The Consumer Financial Protection Bureau is closing a loophole that it says allowed big banks to profit heavily from overdraft fees. A new rule targets banks and credit unions with over $10 billion in assets, offering them three options for handling overdraft charges:
- Cap overdraft fees at $5.
- Set fees to cover only costs and losses.
- Treat overdraft loans like other loans, requiring disclosure of interest rates and terms.
The rule is expected to save consumers $5 billion annually, or about $225 per household paying overdraft fees.
CFPB Director Rohit Chopra criticized banks for exploiting the outdated system and said the rule will bring transparency and fairness to overdraft fees.
"For far too long, the largest banks have exploited a legal loophole that has drained billions of dollars from Americans' deposit accounts," Chopra said. "The CFPB is cracking down on these excessive junk fees and requiring big banks to come clean about the interest rate they're charging on overdraft loans."
Banks, predictably, are not happy. "The nation’s community bankers remain deeply concerned that this rule will have unintended consequences on all institutions and the consumers and local communities they serve," said Rebeca Romero Rainey, CEO of the Independent Community Bankers of America.
Rainey said the CFPB rule would have a negative effect on consumers who "rely on overdraft services by causing them to experience the harsh realities of rejected payments."
The rule will take effect on October 1, 2025. Since the CFPB began tackling junk fees, many banks have reduced or eliminated overdraft fees, saving consumers billions. However, overdraft fees still totaled $5.8 billion in 2023. The agency continues to enforce actions against institutions for illegal fees, recovering hundreds of millions for consumers, Chopra said.
CFPB Director Chopra earlier said that he does not plan to resign voluntarily but accepts that President-elect Trump will have the authority to fire him. The fate of the many rules exacted during Chopra's tenure is in doubt, since many of them could be reversed if Trump appoints a new director.
Biden's current White House National Economic Advisor Lael Brainard said the new overdraft rules are a "real relief for families."
"For too long, excessive overdraft fees have saddled hardworking Americans with charges that really add up, preventing them from getting ahead," she said.
Formation of a loophole
Today’s action closes the large bank regulatory loophole that exempted overdraft fees as a finance charge. When Congress passed the Truth in Lending Act (TILA) in 1968, many families used mail to send and receive checks, and were subject to various bank processing times in order for their deposits and withdrawals to clear.
In 1969, the Federal Reserve Board exempted banks from TILA protections for infrequent cases where a bank was honoring a check that had not cleared and subjected the customer to overdraft fees.
At the time, overdraft services were not considered profit drivers but courtesy services extended by the bank when, for instance, a paper check sent through the mail may have arrived late.
Over the past few decades, these highly profitable overdraft loans have increased consumer costs by billions of dollars. The loans have also led to tens of millions of consumers losing access to banking services, as well as facing negative credit reporting that has prevented them from opening another account in the future, the CFPB said.
Closing the loophole
The CFPB's new rule makes several key updates to federal regulation governing overdraft fees for financial institutions with more than $10 billion in assets.
These institutions would have to choose one of the following options when charging for overdrafts:
- Cap their overdraft fee at $5: Under this simple option, covered banks and credit unions could simply cap their fee at $5, which is the estimated level at which most banks could be able to cover their costs associated with administering a courtesy overdraft program.
- Cap their fee at an amount that covers costs and losses: For banks that wish to offer overdraft as a convenient service rather than as a profit center, the final rule allows financial institutions to set their fee at an amount that covers their costs and losses.
- Disclose the terms of their overdraft loan just like other loans: For financial institutions that wish to profit from overdraft lending, they may do so by complying with the standard requirements governing other loans, like credit cards. This would include giving consumers a choice on whether to open the line of overdraft credit, providing account-opening disclosures that would allow comparison shopping, sending periodic statements, and giving consumers a choice of whether to pay automatically or manually.
CFPB’s junk fee efforts
The CFPB has been leading a multi-agency effort to tackle junk fees. Since the CFPB announced its initiative to curb junk fees, multiple banks have begun reducing or eliminating overdraft and non-sufficient fund fees, and consumers have saved $6 billion annually in these fees.
However, even with these changes, consumers still paid more than $5.8 billion in 2023 in reported overdraft and NSF fees.
In addition to today’s action on overdraft fees, the CFPB has continued to order many large institutions to return illegal overdraft fees to consumers.
The CFPB recently brought a $95 million enforcement action against Navy Federal Credit Union for illegal surprise overdraft fees. The CFPB also took action against Wells Fargo, Regions Bank, and Atlantic Union for illegal overdraft fees, which resulted in refunds to consumers totaling $205 million, $141 million, and $5 million in unlawful fees, respectively.
Dieter Holger contributed to this article.