Several banking institutions and trade organizations have initiated legal action against the Consumer Financial Protection Bureau (CFPB) in response to a newly established regulation aimed at capping the overdraft fees banks are permitted to impose.

This regulation is a part of the Biden administration’s broader initiative to minimize excessive fees that impact consumers during routine transactions, particularly in financial services.

However, banks contend that eliminating overdraft protection may push some consumers, particularly those in financial distress, to resort to less regulated alternatives that may not offer sufficient protections.

According to the finalized CFPB regulation revealed recently, banks have three choices for charging overdraft fees: a standardized fee of $5, a fee that reflects their operational costs, or any fee as long as the terms are clearly stated, similar to how they would disclose other loans, typically expressed as an annual percentage rate (APR).

Despite some reductions in overdraft charges over the last ten years, major banks still collectively earn approximately $8 billion annually from these fees, according to insights from the CFPB and publicly accessible data from banks.

At present, there are no limits on the overdraft fees financial institutions can impose.

This new regulation is scheduled to take effect in October 2025. However, the forthcoming administration has yet to appoint anyone to head the CFPB and has suggested the possibility of abolishing the agency altogether.

The regulation targets banks and credit unions with assets exceeding $10 billion, which includes the largest banking organizations in the U.S. Historically, banks have filed legal challenges against the CFPB regarding similar regulations and limits on late fees associated with credit cards, and Congress retains the authority to push back against or revoke the new rule.

The lawsuit was spearheaded by the Consumer Bankers Association, alongside prominent organizations like the American Bankers Association, America’s Credit Unions, and the Mississippi Bankers Association, among others. These groups allege that the CFPB is overstepping its regulatory boundaries with the latest rule.

“Studies indicate that overdraft services are crucial for providing necessary liquidity during brief financial shortages, allowing consumers to manage essential expenses like groceries and bills,” stated Lindsey Johnson, President and CEO of the Consumer Bankers Association. “Without access to overdraft solutions, those in vulnerable financial positions may increasingly turn to riskier and less regulated non-bank options to address their needs.”

The lawsuit was filed in the U.S. District Court for the Southern District of Mississippi, Northern Division. The Consumer Bankers Association, along with its co-plaintiffs, is also pursuing a preliminary injunction to prevent the CFPB from enforcing the new regulation until the court reaches a final verdict regarding the substance of the claims.