As part of the White House’s effort to cut down on trash fees that affect customers on regular purchases, including banking services, the Biden administration has adopted a rule that restricts the amount of overdraft fees banks can charge. The banking sector has vigorously campaigned to maintain the current cost structures, whereas President Joe Biden has referred to the fees—which sometimes reach $35—as predatory.
Banks will have three options under the finalized rule: they can charge a $5 flat overdraft fee, a fee that covers their costs and losses, or any fee as long as they disclose the terms of the overdraft loan in the same manner as they would for any other loan, which is usually expressed as an annual percentage rate, or APR.
Data from the Consumer Financial Protection Bureau and bank public records show that even though banks have reduced overdraft fees over the last ten years, the largest banks in the country still collect about $8 billion in fees annually. The amount of overdraft fees that banks are permitted by law to impose is now unlimited.
Currently, when a bank extends a short-term loan to a customer whose account balance is zero, the customer is usually obligated to repay the overdraft amount plus an extra fee, which may exceed the initial charge. Opponents of the fees frequently point to the example of how a $3 cup of coffee might end up costing someone over $30.
Although the finished rule is scheduled to go into effect in October 2025, the Trump administration has not yet appointed a leader for the CFPB and has floated the possibility of dismantling the organization.
The largest banks in the country are included in the completed rule, which is applicable to banks and credit unions with assets above $10 billion. Due to these regulations and restrictions on credit card late fees, banks have already sued the CFPB and are probably going to do so again. The ruling may also be contested or overturned by Congress.
Overdraft fees originated during a time when consumers wrote and cashed checks more frequently so that the checks would clear instead of bouncing, if there was an issue of timing but banks steadily increased the fees in the first two decades of the 2000s. Banks’ most financially strapped customers are disproportionately impacted by the fees. According to the CFPB, clients with average account balances between $237 and $439 are charged 70% of overdrafts.
According to the government, the new regulation will save consumers $225 per household that normally incurs overdraft costs, or roughly $5 billion in yearly overdraft fees.
— The Associated Press’s Cora Lewis
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