White House Proposes Cutting Big Banks’ Overdraft Fees to $3

Consumer Financial Protection Bureau Director Rohit Chopra testifies before the Senate Banking, Housing and Urban Affairs Committee April 26, 2022 in Washington, DC. Win McNamee/Getty Images

The Biden administration released a long-awaited proposal to adjust how large banks offer overdraft protection coverage to clients.

The changes are a part of the White House’s broader efforts to clamp down on so-called junk fees, with President Joe Biden calling them a form of “exploitation.”

The Consumer Financial Protection Bureau (CFPB), an independent watchdog agency, unveiled a series of changes to overdraft plans that would apply only to financial institutions with more than $10 billion in assets, affecting nearly 200 banks nationwide.

The proposal would slash big banks’ overdraft fees to as low as $3, eliminating billions of dollars in annual revenue for these companies.

The agency’s new regulations include two options for how big banks can extend commercial overdraft plans to clients.

The first concept would permit companies to provide overdraft loans for profit, but only if they treat the money as credit line loans. That would make the program subject to the rules and regulations of the Truth in Lending Act (TILA), federal legislation that was enacted in 1968 to shield consumers from unfair or inaccurate practices in the credit and lending marketplace.

The second idea would allow large institutions to continue providing customer overdraft coverage as a courtesy service instead of a line of credit that generates revenue for the company’s bottom line.

If it’s identified as a courtesy service, the funds that banks advance would remain exempt from TILA provisions.

“Decades ago, overdraft loans got special treatment to make it easier for banks to cover paper checks that were often sent through the mail,” CFPB Director Rohit Chopra said.

“Today, we are proposing rules to close a longstanding loophole that allowed many large banks to transform overdraft into a massive junk fee harvesting machine.”

In a Jan. 17 statement, President Biden referred to these overdraft fees as “exploitation.”

“For too long, some banks have charged exorbitant overdraft fees—sometimes $30 or more—that often hit the most vulnerable Americans the hardest, all while banks pad their bottom lines,” he said at the time. “Banks call it a service—I call it exploitation.”

Earlier this year, the Biden administration proposed a new rule to cut credit card late fees by 75 percent, calling them “unfair.”

Economists, industry leaders, and Republican lawmakers warned that it would present unintended consequences in the long run, especially for low-income households.

Facts About Overdrafts

Overdrafts occur when when clients spend or withdraw more funds than they have available in their checking account. Banks will cover the withdrawal or transaction as a type of credit but add on a fee for each overdraft.

Despite being categorized as loans, they’ve been largely exempted from consumer protection laws, mainly because overdraft loans were seldom used. The volume of usage gradually changed amid the prevalence of debit cards.

While fewer than one-fifth of U.S. households face overdrafts, a small segment of consumers “are high volume users of overdraft,” said Greg McBride, chief financial analyst at Bankrate. Within this category of users, many are low-income households who “stand to see the most relief.”

“In the meantime, remain vigilant against incurring overdrafts by setting up a link between your checking and savings accounts, signing up for email or text alerts when your balance gets below a certain threshold, and checking your available balance via smartphone app prior to initiating any transactions,” he said in a statement.

About 23 million households are estimated to pay overdraft fees each year, making the fees a considerable revenue tool for financial institutions. Since 2008, Americans have paid about $280 billion in overdraft fees.

CFPB projections suggest that consumers could save about $3.5 billion a year, and households that incur overdraft fees could save $150.

The Reaction

Industry reaction to the White House’s proposed rulemaking on overdrafts has been swift.

The CFPB is “late to the party,” and its “one-size-fits-all approach” threatens competition, innovation, and progress, said Lindsey Johnson, president and CEO of the Consumer Bankers Association.

“From the development of next-day grace periods to the elimination of non-sufficient funds fees, banks for more than a decade, and particularly over the last several years, have innovated and competed to create a range of highly-tailored, consumer-friendly products that aim to support each bank’s consumers best—all without burdensome regulation or legislation,” she said in a statement.

The proposal could prevent millions of people from accessing this emergency safety net, push consumers out of the banking system, and “reshape the economics of banking low-deposit consumers,” Ms. Johnson said.

“We urge the CFPB to pull this misguided and politically driven overdraft proposal and we ask regulators to examine the cumulative impact of these regulations,” she said.

Last month, the Consumer Bankers Association published a report on overdraft statistics.

The trade association cited the Federal Reserve Board’s 2022 Survey of Household Economics and Decisionmaking data, showing that more than half of consumers who used overdraft services at least once in the past year thought that they'd be unable to access other credit if they applied.

Administration officials have expressed similar concerns.

In December 2021, Acting Comptroller of the Currency Michael Hsu warned that “limiting overdrafts may limit the financial capacity for those who need it most.”

“As such, policymakers, advocates, and banks should also consider using financial health as an additional yardstick by which to assess banking access, products, and services,” he told the Consumer Federation of America’s 34th annual Financial Services Conference.

“While there are many different measures of consumer financial health, they generally address the ability of individuals and families to meet their day-to-day obligations and needs, absorb and recover from financial shocks, and pursue long-term savings goals.”

House Republicans asserted that the proposed rule “would undermine the Bureau’s consumer protection mission” by reducing financial inclusion, limiting consumer choice, stifling innovation, and raising the cost of consumer banking.”

“This proposed rule will further reduce access to the short-term liquidity products that millions of Americans rely on to help make ends meet,” House Financial Services Committee Chair Patrick McHenry (R-N.C.) and House Subcommittee on Financial Institutions and Monetary Policy Chairman Andy Barr (R-Ky.) said in a statement.

“We urge the CFPB to withdraw this misguided proposal that harms the very consumers the agency was created to protect.”

The finalized rulemaking is expected to occur in October 2025.