Overdraft Fees Could Be Capped At $5 Under New Rule

In what could be one of the final salvoes in President Joe Biden’s war on what the administration calls “junk fees,” the Consumer Financial Protection Bureau (CFPB) issued a final rule Thursday capping bank overdraft fees at $5 in most cases.

The rule, which goes into effect in October, would restrict what banks can do when customers attempt to withdraw more money than is in their account. Currently, banks can either decline the transaction or let it go through, putting the customer’s balance into the red and possibly charging an overdraft fee. Fee amounts vary by bank but are usually in the $30 range, according to bureau research.

“For far too long, the largest banks have exploited a legal loophole that has drained billions of dollars from Americans’ deposit accounts,” CFPB director Rohit Chopra said in a press release.

Curtailing fees for consumer financial services has been a major focus for Chopra, the bureau’s director who was appointed by Biden. The CFPB’s scrutiny of overdraft practices has prompted many banks to cut or eliminate overdraft fees in recent years. The bureau also issued a rule limiting credit card late fees to $8, but a court temporarily blocked the regulation while a case brought by business groups seeking to overturn the regulation proceeds.

Banks Say Ruling Could Hurt Customers

Limiting overdraft fees will save households that pay them $225 a year, the bureau said in a press release. Previous research by the bureau showed that most overdraft fees are racked up by a small percentage of customers who pay them again and again, with low-income households more likely than wealthier ones to be hit by fees.

The idea of capping overdraft fees is not too popular with banks. The Consumer Bankers Association (CBA), a trade group representing banks, criticized a draft version of the regulations earlier this year, contending it would hurt consumers.

The CBA argued overdrafts serve as an important financial safety net for customers who may be unable to access other forms of credit: by paying an overdraft fee, a customer might be able to avoid missing other bills and incurring heftier fees elsewhere in their budgets.

The rule applies to banks with more than $10 billion in assets. It allows them three options when charging overdraft fees: charge a fee that covers the expenses incurred by the overdraft, charge a fee of no more than $5, or treat the overdraft as a short-term loan, following all the rules and regulations affecting loans. The CBA said realistically, banks would only ever choose the second option.

Implementing the Rule May Be An Uphill Battle

Because of the opposition from banking, a legal challenge could likely pause the rule before it can take effect.

The CFPB has faced several court cases challenging its rulings, including a Supreme Court case heard late last year in which payday lenders argued the bureau was unconstitutional. The court ruled in favor of the government’s consumer watchdog, averting what some experts said would have been pandemonium for consumers.

Additionally, the bureau itself faces an uncertain future under the incoming Donald Trump administration.

Billionaire Elon Musk, who Trump tasked with finding ways for the government to save money, said he wanted to “delete” the bureau. The agency was established in the aftermath of the Great Financial Crisis as a watchdog over financial services.