NEW YORK — The Biden administration has put in place a new regulation aimed at limiting the overdraft fees banks can impose on their customers, reinforcing the administration’s ongoing efforts to eliminate excessive fees associated with everyday financial transactions. President Joe Biden has criticized these fees, which could reach up to $35, labeling them as “exploitative.” In contrast, the banking sector has made significant efforts to maintain their current fee structures.
The newly established regulation, revealed on Thursday, presents banks with three potential options for managing overdraft fees. They can opt to implement a flat fee of $5 for overdrafts, charge a fee that reflects their actual costs and losses, or apply any fee they desire, provided they clearly disclose the terms associated with the overdraft loan in the same manner as they would for other loans, which usually needs to be stated as an annual percentage rate (APR).
Despite reductions in overdraft fees over the last ten years, major banks in the United States continue to generate approximately $8 billion annually from these fees, as reported by the Consumer Financial Protection Bureau (CFPB) and bank public filings. Presently, there is no legal limit on the overdraft fees that financial institutions can assess against their customers.
Currently, when a financial institution lends a customer funds after their account reaches a zero balance, the individual must repay not only the borrowed amount plus a fee, which can sometimes be significantly higher than the overdraft itself. A common example cited by critics illustrates that a $3 coffee could ultimately cost a consumer over $30 due to these additional charges.
The new rule is intended to come into effect in October 2025, although the future leadership of the CFPB remains uncertain under the incoming Trump administration, which has made remarks about potentially disbanding the agency.
This regulation primarily affects banks and credit unions with assets exceeding $10 billion, encompassing the largest financial institutions in the country. Banks have previously taken legal action against the CFPB regarding similar rules and caps on late fees for credit cards, with the likelihood of future lawsuits on this regulation as well. Additionally, Congress holds the authority to challenge or repeal the new rule.
Overdraft fees originated at a time when consumers were more inclined to write and cash checks, with the fees being a means to ensure that checks cleared rather than bouncing due to timing issues. However, these fees have seen a steady increase over the past two decades, predominantly impacting customers who are already facing financial difficulties. The CFPB reports that around 70% of overdraft fees are charged to customers with average account balances ranging from $237 to $439.
The CFPB estimates that the enforcement of this rule could save consumers approximately $5 billion in annual overdraft fees, translating to about $225 in savings per household that typically incurs such fees.
