The Biden Administration Is Ending Bank Overdraft Fees as We Know Them
Under a new Consumer Financial Protection Bureau rule, overdraft fees at large banks would be strictly regulated and capped as low as $3. The working class will save billions.
By Eric Gardner, More Perfect Union
The Biden administration is tightening restrictions on banks' ability to impose overdraft fees on consumers, which generates billions of annual revenue for the industry at the expense of their customers.
“It’s just taking advantage of people,” President Biden said at an October press conference promoting the potential rule changes, which the Consumer Financial Protection Bureau (CFPB) elaborated on in a proposal Wednesday.
Initially designed as a limited service for covering mailed checks when accounts were low on funds, overdraft fees have evolved into a consistent revenue stream for banks. Under the new rule, overdraft fees at large banks will be limited to the service's cost–expected to be as low as $3 per incident. Currently, the typical consumer is charged $35 for each overdraft. The CFPB estimates the new rule could save American consumers $3.5 billion annually.
"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," Rohit Chopra, the Consumer Financial Protection Bureau (CFPB) Director, said.
Keep reading below, or watch our new video about today’s news featuring an interview with CFPB Director Chopra:
In 2019, overdraft fees contributed about $13 billion of revenue to the financial industry, according to the CFPB. To put this into perspective, if those fees were the revenue of a single company, it would rank among the top 300 largest public corporations in the U.S.
The industry is expected to fight the rules changes, potentially setting up a showdown answered by the Supreme Court. In an email to Bloomberg Law, banking lobbyist Greg Mesack summed up the industry’s opinion, “Anything the CFPB does around fees is BAD, REALLY REALLY BAD. NO GOOD, ROTTEN, TERRIBLE BAD.”
Today’s announcement follows the agency's action last year to set the maximum late credit card payment fee at $8–from a previous industry median of $41. The Biden administration has prioritized taking on “junk fees” throughout the economy and has encouraged state lawmakers to pass their own legislation and eliminate junk fees.
“My administration is taking our most comprehensive action ever to eliminate junk fees in industries and sectors across the board, across the entire economy,” Biden said in October.
Ninety-one percent of U.S. banking accounts are subject to overdraft fees averaging about $26 per charge, according to Bankrate. Analysis by Accountable.us found that the ten largest banks that charge fees booked more than $2.3 billion in overdraft fees throughout the year’s first nine months. During that period, JP Morgan Chase, the largest bank in America by revenue, charged $839 million in fees.
The financial industry, unsurprisingly, prefers to make its own rules. Citibank, for example, won praise after announcing an end to overdraft fees in February 2022.
After Citibank’s announcement, the Consumer Bankers Association (CBA), a lobbying group that represents America’s largest banks, pointed to the decision as proof the industry can regulate itself on overdraft fees. “CBA long has urged policymakers to recognize these bank-led innovations, which have occurred without regulatory intervention, and collectively represent a transformational shift across the industry,” CEO Richard Hunt said. (The organization spent $2.6 million lobbying against overdraft fee regulation in the first three quarters of 2023, according to congressional lobbying records.)
Citibank's timing was unmentioned in the press release; just two months prior, the CFPB had announced it would investigate overdraft fees. They weren’t alone, either. In the immediate aftermath of the CFPB’s announcement, Capital One announced an end to overdraft fees, and Bank of America slashed fees from $35 to $10.
“In the past few years, large banks have made several reforms to their approach to overdraft.” Director Chopra said in a statement. “I hope our proposed rule can solidify these gains and provide clear rules of the road that will halt further abuses.”