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If your bank account regularly has negative balances, or if you’re bad at keeping track of your debit card swipes, you’ve probably felt the pain of overdraft fees, one of the banking industry’s most popular fees. There will be.
Thanks to a rule finalized Thursday by the federal Consumer Financial Protection Bureau, those fees could be significantly lower next year unless the rule is overturned by Congress or the courts before it takes effect Oct. 1.
U.S. banks oppose the rule and are expected to work forcefully to block it. Their trade group, the American Bankers Association, argued that the rule would force banks to offer less overdraft protection and prevent them from bouncing overdraft checks and declining debit card transactions.
However, this protection comes at a price, with overdraft fees of about $27 every time a customer withdraws more than their checking account can afford, Bankrate.com reported in August. According to the CFPB, last year banks collected about $5.8 billion worth of fees for overdrafts and insufficient funds, meaning checks that bounced or payments were declined.
The CFPB rule is one of several efforts by the Biden administration to address an estimated $90 billion annually collected in “junk” or hidden fees unrelated to costs incurred. Others include a CFPB rule that reduces late fees on credit card payments, a Department of Transportation rule that limits airline ticket fees, and a federal deal that broadly targets fees charged by ticketing companies, hotels, and other service providers. There are also committee proposals.
Under overdraft rules, large banks and credit unions have three options when setting fees. You may charge an amount based on the cost of the service, including any losses caused by the service. You can be charged $5 for each overdraft. Alternatively, you can charge a profitable amount, but only if you disclose interest rates and other terms upfront and send periodic statements to your customers. The third option treats overdraft protection as a form of short-term lending (which it technically is).
Banks and credit unions with assets of $10 billion or less are exempt from this rule.
According to the CFPB, overdraft protection began decades ago as a service offered by banks to customers who had to wait days for paper checks to clear. But as debit cards became more popular, banks and credit unions started making significant profits from those fees. Some credit unions derive more than half of their net income from overdraft fees, according to California state data.
Opinion of the U.S. Consumer Financial Protection Bureau, Washington, DC, April 3, 2021.
(Graham Sloan/Associated Press)
Consumer advocacy groups have been calling for limits on “predatory” overdraft fees for decades. Robert Herrell, executive director of the Consumers Federation of California, said the fees “come mostly from low-income consumers and a little bit from middle-income consumers,” who “nearly paycheck to paycheck.” “I’m living a life.” “That is completely unacceptable to us.”
The CFPB found that less than 10% of consumers pay nearly 80% of their fees and pay more than 10 times a year. But since the pandemic began in 2020, banks’ revenue from these fees and “insufficient funds” fees (which occur when a bank refuses to cover an overdraft) has been significantly reduced, due in part to regulatory oversight. decreased to
Still, the bureau estimates that the rule could save consumers up to $5 billion a year, or $225 per household in overdraft fees.
“In reality, overdraft fees act as an expensive credit, and it makes sense to regulate such excessive fees,” said Mike Litt, director of consumer campaigns at the Public Interest Research Group. said. “CFPB rules will make overdraft fees more reasonable and commensurate with banks’ actual costs.”
The Bankers Association was less optimistic, arguing that the agency should have refrained from operating until the Trump administration takes office. During former President Trump’s first term, his appointees at the CFPB significantly scaled back their rule-making efforts.
“By taking this action, the bureau is putting highly regulated and transparent banking fees above its mission of helping consumers,” Rob Nichols, president and CEO of the American Bankers Association, said in a statement. “We have chosen to re-prioritize demonization.” “This rule and the government’s accompanying price controls will make it significantly harder for banks to provide this valuable service to their customers, including those who have few other options to cover essential payments. ”
Treasury Secretary Janet Yellen meets with American Bankers Association. March 21, 2023 Rob Nichols, President and CEO.
(Manuel Balce Senator/Associated Press)
Nichols said research shows Americans don’t want to eliminate overdraft protection. He also argued that the agency had no legal authority to limit the price of overdraft fees, adding that the rule “should not be enforced.”
Nadine Chabrier, senior policy and litigation advisor at the Center for Responsible Lending, said banks can continue to offer overdraft protection as a form of credit, but they must follow the same rules that apply to other types. I answered yes. Chabrier said the new rules keep pace with changes to overdraft protection as paper checks are replaced with instant debits.
The first test of the CFPB rules will likely come in the Republican-controlled Congress. Under the Congressional Review Act, lawmakers can introduce a resolution to disapprove a rule within 60 days after it is formally introduced. The resolution cannot be filibustered and only requires a simple majority in the House and Senate to pass.
Other protections previously adopted by the CFPB will remain in place regardless of what happens to the new rules. Importantly, consumers must opt in to overdraft protection so they know that overdrafts are allowed but will incur fees. The other is guidance issued in 2022 that instructs banks not to process debit card transactions or deposits in a sequence that could result in an unexpected overdraft.
The California Legislature enacted two measures this year to further protect consumers from overdraft and insufficient funds fees. Senate Bill 1075 restricts state-chartered banks and credit unions from charging overdraft fees that exceed the amount set by the CFPB or $14, whichever is lower. If the CFPB’s rules are blocked, the law would continue to apply to state-chartered agencies.
Another law, a 2017 House bill, prohibits state-chartered banks and credit unions from charging insufficient funds fees for debit card transactions that are declined because the account is overdrawn.
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