CFPB Caps Overdraft Fees at $5: Biden’s War on ‘Junk Fees’ Continues

The Consumer Financial Protection Bureau (CFPB) has issued a rule that caps overdraft fees at $5 in most cases, a move that is part of the Biden administration’s broader effort to reduce what it terms ‘junk fees.’ This new regulation is expected to save households that pay overdraft fees an average of $225 a year, according to the CFPB.
Starting in October, the rule will limit banks’ actions when customers attempt to withdraw more than their account balance, which currently can result in overdraft fees ranging from $30 or more, as per CFPB research. The CFPB’s director, Rohit Chopra, appointed by President Biden, has made curtailing consumer financial service fees a priority, stating in a press release, ‘For far too long, the largest banks have exploited a legal loophole that has drained billions of dollars from Americans’ deposit accounts.’

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Many banks have already cut or eliminated overdraft fees in response to the CFPB’s scrutiny of their practices. Additionally, the CFPB has issued a rule to limit credit card late fees to $8, although this is currently being challenged in court by business groups.

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The CFPB estimates that limiting overdraft fees will save affected households $225 a year. Their research indicates that most overdraft fees are incurred by a small percentage of customers, with low-income households being disproportionately affected.

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The banking industry, represented by the Consumer Bankers Association (CBA), is not in favor of the cap on overdraft fees. They argue that overdrafts act as a financial safety net for customers who might not have access to other credit options, and that by paying an overdraft fee, customers can avoid missing other payments and incurring higher fees.

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The new rule applies to banks with assets over $10 billion and offers them three options for charging overdraft fees: charge a fee that covers the expenses of the overdraft, charge a maximum fee of $5, or treat the overdraft as a short-term loan, adhering to all relevant loan regulations. The CBA suggests that banks are likely to opt for the second option.

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Implementing the new rule may prove to be an uphill battle due to opposition from the banking industry. A legal challenge could potentially pause the rule before it takes effect.

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The Consumer Financial Protection Bureau (CFPB) has faced numerous court cases challenging its rulings, including a Supreme Court case heard late last year. In that case, payday lenders argued that the bureau was unconstitutional. However, the court ruled in favor of the government’s consumer watchdog, averting what experts said would have been pandemonium for consumers.

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The CFPB itself faces an uncertain future under the incoming Donald Trump administration. Billionaire Elon Musk, who Trump tasked with finding ways for the government to save money, expressed his desire to ‘delete’ the bureau. The agency was established in the aftermath of the Great Financial Crisis as a watchdog over financial services.

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