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CFPB proposes rule to close bank overdraft loophole that costs Americans billions each year in unwanted fees
WASHINGTON DC – The Consumer Financial Protection Bureau (CFPB) today proposed a rule to control excessive overdraft fees charged by the country’s largest financial institutions. The proposal would close an outdated loophole that exempts overdraft services from long-standing provisions of the Truth in Lending Act and other consumer financial protection laws. For decades, very large financial institutions were able to issue highly profitable overdraft loans, which brought them billions of dollars in revenue annually. Under the proposal, big banks would be free to make overdraft loans if they comply with long-standing credit laws, including disclosing any applicable interest rate. Alternatively, banks could charge a fee to recover their costs at a set benchmark – as low as $3, or at a cost they calculate if they present their cost data.
“Decades ago, overdraft loans received special treatment to make it easier for banks to cover paper checks that were often mailed,” said CFPB Director Rohit Chopra. “Today, we are proposing rules to close a long-standing loophole that has allowed many large banks to turn overdraft into a massive junk fee harvesting machine.”
The 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. These institutions typically charge $35 for an overdraft loan, although most consumers’ debit card overdrafts are less than $26 and are repaid within three days.
Approximately 23 million families pay overdraft fees in any given year. The CFPB estimates that this rule could save consumers $3.5 billion or more in fees per year. The potential savings would translate into $150 for families who pay overdraft fees.
The Truth in the Lending Gap
In 1968, Congress enacted the Truth in Lending Act. In 1969, the Federal Reserve Board wrote rules to implement the new law, which generally required lenders to clearly disclose the cost of credit to the borrower. At the time, many families were receiving and sending checks in the mail and had little certainty about when their deposits and withdrawals would clear. When a bank clears a check and the consumer has no funds in the account, the bank is issuing a loan to cover the difference. The Federal Reserve Board created an exemption to Truth in Lending protections if the bank was honoring a check when its depositor “inadvertently” overdrawn his account. At the time, this was used infrequently and was modest in cost. It wasn’t a huge profit generator.
However, in the 1990s and early 2000s, with the emergence of debit cards, institutions began raising fees and using the exemption to generate large volumes of overdraft loans on debit card transactions. Annual revenue from overdraft fees in 2019 was estimated at $12.6 billion. And in 2022, Wells Fargo and JPMorgan Chase led the way – accounting for one third of overdraft revenues reported by banks in excess of US$1 billion.
Recent policy changes at some banks have reduced revenue from overdraft fees to about $9 billion a year. The policy changes followed the CFPB’s enforcement and oversight efforts to root out illegal overdraft practices, such as charging fees to consumers who had enough money in their account to cover the transaction at the time the bank authorized it.
Proposed Rule
The proposed rule would require very large financial institutions to treat overdraft loans like credit cards and other loans, as well as provide clear disclosures and other protections. Many banks and credit unions now offer lines of credit linked to a checking account or debit card when a consumer overdraws. The proposal provides clear traffic rules to ensure consistency and clarity.
The CFPB also proposes limiting the long-standing exemption to overdraft practices that are offered as a convenience rather than a profit generator. The proposed rule would allow financial institutions to charge a fee in line with their costs or in accordance with an established benchmark. The CFPB has proposed reference values of $3, $6, $7, or $14 and is seeking comment on the appropriate value.
CFPB’s Unwanted Fee Efforts
The proposed overdraft rule is part of an ongoing effort by the CFPB to control junk fees and encourage competition in the consumer financial products market. In early 2022, the CFPB released an initiative to save billions of dollars in junk fees, which generated more than 80,000 responses from the public. The overwhelming majority of responses were complaints about overdraft fees.
The CFPB has taken several steps to reduce out-of-control overdraft fees and other junk fees prevalent on consumer financial products. The CFPB has issued guidance to control surprise overdraft fees in October 2022. It also took coercive measures against Wells Fargo, Bank of RegionsIt is Atlantic Union return to consumers $205 million, $141 million, and $5 million in illegal fees, respectively, in addition to significant civil monetary penalties paid to the CFPB’s Victim Relief Fund.
Additionally, the CFPB’s recent supervisory efforts have resulted in the return of financial institutions US$120 million on junk overdraft and insufficient funds fees for consumers. And in a separate enforcement action, the CFPB ordered Bank of America pay $90 million for, among other things, doubling non-sufficient funds fees.
After the CFPB began its work to combat junk fees, many banks began to reform their overdraft and non-sufficient funds fee policies. These reforms resulted in annual savings of $3.5 billion in overdraft fees and an additional US$2 billion in savings in non-sufficient funds fees.
The CFPB has also taken action on credit card late fees and customer service fees. In February 2023, the CFPB proposed a rule to control excessive credit card late fees. In October 2023, the CFPB issued a advisory opinion stop big banks from charging illegal junk fees for basic customer service.
The CFPB is one of many independent regulatory agencies and cabinet departments that are members of the White House Competition Council established by the Executive Order on Promoting Competition in the American Economy.
Read the text of the CFPB’s proposed rule, Overdraft loans: very large financial institutions.
Read the Unofficial redline for overdraft loans: proposed rule for very large financial institutions .
Comments must be received by April 1, 2024.
Read the CFPB fact sheet on the proposed rule .
Read the CFPB research report, NSF and Overdraft Practices Report .
To read Director Chopra’s Remarks on the Proposed Rule.
Read more about the CFPB’s work on junk e-mail fees.
Consumers can lodge complaints about financial products or services by visiting the CFPB website or by calling (855) 411-CFPB (2372).
Employees who believe their company has violated federal consumer financial protection laws are encouraged to submit information about what they know to whistleblower@cfpb.gov.
The Consumer Financial Protection Bureau is a 21st century agency that implements and enforces federal consumer financial laws and ensures that markets for consumer financial products are fair, transparent and competitive. For more information visit www.consumerfinance.gov.