January 18th 2024 — In a significant move aimed at protecting consumers from excessive overdraft fees, the Consumer Financial Protection Bureau (CFPB) announced on Wednesday a proposed rule that could result in substantial savings for bank customers, potentially reaching $3.5 billion annually. The rule would specifically target large banks and credit unions with assets exceeding $10 billion, which collectively serve a significant portion of deposit account customers in the United States.
The CFPB highlighted a common issue where bank customers, often those least able to afford it, are surprised by hefty overdraft fees. The proposed rule aims to close a longstanding loophole that allowed large banks to exploit overdraft fees, transforming them into what CFPB Director Rohit Chopra termed a “massive junk fee harvesting machine.”
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According to the CFPB’s findings, customers are typically charged $35 for overdraft loans, despite the majority of debit card overdrafts being less than $26 and repaid within three days. The proposed rule could potentially save around 23 million households an estimated $150 each year.
Proposed Changes and Impact
The rule targets overdraft fees, which are charged when a bank or credit union covers a transaction for an account holder, even when there isn’t enough money in the account. The CFPB argues that overdraft coverage essentially functions as a loan to the customer and should be subject to the Truth in Lending Act, similar to credit cards.
During the 1990s and early 2000s, with the rise of debit cards, large institutions took advantage of exemptions to generate high volumes of overdraft loans, resulting in an estimated $12.6 billion in annual overdraft fee revenue by 2019. Presently, banks have made modifications to lower their overdraft revenue to approximately $9 billion per year.
Under the proposed rule, big banks and credit unions would be required to be more transparent about the terms of extending an overdraft loan, similar to other lending products. Financial institutions could offer overdraft protection as a line of credit tied to checking accounts or debit cards, charging competitive interest rates. Alternatively, those wishing to remain exempt from the Truth in Lending Act could charge a flat fee for overdraft payments, following benchmark amounts set by the CFPB.
Public Comment and Potential Implementation
The proposed rule is open for public comment until April 1, after which the CFPB will review comments, consider amendments, and decide whether to issue a final rule. If approved, the rule is expected to take effect around October 2025.
Biden Administration’s Broader Effort
The CFPB’s latest move aligns with the Biden Administration’s broader initiative to reduce “junk fees” and enhance transparency across various sectors, including airline tickets, live events, rentals, hotels, and banking services.
In a statement on Wednesday, President Joe Biden emphasized that the proposed rule is a part of the Administration’s comprehensive plan to lower costs for hardworking families, characterizing predatory overdraft fees as a form of exploitation. The President anticipates that the proposal could cut the average overdraft fee by more than half, saving the typical American family $150 annually and totaling savings of $3.5 billion each year.
Banking Industry Response
However, in response to the CFPB’s announcement, two major banking trade groups raised concerns. The Consumer Bankers Association and American Bankers Association warned that the proposed rule, if enacted, could undo years of progress, potentially depriving millions of Americans of a valued emergency safety net and pushing more consumers out of the banking system.
American Bankers Association President and CEO Rob Nichols expressed skepticism, stating that the CFPB may lack the legal authority to subject overdraft services to Truth in Lending Act regulations. The industry also argued that innovation and competition could be stifled, and consumers might face unintended consequences.
Financial services policy analyst Jaret Seiberg of TD Cowen Washington Research Group highlighted potential challenges, suggesting that the choice presented to banks might be an illusion. Banks, if the rule goes into effect, could default to the benchmark fee set by the agency, as calculating overdraft costs separately might not be cost-effective and could risk litigation.
The proposed rule, with its potential to reshape how large financial institutions handle overdraft charges, now awaits public input and scrutiny before any final decisions are made.