Nobody likes overdrafting their bank account. Biden wants to make it less painful.
The Biden administration has proposed a new rule that would curb overdraft fees incurred when consumers withdraw more than the available funds in their bank account.
Banks currently collect about $9 billion annually in overdraft fees, and people who pay overdraft fees pay about $150 on average every year on them, according to the Consumer Financial Protection Bureau (CFPB). As Emily Stewart has written for Vox, overdraft fees are just one of the many ways “banks have … of extracting funds out of consumers.” The new proposal from the Biden administration would slash those fees by about $3.5 million a year overall, according to the White House.
The proposal still has to go through a normal regulatory approval process (more on that later) but would take effect in October 2025 if approved. It would apply to banks and credit unions with more than $10 billion in assets, and would essentially treat overdraft programs as credit programs. That means that these overdraft programs would have to abide by the same requirements that apply to credit cards, such as disclosure of annual interest rates, fee limits in the first year, and reasonable penalty fees. The rule would also limit fees for overdraft services to just cover the institutions’ costs — somewhere between $3 and $14, instead of the $35 some banks charge now
“These fees push people out of bank accounts and deprive them of access to financial services,” said Lauren Saunders, associate director of the National Consumer Law Center. “This proposed rule will level the playing field, promote fair competition, and benefit both responsible banks and consumers.”
Why is the Biden administration doing this?
The people who are hit hardest by overdraft fees are some of the most financially vulnerable.
Three-quarters of bank revenue from overdraft fees comes from just 8 percent of their customers. Among frequent overdrafters, 90 percent had a daily balance of no more than a few hundred dollars, and among households that made $30,000 or less, more than a third said they had been charged an overdraft fee six or more times in 2022. Banks can levy these fees multiple times a day, despite the low cost of executing the transaction.
“Banks call it a service — I call it exploitation,” President Joe Biden said in a statement.
Biden has shined in tackling these kinds of small economic injustices shouldered by regular Americans. He’s also been going after junk fees more broadly: hidden fees that make everything from airline bookings to concert tickets more expensive than their sticker price, but also just feel like shady corporate attempts to get the better of consumers. It’s an initiative that has overwhelming bipartisan backing.
It might not fix America’s bigger perceived economic problems: Even though forecasters are optimistic about the US economy avoiding a recession in 2024, most people said in a December CBS News poll that the economy is bad, that their income isn’t keeping up with inflation, and that only the few at the top have an opportunity to get ahead. But if these proposed regulatory changes take effect, at least they might not have to drown in fees.
“This is just one part of my administration’s broader plan to lower costs for hardworking families,” Biden said in the statement. “We’re going to continue doing everything in our power to bring down costs and grow our economy from the middle out and bottom up, while standing up to extreme Republican attempts to provide more giveaways to the wealthy and big corporations and undermine competition.”
Will it actually happen?
The proposed rule is the result of longtime efforts to crack down on abusive overdraft fees. David M. Silberman — former associate director for the then-CFPB Division of Research, Markets, and Regulations and now a senior fellow at the Center for Responsible Lending — said a rule that bears a strong resemblance to the current proposal is likely to be adopted.
First, though, it will have to undergo a lengthy rulemaking process that involves soliciting public feedback and adopting changes accordingly. That process likely wouldn’t gut the rule entirely, but it could change it in meaningful ways. Silberman said he’ll be looking closely at how the proposal draws the line in terms of the size of financial institutions covered and how it defines a courtesy overdraft program.
And the rule is likely to face legal challenges from banks, which are already organizing in opposition to it.
“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 American Bankers Association, an industry trade group, said in a statement.
Still, Silberman thinks the CFPB has “offered a strong legal basis for what it’s doing,” which is really just repealing an exemption adopted by the Federal Reserve Board in 1969 that allowed overdraft programs not to be treated as a form of credit. As my colleague Li Zhou writes, overdraft fees were initially conceived as a “penalty primarily associated with checks” so that customers could be spared the inconvenience of having a check bounce. But in the late ’90s, banks started introducing them to debit cards, which then suddenly became a vehicle through which people could accumulate debt.
There’s also a question as to how banks will change their policies if the rule is adopted. It’s possible that banks might just increase fees in other areas of their business, essentially passing along the costs of the rule to the consumer. In practice, though, that’s not what has happened so far, Silberman said.
Some banks have already made voluntary changes to their overdraft fee policies: Capital One eliminated them entirely, and Bank of America slashed its overdraft fee from $35 to $10. In a May 2023 report, the CFPB did not find any clear correlation between declines in banks’ overdraft fee revenue and increases in other listed fee revenue, such as service fees on checking accounts.
Saunders says this shows that “it is possible to be profitable without engaging in abusive overdraft fee practices.”