Consumer Affairs Office Proposes Limits on Overdraft Fees for Big Banks

The Consumer Financial Protection Bureau proposed a rule Wednesday that would sharply limit overdraft fees at America’s largest banks and credit unions, a change the agency said could save households up to $3 .5 billion dollars per year in fees.

The proposal, which must go through a comment period and would not take effect until at least the end of 2025, aims to end the $35 overdraft fees that have become the norm at many banks.

The desk rule would give banks some options for setting lower fees. They could charge a balancing fee – based on each bank’s own costs – or a referral fee determined by the bureau. The agency proposed a range of $3 to $14 for the benchmark.

Alternatively, banks could treat overdrafts as a line of credit and provide the information required by the Truth in Lending Act, including interest rates.

“Decades ago, overdraft loans received special treatment to make it easier for banks to cover paper checks that were often mailed,” said Rohit Chopra, director of the Bureau of Consumer Affairs. “Today we are proposing rules to close a long-standing loophole that allowed many big banks to turn their overdrafts into a massive machine to harvest unwanted fees. »

The proposed rule would apply only to institutions with assets of $10 billion or more, a category that includes about 175 of the nation’s more than 9,000 banks and credit unions. These large providers collect about two-thirds of all overdraft fee revenue, the bureau said.

The Office of Consumer Affairs has been laying the groundwork for more than a decade for a rule limiting overdraft fees, issuing reports analyzing the fees and discussing its concerns with banking industry executives and trade groups.

Anticipating the crackdown, some major banks have already reduced their fees. In 2022, Citigroup eliminated the fee and Bank of America reduced its fee from $35 to $10. Consumers paid $7.7 billion that year in overdraft fees, compared to $12.6 billion in 2019, according to Consumer Affairs Bureau estimates.

Banking industry trade groups are fiercely opposed to stricter overdraft rules. “Overdraft protection fees are clearly disclosed, highly regulated and provide a service that an overwhelming majority of consumers find valuable,” Rob Nichols, chief executive officer of the American Bankers Association, said last month.

His group and two others sent a letter to Mr. Chopra This month, he urged the bureau to convene a small business review committee to comment on the rule, a step the bureau is required to take before adopting regulations that could significantly affect small businesses.

“Regardless of which banks are directly subject to the Bureau’s rules, all banks would face market pressure to conform their practices to the Bureau’s rules,” the trade groups wrote.

The bureau said this week that it would not be suitable for this requested panel because its rule would only apply to large banks and credit unions.

Consumer advocates welcomed the proposal. “Overdraft fees are not so much a useful service as a lucrative profit center driven largely by the most economically vulnerable consumers,” said Carter Dougherty, a spokesperson for Americans for Financial Reform. “This reform is a step to get banks to provide good service again and move away from trap fees.”

The office will accept public comments on the proposed rule until April 1, after which it can begin the final steps of adopting the changes.