Americans Could Save Billions in Fees Under New Rule

The Consumer Financial Protection Bureau (CFPB) this week proposed a new rule targeting the costly practice of bank overdrafts, a change that could save American consumers billions annually in fees.

The initiative seeks to close a longstanding loophole allowing major financial institutions to levy hefty charges on overdraft services, often burdening households with significant expenses. By enforcing transparency and stricter regulations on overdraft loans, the CFPB aims to alleviate the financial strain on approximately 23 million U.S. households that incur overdraft fees each year.

With an estimated annual saving of $3.5 billion in fees, the average household stands to gain $150, CFPB said, bringing substantial relief to millions of Americans.

What To Know About Overdraft Fees

The CFPB's proposal targets a crucial area in the financial sector, addressing a gap in consumer protections that has persisted for decades. Traditionally, overdraft services were treated differently under financial regulations, often resulting in unexpected and high fees for consumers.

The proposed rule mandates that large financial institutions—those with assets over $10 billion—comply with existing consumer lending laws, such as disclosing interest rates on overdraft loans. More than that, banks could charge fees that reflect their actual costs, with CFPB's proposed benchmarks ranging from $3 to $14, a move that aims to balance the need for banks to cover costs while protecting consumers from excessive charges.

Originally, exemptions in the Truth in Lending Act allowed banks to provide overdraft services as a courtesy, without the stringent disclosure requirements of other forms of credit. However, with the rise of debit card transactions and automation, what was once an infrequent service has become a significant revenue source for banks. In 2022 alone, the CFPB noted that major financial institutions like Wells Fargo and JPMorgan Chase made a substantial portion of the $9 billion generated in overdraft fees.

The CFPB's focus on overdraft fees stems from their disproportionate impact on lower-income households. A substantial number of households incur overdraft fees each year, with a small segment of high-volume users, often from lower-income brackets, being most affected.

"Fewer than 20 percent of U.S. households incur overdrafts in a given year but a smaller segment of consumers are high volume users of overdraft, and these households—many of which are lower-income households—stand to see the most relief," Greg McBride, Chief Financial Analyst at Bankrate shared with Newsweek.

While the proposal marks a leap towards consumer protection, McBride cautions that the finalization and implementation of the new rules are still some time away. "It is far too early for consumers to let their guard down regarding overdrafts. These are merely proposed rules—not final rules—and the soonest any rules would likely take effect would not be until October 2025, and possibly later," he explained.

In the interim, McBride advises consumers to remain vigilant against incurring overdrafts. Measures such as linking checking and savings accounts, setting up low-balance alerts, and regularly checking account balances can help avoid overdraft fees.

CFPB Director Rohit Chopra, in a press release issued Tuesday, pointed to the impact that overdraft fees have on American families. "Right now, overdraft fees are often assessed for reasons people do not expect or understand, chip away at needed income, and take a heavy toll on families living paycheck to paycheck. According to some data, these fees can drive people to leave the banking system altogether and limit their ability to get ahead financially," Chopra said.

He noted that while reforms have been made by large banks in recent years, the CFPB's proposed rule aims to solidify the gains. "In the past few years, large banks have made several reforms to their approach to overdraft. I hope our proposed rule can solidify these gains and provide clear rules of the road that will halt further abuses," Chopra added.

The CFPB's proposed rule is part of a broader initiative to curb excessive fees and promote fair competition in the financial sector. By ensuring transparency and limiting overdraft fees to actual costs, the CFPB aims to protect consumers, especially those in vulnerable financial positions, from undue financial strain.

The CFPB said the hope is that the changes will lead to a more equitable financial environment, where unexpected fees do not disproportionately burden those least able to afford them.