by The Consumer Financial Protection Bureau on Wednesday proposed a rule that would sharply limit overdraft fees at the largest U.S. banks and credit unions, a change the agency estimated could save households up to $3.5 billion a year. in commissions.
The proposal, which must go through a comment period and would not take effect until at least the end of 2025, aims to end the $35 overdraft fee that has become the norm at many banks.
The bureau rule would give banks some options for setting a lower fee. They could charge a balancing fee (based on the individual bank’s own costs) or a referral fee determined by the office. The agency has proposed a range of $3 to $14 for the benchmark.
Alternatively, banks could treat overdrafts as a line of credit and provide the information required by the Truth in Lending Act, including interest rates.
“Decades ago, overdraft loans received special treatment to make it easier for banks to cover paper checks that were often mailed,” said Rohit Chopra, director of the consumer bureau. “Today we are proposing rules to close a long-standing loophole that allowed many big banks to turn overdrafts into a huge junk fee-collecting machine.”
The proposed rule would apply only to institutions with assets of $10 billion or more, a category that includes about 175 of the country’s more than 9,000 banks and credit unions. Those large providers collect about two-thirds of all overdraft fee revenue, the bureau said.
The consumer bureau has been laying the groundwork for more than a decade for a rule limiting overdraft fees, publishing reports analyzing the fees and discussing its concerns with banking industry executives and trade groups.
In anticipation of the crackdown, some large banks have already reduced their fees. In 2022, Citigroup eliminated fees and Bank of America reduced its charge from $35 to $10. Consumers paid $7.7 billion that year in overdraft fees, up from $12.6 billion in 2019, according to consumer bureau estimates.
Banking trade groups are fiercely opposed to stricter overdraft rules. “Overdraft protection fees are clearly disclosed, highly regulated, and provide a service that an overwhelming majority of consumers find valuable,” Rob Nichols, CEO of the American Bankers Association, said last month.
His group and two others sent a letter to Mr. Chopra this month urging the bureau to convene a small business review panel to comment on the rule, a step the bureau must take before adopting regulations that could substantially affect small businesses.
“Regardless of which banks are directly subject to the bureau’s rules, all banks would face market pressure to conform their practices to the bureau’s rules,” the trade groups wrote.
The bureau said this week that it would not convene the requested panel because its rule would apply only to large banks and credit unions.
Consumer advocates praised the proposal. “Overdraft fees are not so much a useful service as a lucrative profit center supported largely by the most economically vulnerable consumers,” said Carter Dougherty, a spokesman for Americans for Financial Reform. “This reform is a step for banks to once again offer good service and move away from cheating fees.”
The office will accept public comments on the proposed rule until April 1, after which it can begin final steps to adopt the changes.
