The Biden administration on Tuesday announced a major crackdown on high overdraft fees charged by the nation’s largest banks, unveiling new rules that could save Americans billions of dollars a year.
CFPB Proposes Strict Limits on Overdraft Fees
The Consumer Financial Protection Bureau (CFPB) has put forward draft regulations that would dramatically limit the amount banks can charge customers for overdrawing their accounts. According to the proposal, banks with more than $10 billion in assets could charge no more than $8 per overdraft to begin, down from an average fee today of $35. That number would then be adjusted over time as part of the “junk fee” crackdown promised by President Biden.
Under the proposed rules, banks would also face restrictions on how many overdraft fees they can charge per day or per month. The number would depend on the size of the bank:
|Max Overdraft Fees per Day
|Max per Month
|> $100 billion
|< $10 billion
This table shows the maximum overdraft fees banks in different asset tiers could charge customers under the new rules.
The proposal would also prohibit banks from charging surprise overdraft fees. Customers would not incur a fee unless they opted into overdraft protection or a transaction would otherwise be declined – putting an end to unexpected charges.
CFPB Director Rohit Chopra called overdraft fees “rife with abuse” and said it was time to move away from an overdraft model that “relies on tricks and traps.” The plan is one of Chopra’s most aggressive moves since being confirmed as director in 2021 on promises to crack down on fees faced by Americans.
Over $15 Billion in Overdraft Revenue at Stake
The proposed regulations target what consumer groups have long criticized as abusive practices that charge extremely high fees for minor lapses. Research shows overdraft charges fall heaviest on vulnerable groups already struggling to make ends meet.
Major banks collect over $15 billion per year from overdraft alone, according to the CFPB, accounting for 60% to 70% of their consumer account revenues. Under the proposed rules, daily overdraft revenue at the largest banks would be slashed by over 97%.
Top bank executives have privately blasted the CFPB proposal as extreme, with some claiming it could wipe out free checking accounts altogether. But defenders argue the status quo has gone unchecked for too long, allowing banks to profit enormously off small fees that hammer consumers.
JPMorganChase CEO Jamie Dimon preemptively warned limits on overdraft fees could cause the bank to stop serving lower-income customers altogether – a claim met by skepticism from consumer groups.
Fierce Industry Pushback Expected
The banking industry is gearing up to fight the proposed regulations, which could face revisions during a lengthy review process. After initial comments, the rules would need to be finalized and could spark legal challenges from banks.
Republicans in Congress have also vowed “aggressive oversight” of the move, accusing Democrats of overreach in trying to eliminate what they call “consumer choice” in banking.
But the Biden administration sees addressing high bank fees as low-hanging fruit in its broader effort to reduce costs for middle and low-income families struggling with inflation.
And chopping billions off banks’ bottom lines plays well politically in both parties during an election year. One progressive advocate said overdraft fees are so unpopular that even conservatives may hesitate to defend them openly.
Consumer Groups Praise “Long Overdue” Reform
Consumer advocacy organizations cheered Tuesday’s proposal, framing it as a major step toward fairer practices after years of high fees paid predominantly by those least able to afford them.
“These junk fees have been allowed for far too long and this rule is long overdue,” said the director of consumer group Accountable.US. “There is absolutely no justification for banks to charge outrageous penalties for people simply trying to access their own hard-earned money.”
Another group called overdraft a “predatory practice” that “preys on society’s most vulnerable.” It estimated the proposed rules could save Americans more than $15.47 billion per year.
Free market proponents counter that consumers can always switch banks or opt out of overdraft if they view the fees as unfair. They warn restricting charges could remove options which some may value.
What Happens Next?
The public now has 90 days to comment on the draft regulations before the CFPB revises the rules and issues final guidance later this year or early next.
Some financial analysts think banks may proactively cut fees on their own rather than wait for regulation. Several large banks have already reduced overdraft charges in the face of growing public criticism – JPMorgan slashed fees twice last year.
While Tuesday’s proposal sets strict federal limits, state legislatures are also looking at interventions like requiring banks to enroll consumers in no-overdraft programs by default.
Consumer groups vow to continue monitoring predatory fee practices closely and push for even stronger nationwide protections if needed. The banking industry is sure to resist further restrictions.
Overdraft policy promises to remain a key battleground in the simmering war between consumer advocates and large banks – with each side digging in for extended clashes to come.
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