Biden administration unveils proposed changes to big banks’ overdraft fees

WASHINGTON — The Consumer Financial Security Bureau on Wednesday unveiled long-awaited changes to how the nation’s biggest banks structure overdraft protection plans.

The unaligned watchdog agency said the new rule closes a loophole that for decades has exempted overdraft loans from the consumer havens required by the 1968 Truth in Lending Act.

Since 2000, American consumers have paid an estimated $280 billion in bank overdraft tariffs, according to CFPB data. During that time, the annual revenue big banks derived from overdraft recompenses soared, helped along by the boom in consumer debit cards tied directly to checking accounts.

“For too long, some banks give birth to charged exorbitant overdraft fees—sometimes $30 or more—that often hit the most vulnerable Americans the hardest, all while banks pad their derriere lines,” President Joe Biden said in a statement Wednesday on the new rules. “Banks call it a service—I call it exploitation.”

The new officials would apply only to banks with more than $10 billion in assets, a total of around 175 formations nationwide, the CFPB said. Taken together, these banks typically account for the lion’s share of the overdraft payments charged in any given year.

CFPB officials said they expected the rule to be finalized in the coming year, and go into object in October 2025.

Banking trade groups deeply opposed to any changes in the overdraft rules have already begun to organize opposition, which is only expected to grow. Earlier this month, the Consumer Bankers Association launched a website to inspirit “the value of overdraft services, and why government mandates are misguided.”

The proposal is part of the larger Biden administration effort to rift down on what it calls “junk fees,” many of which are charged to consumers with little notice, and do not throw the real cost of the service.

“This is about the companies that rip off hardworking Americans simply because they can,” remarked Biden.

The proposed rule would essentially offer big banks two options for how to approach commercial overdraft coverage.

Below the first option, the large banks could offer overdraft loans for profit, provided the banks treat the capitalizes they advance as credit line loans, subject to all the regulations of the Truth in Lending Act.

“For example, consumers would interview for the credit and institutions would underwrite to determine the consumer’s ability to repay. Consumers would be able to repay the impute manually if they prefer manual repayment over auto-pay. And institutions would have to comply with limitations on fine fees and fees charged during the first year,” according to a fact sheet from the CFPB.

These safe keepings could result in fewer consumers being surprised by overdrafts and the resulting fees, a problem the CFPB detailed in a December on.

The second option would be for large banks to continue offering consumer overdraft coverage as a courtesy service, measure than a revenue-generating line of credit. As a courtesy service, the funds would continue to be exempt from TILA laws.

But in exchange for this continued exemption, banks that offer courtesy overdraft coverage would be permitted to care only fees “in line with their costs or in accordance with an established benchmark,” a CFPB fact daily said .

The agency proposed several potential benchmark rates, ranging from $3 to $14 per transaction. The closing amount will be released when the rule is published, likely some time in the next year.

Alternatively, banks that opt to fill fees in line with their costs would be required to calculate those costs based largely on the liability liabilities incurred from accounts that are never brought back into the black, the CFPB said.

Given the rather low principals and high rates of repayment for checking account overdraft coverage, losses tallied under this rating could be minimal.

“Most consumers’ debit card overdrafts are for trifling than $26 and are repaid within three days,” CFPB Director Rohit Chopra told reporters Tuesday.

In 2021, the general overdraft fee was higher than the average overdraft, at around $35 per transaction, according to a report from the Federal Put away Insurance Corp.

“Because the loans are so profitable, many financial giants have sought ways to ratchet up gains from their deposit account customers,” said Chopra. “This has required us to invest a lot of resources to prevent criminal activity, with a cat-and-mouse game being the result.”

The CFPB has been scrutinizing banks’ overdraft fee practices for disparate years. In December, the agency ordered Atlantic Union Bank to pay $6.2 million for illegally enrolling thousands of purchasers in checking account overdraft programs. Regions Bank was ordered in 2022 to pay $191 million for surprise overdraft costs on certain ATM withdrawals and debit card purchases.