Overdraft fees could soon be slashed following CFPB proposal to limit what banks can charge
The Consumer Financial Protection Bureau (CFPB) announced today that it’s proposing a rule designed to end a bank overdraft loophole that has cost Americans billions of dollars each year in unnecessary fees over several years, while benefitting banks in the process.
The rule is meant to regulate overdraft lines of credit covered under Regulation Z – a rule that protects consumers from harmful or misleading lending practices – and proposes to lower overdraft fees at banks with at least $10 billion in assets, which includes approximately 175 of the largest banks in the US, by potentially capping these fees at up to $14. The CFPB estimates that these large banks are responsible for more than two-thirds of total marketwide overdraft fee revenue.
Banks could also charge a fee that helps them break even on an overdraft transaction, the CFPB added in its 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,” says Rohit Chopra, CFPB director, in a press release.
Overdraft loans received special treatment decades ago due to the time checks took to be delivered through the mail, Chopra added.
An overdraft fee is incurred when a transaction that’s larger than the amount in your bank account causes your bank balance to go negative. The bank pays the item that took your account negative and potentially charges you an overdraft fee, sometimes as high as $38 per transaction.
Overdraft fees could be capped at $14 under the CFPB’s proposed rule
Bankrate’s 2023 checking account and ATM fee study shows that the average overdraft fee decreased around 20 percent from 2019 ($33.36) to 2023 ($26.61). According to the CFPB, there are some 23 million households that pay overdraft fees in any given year. The CFPB expects that its proposed rule could save consumers $3.5 billion or more in fees per year; a potential savings of $150 per household that pays overdraft fees.
The CFPB’s proposed rule would mean that roughly 175 banks and credit unions under CFPB supervisory authority could still offer overdraft services, but they could only charge fees ranging from $3 to $14 or they could determine a fee to breakeven. Banks might offer the more profitable overdraft lines of credit, which might cost consumers more money over time. But they would have Regulation Z protections for consumers.
Why is the CFPB proposing this rule?
The majority of overdraft loans aren’t covered under the Truth in Lending Act (TILA)/Regulation Z, due to exemption back in 1968 and the CFPB would like to see overdraft fees lower or banks using the more profitable option of overdraft lines of credit, which will be under Regulation Z.
Four ways to avoid overdraft fees today
The CFPB’s proposed rule is expected to go into effect in October 2025. Comments must be received by April 1. Until the proposal becomes law, here are four ways consumers can avoid high-cost overdraft fees:
- Find a bank that doesn’t charge an overdraft fee, especially if you think you’ll be incurring overdraft fees.
- Bank with a financial institution that offers early direct deposit. A paycheck available a couple days earlier could make the difference between your account balance going negative or having the money to pay for an item in your account.
- Budget to try and plan your spending to avoid overdraft fees.
- Check your balance using your bank’s app or the bank’s website to confirm your bank account balance before using your debit card or paying anyone.
Bottom line
The CFPB’s proposed changes to lower overdraft fees aren’t projected to go into effect until October 2025. Since 2021, some banks have eliminated or lowered overdraft fees. But about 91 percent of accounts still have overdraft fees – down from 100 percent in 2021 – according to Bankrate’s 2023 checking account and ATM fee study.
You might be able to avoid these costly fees now by finding a bank that doesn’t have overdraft fees, bank with one that offers early direct deposit, or by simply budgeting.
