The Biden administration has recently implemented a rule aimed at curbing the excessive overdraft fees that banks can charge consumers. This move is part of President Joe Biden's broader initiative to reduce what he has termed as 'exploitative' fees that burden individuals on everyday transactions, including banking services.
Under the finalized rule, banks now have three options when it comes to overdraft fees. They can opt for a flat fee of $5, charge a fee that covers their costs and losses, or disclose the terms of the overdraft loan, similar to any other loan, typically expressed as an annual percentage rate (APR).
Despite some reduction in overdraft fees by banks over the past decade, the largest banks in the country still collect around $8 billion annually from these charges. Presently, there is no cap on the overdraft fees that banks can impose legally.
Typically, when a bank advances money to a consumer with a zero balance in their account, the consumer is required to repay the overdrawn amount along with an additional fee, often exceeding the original charge. This practice has led to scenarios where a simple $3 cup of coffee can end up costing more than $30.
The finalized rule is scheduled to come into effect in October 2025. However, the incoming administration has not yet appointed a leader for the Consumer Financial Protection Bureau (CFPB) and has even discussed the possibility of dismantling the agency.
The rule applies to banks and credit unions with assets exceeding $10 billion, encompassing the nation's major financial institutions. Banks have previously contested these regulations and are expected to challenge them again. Congress also retains the authority to contest or overturn the rule.
Overdraft fees originated during a time when check transactions were more prevalent, aimed at ensuring checks cleared without bouncing due to timing issues. However, banks escalated these fees significantly in the early 2000s, disproportionately affecting their most financially vulnerable customers. The CFPB reports that 70% of overdrafts are incurred by customers with average account balances ranging from $237 to $439.
The CFPB estimates that the new rule could save consumers approximately $5 billion annually in overdraft fees, translating to an average of $225 per household that typically faces these charges.
