CFPB Proposes Rule to Crack Down on Overdraft Fees

Jan 23, 2024Federal Regulation, News

Last week, the Consumer Financial Protection Bureau (CFPB) proposed a rule to rein in excessive overdraft fees that would close a loophole exempting overdraft lending services from provisions of the Truth in Lending Act and other consumer financial protection laws. The proposal would allow large banks to extend overdraft loans if they comply with longstanding lending laws.

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

If banks show their cost data, they could charge a fee to recuperate their costs at an established benchmark as low as $3 under the new proposal. The rule would apply to insured financial institutions with over $10 billion in assets, which covers roughly 175 of the biggest banks in the U.S. that usually charge $35 for overdraft fees. 

As noted by CNBC, the proposal is part of a larger effort by the Biden administration to crack down on junk fees. If banks chose to offer overdraft loans for profit, it would likely result in fewer consumers being surprised by overdrafts, since they could choose to repay the credit manually or through auto-pay.

“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,” said President Biden.

Alternatively, Representatives Patrick McHenry (R-N.C.) and Andy Barr (R-Ky.) of the House Financial Services Committee issued a statement in response to the proposed rule, saying that it will “further reduce access to the short-term liquidity products that millions of Americans rely on to help make ends meet.”

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