The Biden administration on Wednesday took another aim at slashing junk fees, proposing a rule that would cut banks’ overdraft fees as low as $3, a large upset to some bankers.
The rule introduced by the Consumer Financial Protection Bureau (CFPB) would apply to banks and credit unions with more than $10 billion in assets or approximately 175 of the largest financial institutions in the country. According to the proposal, large to mid-size banks would have to calculate and disclose an annual percentage rate on each overdraft fee.
Alternatively, banks could charge a fee to recoup their costs or rely on a benchmark set by the bureau. The CFPB asked for comment on $3, $6, $7, or $14 as proposed benchmarks.
Overdraft fees often weigh hardest on Americans living paycheck to paycheck, as they are most vulnerable to any small transaction accidentally overdrawing an account. According to the independent watchdog, many institutions charge $35 for an overdraft loan, even though overdraft amounts average less than $26.
“We are proposing rules to close a longstanding loophole that allowed many large banks to transform overdraft into a massive junk fee harvesting machine,” CFPB director Rohit Chopra said in a statement.
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New rule could save consumers billions of dollars
The proposed rule would end a decades-long loophole in the 1969 Truth in Lending Act, which has exempted overdraft fees from consumer protections. Back then, when consumers lacked the funds to cover a check, the bank would “occasionally honor it” and charge a small overdraft fee to the consumer.
However, as automation of payments has been extended to smaller and more frequent debit transactions, overdraft fees have evolved into an “expensive loan product,” the watchdog found. Very few consumers rely on paper checks, which were what overdraft fees were meant to cover decades ago.
“In the paper check era, overdraft service was intended to be a convenience rather than a massive profit driver,” the CFPB noted.
Federal banking regulators have identified abuses in overdraft charges, including high fees and complex transaction processes, dating back to the 2000s. Consumers have paid an estimated $280 billion in overdraft fees over the past two decades.
That figure declined to $9 billion in 2022 as some banks have made policy changes to curb junk fees, the CFPB noted.
For instance, Bank of America (BAC) reduced its fee by 90% within four quarters (from Q1 2021 to Q3 2023). Over that period, Bank of America’s overdraft fees were $90 million — $1 billion lower than its competing mega-banks.
If enacted, the proposed rule could collectively save 23 million consumers roughly $3.5 billion in fees annually. That translates to savings averaging $150 for households that pay overdraft fees and even more for the most vulnerable Americans.
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Bankers slam CFPB proposal
The American Bankers Association (ABA) slammed the CFPB’s authority to slash overdraft fees, saying the proposal was issued without regard to the economic impact it would have on community banks and credit unions — as is required under the Dodd-Frank banking reform law.
“Today’s proposal from the CFPB marks the bureau’s latest attempt to demonize and mischaracterize highly regulated and clearly disclosed bank fees for a service fee that surveys consistently show Americans value and appreciate,” Rob Nichols, CEO of the American Bankers Association, said in a statement. “The proposal would make it significantly harder for banks to offer overdraft protection to consumers, including those who have few, if any, other means to access needed liquidity.”
Nichols cited a recent survey conducted by Morning Consult, where 9 in 10 consumers polled found value in overdraft protections, and nearly 8 in 10 who have paid overdraft fees in the past year would rather have paid a fee than have a declined payment.
Another 63% of consumers said it was reasonable for banks to charge a fee for an overdraft, as opposed to 24% who thought fees were unreasonable. The survey sampled 2,211 adults in the US between Sept. 20-22.
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“The CFPB is effectively proposing to take away overdraft protection from consumers who want and need it,” Nichols said.
Despite his concerns, some big banks continue to charge an exorbitant amount in overdraft fees, a detriment to folks struggling to make ends meet.
In 2022 alone, JPMorgan Chase (JPM) and Wells Fargo (WFC) were the two leading mega-banks profiting from overdraft fees, collecting slightly over $1 billion in revenue from those fees, the CFPB found.
“When companies sneak hidden junk fees into families’ bills, it can take hundreds of dollars a month out of their pockets and make it harder to make ends meet,” Biden said. “That might not matter to the wealthy, but it’s real money to hardworking families—and it’s just plain wrong. This is about the companies that rip off hardworking Americans simply because they can.”
Gabriella is a personal finance and housing reporter at Yahoo Finance. Follow her on X @__gabriellacruz.