CFPB Proposes Rule to Close Bank Overdraft Loophole that Costs Americans Billions Each Year in Junk Fees
Rule would require nation's largest banks to apply longstanding consumer protections, including interest rate disclosures to overdraft loans
The Consumer Financial Protection Bureau (CFPB) today proposed a rule to rein in excessive overdraft fees charged by the nation’s biggest financial institutions. The proposal would close an outdated loophole that exempts overdraft lending services from longstanding provisions of the Truth in Lending Act and other consumer financial protection laws. For decades, very large financial institutions have been able to issue highly profitable overdraft loans, which have garnered them billions of dollars in revenue annually. Under the proposal, large banks would be free to extend overdraft loans if they complied with longstanding lending laws, including disclosing any applicable interest rate. Alternatively, banks could charge a fee to recoup their costs at an established benchmark – as low as $3, or at a cost they calculate, if they show their cost data.
"Decades ago, overdraft loans got special treatment to make it easier for banks to cover paper checks that were often sent through the mail," said CFPB Director Rohit Chopra. "Today, we are proposing rules to close a longstanding loophole that allowed many large banks to transform 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, even though the majority of consumers’ debit card overdrafts are for less than $26, and are repaid within three days.
Approximately 23 million households pay overdraft fees in any given year. The CFPB estimates that this rule may save consumers $3.5 billion or more in fees per year. The potential savings would translate to $150 for households that pay overdraft fees.
The Truth in Lending Loophole
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 a borrower. At the time, many families received and sent checks through the mail, and had little certainty about when their deposits and withdrawals would clear. When a bank clears a check and the consumer doesn’t have 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 their depositor “inadvertently” overdrew their account. At the time, this was used infrequently and there was a modest cost. It was not a major profit driver.
However, in the 1990s and early 2000s, with the rise of debit cards, institutions began raising fees and using the exemption to churn high volumes of overdraft loans on debit card transactions. Annual overdraft fee revenue in 2019 was an estimated $12.6 billion. And, in 2022, Wells Fargo and JPMorgan Chase led the way – accounting for one-third of overdraft revenue reported by banks over $1 billion.
Recent policy changes at some banks have lowered overdraft fee revenue to about $9 billion per year. The policy changes followed enforcement and supervisory efforts by the CFPB 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 to provide clear disclosures and other protections. Many banks and credit unions already provide lines of credit tied to a checking account or debit card when the consumer overdraws. The proposal provides clear rules of the road to ensure consistency and clarity.
The CFPB also is proposing to limit the longstanding exemption to overdraft practices that are offered as a convenience, rather than as a profit driver. 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 benchmarks of $3, $6, $7, or $14 and is seeking comment on the appropriate amount.
CFPB’s Junk Fee Efforts
The proposed overdraft rule is part of a continued effort by the CFPB to rein in junk fees and spur competition in the consumer financial product marketplace. In early 2022, the CFPB launched an initiative to save Americans billions in junk fees, which generated more than 80,000 responses from the public. The overwhelming majority of the responses were complaints about overdraft fees.
The CFPB has taken multiple actions to curb out-of-control overdraft fees and other junk fees prevalent in consumer financial products. The CFPB issued guidance to rein in surprise overdraft fees in October 2022. It also took enforcement actions against Wells Fargo, Regions Bank, and Atlantic Union to return to consumers $205 million, $141 million, and $5 million in unlawful fees, respectively, in addition to significant civil money penalties paid to the CFPB’s victims relief fund.
Additionally, the CFPB’s recent supervisory efforts resulted in financial institutions returning $120 million in junk overdraft and non-sufficient funds fees to consumers. And in a separate enforcement action, the CFPB ordered Bank of America to pay $90 million for, among other things, double-dipping on non-sufficient funds fees.
After the CFPB began its work to tackle junk fees, many banks began reforming their overdraft and non-sufficient funds fees policies. Those reforms have resulted in $3.5 billion in annual savings on overdraft fees and an additional $2 billion in savings on non-sufficient funds fees.
The CFPB has also taken actions on credit card late fees and customer service fees. In February 2023, the CFPB proposed a rule to rein in excessive credit card late fees. In October 2023, the CFPB issued an advisory opinion to halt large 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 Lending: Very Large Financial Institutions.
Comments must be received on or before April 1, 2024.
Read the CFPB’s fact sheet on the proposed rule.
Read the CFPB’s research report, Overdraft and NSF Practices Report.