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Proposed CFPB Rule Would Curtail 'Excessive' Bank Overdraft Fees

S.J. Steinhardt
Published Date:
Jan 17, 2024

The Consumer Financial Protection Bureau (CFPB) has proposed a rule that would limit large financial institutions’ ability to charge lending overdraft fees.

Currently, such institutions make billions of dollars from overdraft loans. The proposal would close a loophole in the Truth in Lending Act and other consumer financial protection laws that exempts overdraft lending services. Instead, “large banks would be free to extend overdraft loans if they complied with longstanding lending laws, including disclosing any applicable interest rate,” according to the CFPB’s announcement. “Alternatively, banks could charge a fee to recoup their costs at an established benchmark—as low as $3, or at a cost they calculate, if they show their cost data.”

"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 CFPB Director Rohit Chopra in the announcement. "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."

“We don’t believe [this] is something that needs to be regulated or legislated” beyond current law, said Lindsey Johnson, the president of the Consumer Bankers Association, a group whose board of directors includes executives from Capital One, JPMorgan Chase and Wells Fargo. In an interview last week, she said the group would “take a look at” the proposal before deciding its next steps, The Washington Post reported.

“When companies sneak hidden junk fees into families’ bills, it can take hundreds of dollars a month out of their pockets and make it harder to make ends meet,” President Biden said in a statement. “This is about the companies that rip off hardworking Americans simply because they can.”

In October 2022, the CFPB issued guidance about surprise depositor and surprise overdraft fees, which the agency said “likely violate the Consumer Financial Protection Act prohibition on unfair practices when consumers cannot reasonably avoid them.”

The Biden Administration announced its intention to eliminate and reduce “junk fees” in general in September 2022.

The new proposed rule would apply to insured financial institutions with more than $10 billion in assets, which covers approximately the 175 largest depository institutions in the country, according to the CFPB. These institutions typically charge $35 for an overdraft loan, even though the majority of consumers’ debit card overdrafts are for less than $26, and are repaid within three days, the CFPB said in its statement.

The CFPB estimated that this rule may save consumers $3.5 billion or more in fees per year.

“There are families struggling, paycheck to paycheck, [that] are getting hammered, and it is a real tax on access to their deposit funds,” said Michael Calhoun, the president of the Center for Responsible Lending, which has advocated for such rules, in an interview with the Post.

The CFPB has gone after large institutions for its practices. In December 2022, it fined Wells Fargo Bank $3.7 billion for its widespread mismanagement of many of its product offerings. Late last year, a joint investigation by the CFPB and the Comptroller of the Currency (OCC) resulted in U.S. Bank’s being fined a total of $56.7 million for illegal conduct during the Covid-19 pandemic, such as preventing out-of-work consumers from accessing their unemployment benefits.

In a statement, the American Bankers’ Association said it had not yet reviewed the details of the CFPB’s new proposal, but “we do know that the Bureau’s efforts to demonize a financial product that many Americans value and rely upon is misguided,” a spokesman told the Post.

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