The Consumer Financial Protection Bureau has passed a rule limiting overdraft fees banks can charge, continuing the Biden administration's crackdown on junk fees that affect consumers on everyday purchases.
Overdraft fees occur when a bank loans a consumer money after their balance dips below zero, expecting the amount to be repaid with an additional fee. In some cases, according to The Associated Press, the consumer is expected to repay the bank more than the original amount charged. For example, a $3 coffee could end up costing more than $30.
Under the new policy, banks can choose between one of three options to replace their old overdraft rate, which could have been as high as $35. Banks may charge a flat fee of $5, a fee that covers the bank’s costs and losses or they can charge any fee — as long as the terms of the overdraft loan are disclosed like any other loan.
“For far too long, the largest banks have exploited a legal loophole that has drained billions of dollars from Americans' deposit accounts,” Rohit Chopra, director of the Consumer Financial Protection Bureau, said in a statement. “The CFPB is cracking down on these excessive junk fees and requiring big banks to come clean about the interest rate they're charging on overdraft loans.”
However, the Consumer Bankers Association warned the new rule may reduce the availability of overdraft services, describing them as a “critical safety net” for consumers.
“Overdraft services are a vital lifeline for millions of consumers — including the one in five Americans who lack access to credit,” a spokesperson for the CBA said in a statement. “The CFPB’s rule jeopardizes access to overdraft services when hardworking Americans face unexpected expenses, leaving them with worse alternatives like payday loans and pawnshops.”
Overdraft fees disproportionately affect consumers with low savings, according to the CFPB, with around 70% of overdrafts charged to customers with account balances between $237 and $439.
The agency estimates that consumers will save around $5 billion a year under the new overdraft rule, set to go into effect on Oct. 1, 2025.
President-elect Donald Trump, who takes office in January, has not tapped anyone yet to lead the CFPB under his administration. His allies, including Elon Musk, have called for the agency to be eliminated.
