The cost of overdrafting a bank account could fall to as much as $3 under a proposal announced by the White House, the latest move by the Biden administration to combat fees it says place an unnecessary burden on American consumers, especially those living paycheck to paycheck. .
The change would likely wipe out billions of dollars in fee revenue for the country's largest banks, which were bracing for battle even before Wednesday's announcement. The exact amount of revenue depends on which version of the new regulation will be adopted.
Banks charge a customer an overdraft fee if their bank account balance falls below zero. Overdrafts began as a courtesy offered to some customers when paper checks took days to clear, but have spread thanks to the growing popularity of debit cards.
“For too long, some banks have charged exorbitant overdraft fees — sometimes $30 or more — that often hurt the most vulnerable Americans, all while the banks cover their bottom lines,” President Joe Biden said in a statement. Service – I call it exploitation.”
Under the proposed rule, banks could only charge customers what it would cost them to break even in offering overdraft services. This requires banks to show the Consumer Financial Protection Bureau the costs.
Alternatively, banks can use standard fees that will apply to all affected financial institutions. Regulators have proposed several fees — $3, $6, $7 and $14 — and will gather industry and public input on the most appropriate amount. The CFPB says it arrived at these numbers by looking at how much it would cost banks to recover losses from accounts that went negative and were never paid off.
According to research conducted by Bankrate last August, the average overdraft fee was $26.61. Some banks charge up to $39. The nation's largest banks still rack up nearly $8 billion in overdraft fees each year, according to data from the CFPB and public bank records.
Biden has made eliminating “junk fees” one of the cornerstones of his administration’s economic agenda ahead of the 2024 election. Overdraft fees have been at the heart of that campaign, and the White House directed government regulators last year to do everything they can to curb the practice.
“We are proposing rules to close a long-standing loophole that has allowed many large banks to turn overdrafts into a massive machine for collecting unwanted fees,” Rohit Chopra, director of the Consumer Financial Protection Bureau, said in a prepared statement to reporters.
Banks can also provide small lines of credit to allow customers to make overdrafts, a service that works like a credit card. Some banks like Truist Bank currently offer this type of service.
The CFPB has indicated for months that it plans to limit the collection of overdraft fees, as regulators issue statements and the bureau publishes research showing that overdraft fees disproportionately affect poor people and families of color, who often overdraft several times a year.
In response, banks have prepared a massive pressure campaign to reject the Biden administration's proposal. Whichever proposal is adopted will almost certainly be challenged in court.
The rules will only apply to banks with assets exceeding $10 billion, or approximately 175 banks that make up most of the financial institutions that Americans deal with. The rules avoid small banks and credit unions, some of which rely disproportionately on overdraft fees. CFPB officials told reporters they chose to focus on the largest banks because most Americans do business with these large institutions, and that's where widespread abuses have historically occurred.
If this has happened to you, it may have upset you. It is estimated that 85% of Americans have paid them at some point.
Decades ago, banks created a service that allowed some customers with checking accounts to switch to passive accounts to avoid paper checks bouncing. What started as a niche service became a massive profit center for banks after the proliferation of debit cards that caused customers to debit their bank accounts with small and large amounts of money several times a day.
Overdraft fees have been a financial bonanza for the banking industry, with the CFPB estimating that banks have collected $280 billion in overdraft fees in the past 20 years. These fees became so popular that one bank executive named his boat an “overdraft.”
Bowing to popular and political pressure, most major banks have added guarantees to customer accounts to allow them to bring the balance back into positive territory before they incur fees. Bank of America, once seen by industry critics as the biggest abuser of overdraft fees, cut its fee from $35 to $10 two years ago, and says revenue from overdraft fees is now less than 10% of what it was.
While overdraft fees have decreased in recent years, a Bankrate survey found that 91% of bank accounts can still charge overdraft fees.
If the rule is adopted and overcomes the political and legal challenges, the new regulations would go into effect in the fall of 2025.
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