Biden administration proposes drastic cut in overdraft fees, aims for $3 limit

In a move aimed at curbing what President Joe Biden calls the “exploitation” of vulnerable Americans, the Biden administration has revealed a proposed rule that could potentially reduce bank overdraft fees to as little as $3.

This groundbreaking regulation, unveiled by the Consumer Financial Protection Bureau (CFPB) in collaboration with the White House, seeks to limit the excessive fees that large banks charge customers for overdrawing their accounts.

Under the proposed changes, banks would be permitted to charge customers the actual cost of covering an overdrawn account or adhere to a predetermined limit set by the CFPB. This could eliminate the common $35 fees associated with overdrafts, which collectively contribute approximately $9 billion annually to the coffers of major financial institutions, according to the CFPB.

The proposed rules, targeting banks and credit unions with assets exceeding $10 billion, could revolutionize the landscape for nearly 175 of the nation’s largest financial institutions. Instead of providing detailed breakdowns of costs, banks may choose to adopt benchmark fees, with figures like $3, $6, $7, and $14 suggested by regulators. The proposal is currently open for industry and public input until April 1, with a regulation expected to be in effect by October 2025.

Anticipating resistance, the banking industry, represented by the American Bankers Association, is gearing up for a robust lobbying campaign. The association argues that the proposal threatens to impede banks’ ability to offer overdraft protection, particularly to customers with limited alternatives for accessing much-needed liquidity.

Overdraft fees, initially conceived to prevent bounced checks, have evolved into a substantial revenue stream for banks, with an estimated $280 billion collected in the last two decades.

Consumer Reports emphasizes that a mere 8% of bank customers, predominantly lower-income individuals, contribute nearly 75% of the revenue generated from overdraft fees. Critics argue that these fees disproportionately impact economically vulnerable consumers, acting as de facto short-term lending programs with exorbitant interest rates.

As the proposal faces potential legal challenges and a looming battle with the banking industry, the Biden administration aims to reshape a financial landscape where overdraft fees have become a significant burden on those least equipped to bear it.