Rohit Chopra, Director of the CFPB, testifies during a hearing of the House Financial Services Committee on June 14, 2023.
Tom Williams | Cq-roll Call, Inc. | Getty Images
The Consumer Financial Protection Bureau on Thursday announced the final version of a rule limiting banks' ability to charge overdraft fees. It says the rule will save American consumers $5 billion annually.
The regulator said banks could choose to charge $5 for overdrafts – a significant reduction from the average fee of about $35 per transaction – or cap the fee at an amount that covers lenders' costs , or to charge any fee while disclosing the interest rate on the loan.
“For far too long, the largest banks have exploited a legal loophole that has drained billions of dollars from Americans’ deposit accounts,” CFPB Director Rohit Chopra said in a statement. “The CFPB is cracking down on these excessive junk fees and requiring major banks to be clear about the interest rates they charge on overdrafts.”
While overdraft fees have been a lucrative line item for the industry, generating $280 billion in revenue since 2000, according to the CFPB, banks' revenue from the service has been declining. This is because lenders include JPMorgan Chase And Bank of America have either reduced fees or restricted the types of transactions they trigger, while some banks have eliminated the fee altogether.
The CFPB rule applies to banks and credit unions with at least $10 billion in assets.
The effort, part of a flurry of activity by the CFPB in the final days of the Biden administration, is facing fierce opposition from U.S. banking groups that have successfully blocked other efforts by the regulator. For example, a rule that would limit credit card late fees to $8 per incident and was set to take effect in May was struck down in federal court.
The CFPB said its overdraft rule will take effect on Oct. 1, 2025, although the rule's ultimate fate is unclear.
Even before Donald Trump's victory in the November presidential election, the fate of the overdraft scheme would have been uncertain due to industry opposition. But Trump is expected to appoint a new CFPB chief in January who is unlikely to support Biden-era efforts to curb banking activity.
Bank lobbying groups have argued that the overdraft rule, first proposed in January as part of Biden's fight against junk fees, would limit access to overdraft services and could steer customers toward worse alternatives such as short-term loans.
Later Thursday, the Consumer Bankers Association filed a lawsuit against the CFPB in Mississippi, claiming the agency exceeded its authority and failed to consider how its actions would impact consumers. The group chose a venue deemed suitable to meet the challenges of federal regulators.
“While it is unfortunate, the CBA had no choice but to take legal action to address the CFPB’s blatant legal overreach with its misguided rule to ensure consumers continue to have access to liquidity through overdraft services,” said CBA President Lindsey Johnson in a statement.