CFPB proposes setting maximum overdraft fees at $14 for largest banks

The Consumer Financial Protection Bureau plans to dramatically slash overdraft fees at the largest banks by classifying overdraft services as extensions of credit and allowing financial institutions to recoup their costs or agree to charge a maximum fee of $14 under a benchmark set by the government.

Under a proposal to be released Wednesday, the CFPB plans to radically change how overdraft fees are calculated and charged by financial institutions that have more than $10 billion in assets. Banks and credit unions with less than $10 billion in assets would be exempt from the proposed rule. 

Two years after many large banks eliminated or dropped overdraft and nonsufficient fund fees, the CFPB wants overdraft services to be classified as an extension of credit, subject to the same consumer protections as credit cards under the Truth in Lending Act that requires disclosures of annual percentage rates. 

CFPB Director Rohit Chopra said that what began more than a half-century ago with banks offering overdraft services as a convenience to customers when bills were paid with paper checks has morphed into what he called “a junk fee harvesting machine.” The advent of debit cards changed the calculus with banks collecting $12.6 billion in overdraft fee revenue in 2019. The CFPB has estimated that recent policy changes by some banks have lowered overdraft revenue to about $9 billion a year. 

“We’re proposing a rule that would establish clear, bright lines and ensure customers know what they are getting when it comes to overdraft,” Chopra said Tuesday on a conference call with reporters. “Right now, overdraft lending is one of the only types of consumer loans where consumers are not told an APR or given lending disclosures.”

A key aspect of the proposal is that the CFPB would set a benchmark fee of either $3, $6, $7 or $14 that would not require the financial institution to calculate their own costs and losses for providing overdraft services. The bureau calculated how much it would cost to cover costs and losses based on data collected from various financial institutions, and proposed those four benchmark amounts. The CFPB is seeking comment on which of those benchmarks is appropriate, senior CFPB officials said on the call with reporters. 

Under the proposal, large financial institutions would have the choice of either offering customers overdraft services as a courtesy and charging the benchmark amount set by the bureau, or charging a fee in line with their costs. Alternatively, banks could also provide overdraft as a line of credit to customers, though doing so would require compliance with TILA, including disclosing an applicable interest rate for overdraft services. The pricing for overdraft services translates to an annual percentage rate of roughly 16,000%, Chopra said. 

Because the largest financial institutions cover roughly 80% of consumers, the bureau exempted smaller banks and credit unions. As a result, it did not have to convene a small business review panel, which is typically required for major rules that would impact small institutions. 

The CFPB is seeking public comment by April 1. A final rule is expected in October, though an overdraft rule would not go into effect until Oct. 1, 2025, due to TILA requirements. 

Chopra has repeatedly blamed the Federal Reserve Board for giving banks an exemption from the Truth in Lending Act’s disclosure requirements that allowed overdraft to become what he called a “profit driver.” Technically, the CFPB plans to propose eliminating an exemption for overdraft services from complying with the Truth in Lending Act. 

Chopra said consumers have paid an estimated $280 billion in overdraft fees in the past two decades. In 2022 alone, Wells Fargo and JPMorgan Chase accounted for one- third of all overdraft revenue, the CFPB said. 

Lael Brainard, director of the National Economic Council and a former vice chair of the Federal Reserve, joined Chopra from the White House on a call with reporters and said the CFPB’s overdraft proposal was part of President Biden’s efforts to eliminate hidden fees generally for all Americans. 

“We’re calling on all corporations that are benefitting from yields and supply chains and lower input costs, to pass those savings along to consumers,” Brainard said. 

Under Chopra, the CFPB has announced a slew of enforcement actions and settlements with banks. Wells Fargo had to return $205 million, Regions Bank $141 million, and Atlantic Union $5 million in fees to consumers that the CFPB said were unlawful. Chopra cited on the call with reporters the deceptive overdraft practices of TCF Financial, which was acquired by Huntington Bancshares in 2020.

Some experts point to Bank of America’s decision in early 2022 to slash overdraft fees from $35 to $10 for having a ripple effect across the industry, pressuring other banks to follow suit. 

The Trump administration opened the door to rewriting overdraft rules in 2019. Chopra first announced a crackdown in 2021, then issued guidance in late 2022 that found practices that the agency considered unfair to consumers. Last year, the Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. also took aim at certain practices such as “authorized positive, settle negative,” that may be deceptive because transactions get approved when a consumer’s account balance is positive, but later post to the account when the available balance is negative, incurring fees. 

Authority for regulating overdraft fees was transferred from the Fed to the CFPB in the 2010 Dodd-Frank Act.