Your daily fintech and banking briefing.
Today: Nov 02, 2024

Watch out: overdraft fee limits may lead to higher bank fees

1 min read

TLDR:

  • The Consumer Financial Protection Bureau (CFPB) released a proposal that would limit overdraft fees charged by large banks.
  • The rule would require banks with over $10 billion in assets to charge overdraft fees between $3 and $14.

Bank customers in the Charlotte region could see a significant drop in overdraft fees following a proposal from the Consumer Financial Protection Bureau (CFPB). The proposal, released on January 17th, would limit the excessive overdraft fees charged by large financial institutions. Currently, these banks charge an average of $35 for overdraft fees, even when the overdrafts are for less than $26 and repaid within three days. The CFPB rule would require banks with more than $10 billion in assets to charge overdraft fees with a maximum of $14 and a minimum of $3.

The CFPB estimates that annual overdraft fee revenue for these large banks reached about $12.6 billion in 2019. The ruling would also require these banks to treat overdraft fees like credit cards, providing consumer protections under the Truth in Lending Act. According to Rohit Chopra, CFPB director, the proposal would close a loophole that allowed banks to turn overdraft fees into a “massive junk fee harvesting machine.”

Setting a limit on overdraft fees has been a topic of discussion for years, with critics arguing that banks should not be encouraged to charge fees that exceed what customers have in their accounts. Stephen Biggar, director of financial institutions at Argus Research, states that there is a disconnect between the government’s intentions to protect consumers and banks’ need to cover their costs.

The CFPB estimates that consumers could save around $3.5 billion per year in fees, equivalent to $150 per household. However, there are concerns that slashing the fees could lead banks to raise fees elsewhere to compensate. Some banks, such as Bank of America, Ally Financial, Truist Financial, and Wells Fargo, have already made changes to their overdraft policies in response to the pandemic.

A final overdraft rule from the CFPB is expected to go into effect on October 1, 2025. The proposed limit on overdraft fees could have a significant impact on bank customers in the Charlotte region, potentially reducing the amount they pay in overdraft fees and providing greater consumer protections.