Generally, overdraft payment programs function as a kind of loan: If a customer spends more money than they have, they can elect for the bank to process the transaction anyway. If they do, consumers must pay back the remainder they owe, plus a fee, which averages about $26 per overage nationally, according to Bankrate, a publication that tracks the industry.
The exact mechanics vary by bank and program, but the fees historically have fallen the hardest on poor Americans while enriching major banks. In 2022, overdraft charges generated nearly $9 billion in revenue for the industry, according to data furnished this week by the CFPB, which has repeatedly punished banks for imposing excessive penalties to boost their profits.
Under the agency’s new draft proposal, banks would be subject to tough credit card-like regulations on their overdraft programs, unless they agree to lower fees on customers. The charges would be capped, either to the amount necessary for a bank to cover its losses, or to a federal maximum, which may be set between $3 and $14.
The exact amount is not decided, nor are the rest of the bureau’s rules, as the agency plans to solicit public feedback in the hopes of enacting its proposal by October 2025.
“For many of those charged overdraft fees, the market is not working for them, even if they’re happy a bank processes a transaction instead of declining it,” said Rohit Chopra, the director of the CFPB, describing the charges as a “junk fee harvesting machine.”
Top CFPB officials say the regulations, which would apply only to the largest banks, can still save consumers about $3.5 billion annually in fees. Already, though, major banks have signaled sharp opposition to any new regulation, even though Bank of America, Wells Fargo and others have lowered their fees in response to political pressure in recent years. Some industry lobbyists are expected to sue the agency if it issues any final rules, potentially denying relief to Americans who have clamored for the CFPB to act.
“We don’t believe it is something that needs to be regulated or legislated” beyond current law, said Lindsey Johnson, the president of the Consumer Bankers Association, a group whose board of directors includes executives from Capital One, JPMorgan Chase and Wells Fargo. In an interview last week, she said the group would “take a look at” the proposal before deciding its next steps.
The CFPB proposal reflects a broader campaign across the Biden administration to crack down on what it describes as “junk fees,” or the charges levied on consumers for services they once received free. For more than a year, the president has publicly blasted airlines, credit card giants, concert venues, hotels, internet providers and landlords for their profiteering, as the White House looks for ways to lower prices in a tough election year.
“When companies sneak hidden junk fees into families’ bills, it can take hundreds of dollars a month out of their pockets and make it harder to make ends meet,” Biden said Wednesday in a statement. “This is about the companies that rip off hardworking Americans simply because they can.”
The heightened attention has touched off a lobbying barrage, as companies scramble to ward off even the most basic rules that might require them to be more transparent about their practices. The pushback has been especially acute at the CFPB, which banks and other financial institutions have regularly sued in a bid to weaken its authority or eliminate the agency altogether.
Adding to the pressure, top Republicans on Wednesday similarly faulted the CFPB for targeting overdraft fees. Rep. Patrick McHenry (R-N.C.), the chairman of the House Financial Services Committee, and Rep. Andy Barr (R-Ky.), who leads a key panel focused on financial institutions, said that its proposed rules would “undermine the Bureau’s consumer protection mission.”
When banks first offered overdraft services widely roughly 30 years ago, they pitched them to customers as a way to avoid the embarrassment and hassle of bounced checks. By 2019, though, banks had heavily monetized the practice, taking advantage of lax federal rules to rake in nearly $12 billion that year in fees, according to the CFPB.
“There are families struggling, paycheck to paycheck, [that] are getting hammered, and it is a real tax on access to their deposit funds,” said Michael Calhoun, the president of the Center for Responsible Lending, which has advocated for such rules.
Flooded with horror stories, the U.S. government ramped up its enforcement in response. The CFPB, in particular, recently has penalized TCF Bank, TD Bank and Regions Bank for various charges related to the way they processed transactions, marketed overdraft services or imposed fees.
As part of a roughly $4 billion settlement with Wells Fargo in 2022, the bureau found the company’s overdraft practices to be illegal, alleging that the bank charged customers even in cases when consumers had enough money in their accounts. The Treasury Department, meanwhile, fined Bank of America last July for imposing overdraft fees multiple times on a single transaction.
The heightened scrutiny ultimately prompted some banks to rethink their overdraft policies entirely. Before its federal fine, Bank of America reduced the amount it charges for an overdraft to $10 from $35. Wells Fargo similarly overhauled its policies in 2022, joining some banks in instituting a grace period in which a customer can make their account whole before any fee is incurred. And Capital One eliminated overdraft penalties entirely, provided customers make regular deposits.
But the changes still have not satisfied the CFPB, which reported in December that more than a quarter of surveyed Americans said they faced overdraft fees or other similar charges in the past year. Of those affected customers, roughly 4 in 10 said they were surprised they were charged a fee, prompting Chopra to conclude at the time that “American families are paying fees they do not expect, even when they have access to cheaper forms of credit.”
Foreshadowing the industry’s stiff opposition, the release of the CFPB analysis sparked sharp rebukes from the banking industry last month. Rob Nichols, the president of the American Bankers Association, faulted the U.S. government and argued that overdraft charges are “clearly disclosed, highly regulated, and provide a service that an overwhelming majority of consumers find valuable.”
“Next time we hope the CFPB recognizes the value Americans say they receive from overdraft programs rather than demonizing a financial product consumers clearly appreciate,” he said in a statement.
In a statement this week, the ABA — the largest lobbying group for the banking industry — said it had not yet reviewed the details of the CFPB’s new proposal. But, a spokesman added, “we do know that the Bureau’s efforts to demonize a financial product that many Americans value and rely upon is misguided.”
