A Proposed CFPB Rule Could Limit Bank Overdraft Fees

On Jan. 17, the Consumer Financial Protection Bureau (CFPB) proposed a new rule to curb excessive overdraft bank fees. The rule would end a loophole that exempts overdraft lending services from some consumer protection laws. It could save consumers an estimated $3.5 billion or more in bank fees annually. Here's what you need to know.

The Biden administration wants to eliminate junk fees

One initiative that the Biden administration has been tackling is excessive junk fees. These additional fees impact consumers' bank accounts and are often not disclosed clearly.

In 2022, the CFPB announced its initiative to reduce exploitative junk fees. The agency collected public comments from consumers to learn more about their experiences with these fees. Over 80,000 responses were gathered during the public commentary period.

A common complaint was overdraft fees. Last week, the CFPB announced a rule that could save consumers billions on such fees. With this proposal, the agency hopes to close a loophole that many large banks are using to profit from excessive overdraft fees.

The CFPB wants to end this loophole

The Truth in Lending Act was enacted in 1968 to help protect consumers. It required lenders to provide disclosures regarding lending processes and fees. However, the Federal Reserve Board established an exemption to this law, and big banks still use it today as a loophole.

The exemption ensured that banks didn't have to treat overdraft loans as a consumer credit product, meaning the disclosure rules didn't apply. This exemption was created at a time when consumers were sending checks by mail, so there was some unpredictability as to when a check might be received.

Years ago, when bank accounts were overdrawn, some banks would charge a modest fee and clear the check as a convenience to their customers. However, banking habits have changed since then -- and the fees have continued to rise.

Debit card usage and banking automation have significantly increased in modern years, resulting in more frequent overdrafts. Banks have continued to use this loophole to charge excessive fees, resulting in billions of dollars in profit yearly. But that could change in the future, saving consumers billions in fees.

Here's what the new rule proposes

On Jan. 17, 2024, the CFPB proposed a rule that would force large banking institutions to treat overdraft coverage like credit cards and other loans, meaning they'd be required to provide clear disclosures. This rule would apply to large financial institutions with assets of $10 billion or more.

The agency also proposes setting limits for fees. Financial institutions would be allowed to determine a fee they would need to charge to break even, using a breakeven standard.

Alternatively, they would be allowed to charge fees in accordance with a set benchmark. The CFPB has proposed fee benchmarks of $3, $6, $7, or $14.

Positive changes could be coming for consumers

If you've ever paid overdraft fees, this is good news for your personal finances. While this proposed rule won't result in immediate change, it's a positive step toward protecting consumers from excessive and unfair fees. Consumers are encouraged to comment on the proposed rule on or before April 1, 2024. The proposed rule is expected to go into effect on Oct. 1, 2025.