Biden Administration Proposes Strict Limits on Overdraft Fees to Provide Relief
The Biden administration made a major regulatory move this week that could save American consumers billions in overdraft fees charged by the nation’s largest banks. The proposed rules from the Consumer Financial Protection Bureau (CFPB) aim to rein in what the administration calls “junk fees” that disproportionately impact lower income households.
Overdraft Fees Targeted in New Regulations
Overdraft fees are charged when customers spend more than their available balance, allowing the bank to cover the difference. These fees currently average around $35 per overdraft, according to the CFPB. In 2019 alone, banks collected $12.6 billion in revenue from such fees.
The new regulations would limit the size of overdraft fees, cutting the average fee by more than half. The proposal specifies that banks could only charge between $3-$14 per overdraft to recoup their costs. Banks would need to provide evidence to justify any higher fees.
Who Do Overdraft Fees Impact?
Around 25% of consumer checking accounts rack up overdraft fees over the course of a year, frequently catching consumers by surprise. Lower income consumers are hit the hardest.
By reducing overdraft fees, the Biden administration aims to ease the financial squeeze on vulnerable households. Annual savings could reach $3.5 billion for consumers if the rules take effect.
Strict New Rules Would Apply to Biggest Banks
The proposed regulations target banks with assets over $10 billion, which covers most of the largest consumer banks in the U.S. Wells Fargo and JPMorgan Chase alone accounted for around one-third of total overdraft fee revenue in 2022.
Under the new rules, these banks would also be required to disclose overdraft fees and terms clearly, preventing surprise fees on consumers. Overdrafts would be regulated similarly to other forms of credit and loans.
Banking Industry Pushes Back Against Regulations
The banking industry has already pushed back strongly against the proposed overdraft rules.
The Consumer Bankers Association called the regulations “politically driven” and unnecessary given existing trends of banks voluntarily reducing reliance on overdraft fees.
Banks generate significant revenue from overdraft fees, though some have pulled back recently amid public and regulatory pressure. The proposed rules aim to accelerate this shift industrywide.
Final Rules May Take Effect in 2025 After Public Comment
The CFPB’s proposed limitations on overdraft fees are not yet set in stone. The public has the opportunity to comment on the proposal before final rules are issued.
Industry groups are expected to ramp up lobbying efforts to shape the final regulations, though substantial change is still expected. If implemented as proposed, the rules would take effect in late 2025.
The overdraft fee proposal represents a broader effort by the Biden administration to rein in extra costs and fees imposed by companies across industries. More action on “junk fees” in other sectors is anticipated from the White House and regulators.
