocates have long criticized the practice, saying banks use overdraft fees to profit from their most financially vulnerable customers.

“Millions of households living paycheck to paycheck are saddled with hundreds of dollars in fees they can’t afford,” said Lael Brainard, director of the White House’s National Economic Council in a conference call with reporters. “Banks may call this a service but it amounts to squeezing the hardest hit consumers to increase the bottom line.”

The bureau’s proposed rule would give banks two options: first, they could offer overdraft fees as a loan, and follow all the rules covering consumer loans under the Truth in Lending Act of 1968 including full disclosure of fees, interest rates, and the like, similar to the fine print you get when you sign up for a credit card. Banks would also have to follow consumer protection rules, such as considering the borrower’s ability to repay the debt. Currently, overdraft fees are exempt from those rules.

The second option would be to offer overdraft protection as a courtesy. They’d continue to be exempt from the Truth in Lending Act requirements, but they’d only be allowed to charge fees that covered their losses, not make a profit. The bureau has yet to determine what the maximum allowed fee would be and said it could either be $3, $6, $7, or $14, depending on how it’s calculated.

The rule would apply to banks and credit unions that have $10 billion or more in assets—roughly 175 institutions according to the bureau.

Fees Are Major Source of Income For Banks

Overdraft and related nonsufficient funds fees are a major, though declining, source of revenue for banks. In 2022, banks collected $7.6 billion from nonsufficient fund fees, according to the CFPB, down 33% from 2019.

Many banks began curtailing or eliminating overdraft and NSF fees starting in 2021 as the CFPB ramped up its scrutiny of the practice. However, some large banks still charge them.

For example, the nation’s largest consumer bank, JPMorgan Chase, charges $34 for overdrafts and made $1.2 billion on them in 2022, according to the CFPB.

Lowest Income Households Hit Hardest By Fees

People with lower incomes are the most likely to pay overdraft fees, according to a CFPB survey released in December, which showed that households making $65,000 were three times as likely as households making more than $175,000 to have paid an overdraft fee over the previous year (34% vs. 10%).

Unsurprisingly, those paying overdraft fees were more likely to report struggling with bills, with 81% of those who overdrafted saying they had trouble paying a bill compared to 10% for non-overdrafters.

The new rule would save an average of $150 a year for each of the 23 million households who pay overdraft fees, the bureau said.

In some cases, people deliberately use overdraft fees as a kind of short-term loan to cover expenses. More than 60% of people who incurred overdraft fees did so on purpose, a 2021 report by financial data firm Curinos found.

If those overdrafts are best thought of as loans, however, they’re costly ones: the typical overdraft is for a transaction of less than $26, and is repaid in less than three days, according to CFPB data. A $35 overdraft fee on such a transaction would be equivalent to an APR of more than 16,000%, the bureau said.

Banks Oppose the Rule

Trade groups representing banks have argued against the government regulating overdraft fees the same as consumer loans, and have pushed back against the Biden administration’s characterization of them as “junk fees.”

In December, the American Bankers Association, anticipating the regulatory move, pointed to a Morning Consult survey showing that 88% of consumers said their overdraft service was valuable, with 63% saying it was reasonable for banks to charge a fee.

“We hope the CFPB recognizes the value Americans say they receive from overdraft programs rather than demonizing a financial product consumers clearly appreciate,” ABA CEO Rob Nichols said in a statement.

The bureau is accepting public comments on the rule change through April 1 and estimates it will go into effect in October 2025.