Overdraft fees would drop to as little as $3 under Biden proposal

The Biden administration is proposing a new rule that could limit bank overdraft fees to as little as $3.

The proposed regulation unveiled by the Consumer Financial Protection Bureau in tandem with the White House could potentially cut billions in dollars that large banks earn from bank customers overdrawing their accounts.

"For too long, some banks have charged exorbitant overdraft fees — sometimes $30 or more — that often hit the most vulnerable Americans the hardest, all while banks pad their bottom lines," President Biden said Wednesday in a statement. "Banks call it a service — I call it exploitation."

Under the proposal, a bank would be allowed to charge consumers its actual cost to cover an overdrawn account, or conform to a set limit determined by the CFPB, effectively eliminating the $35 fees typically charged for an overdraft, according to the agency. Banks take in about $9 billion a year from the fees, according to the CFPB.

The rules would apply to banks and credit unions with more than $10 billion in assets, or about 175 of the nation's biggest financial institutions, according to the bureau. All could continue charging customers the actual cost to cover an overdraft, but they could no longer generate big bucks off the service. 

Rather than provide the CFPB with a breakdown of the costs, banks could instead opt to adopt a benchmark fee, with regulators suggesting $3, $6, $7 and $14 as possibilities. The agency plans to solicit industry and public comments by April 1, with a regulation expected to take effect in October 2025.

Banks could also provide small lines of credit to allow customers to overdraw their accounts, a service that would operate like a credit card. Some lenders like Truist Bank currently offer that type of service.

Big bucks for banks

Banks are expected to fight the proposed restrictions, with a massive lobbying campaign in the works. And whatever rule is adopted in nearly certain to be challenged in court.

"Today's proposal from the CFPB marks the bureau's latest attempt to demonize and mischaracterize highly regulated and clearly disclosed bank fees for a service that surveys consistently show Americans value and appreciate," the American Bankers Association, an industry trade group, said in a statement. "The proposal would make it significantly harder for banks to offer overdraft protection to customers, including those who have few, if any, other means to access needed liquidity. The CFPB is effectively proposing to take away overdraft protection from consumers who want and need it."

Banks decades ago started letting some checking account holders take their balances below zero to avoid bouncing paper checks. But what began as a niche service expanded into an enormous profit center for banks with the proliferation of debit cards, which has customers debiting their bank accounts for small and large amounts each day, often multiple times.

Overdraft fees have been a financial bonanza for the banking industry, with the CFPB estimating that banks collected $280 billion in overdraft fees in the last 20 years. According to the Washington Post, these fees became so popular that one bank CEO named his boat the "Overdraft."

"Far too many banks continue to pad their profits by collecting steep overdraft fees from those least able to afford it," Chuck Bell, advocacy program director at Consumer Reports, said in a statement. "By providing short-term liquidity for overdrawn transactions, bank overdraft services are essentially short-term lending programs with extremely high interest rates."

Consumer Reports notes that 8% of bank customers — mostly lower-income — account for nearly 75% of the revenue banks generate from overdraft fees.

"Overdraft fees mostly penalize economically vulnerable consumers with exorbitant charges that can make it harder for them to get back on track financially," Bell said.

—The Associated Press contributed to this report.