The Consumer Financial Protection Bureau (CFPB) adopted a final rule that closes an outdated overdraft loophole that exempted overdraft loans from lending laws.
The reforms, which apply to banks and credit unions with more than $10 billion in assets, will allow large banks several options to manage their overdraft fees and lending programs.
The final rule is expected to add up to $5 billion in annual overdraft fee savings to consumers, or $225 per household that pays overdraft fees.
“For far too long, the largest banks have exploited a legal loophole that has drained billions of dollars from Americans’ deposit accounts,” CFPB Director Rohit Chopra said. “The CFPB is cracking down on these excessive junk fees and requiring big banks to come clean about the interest rate they’re charging on overdraft loans.”
When Congress passed the Truth in Lending Act (TILA) in 1968, overdraft services were not considered profit drivers, but courtesy services extended by the bank when, for instance, a paper check sent through the mail may have arrived late. However, over the past few decades, overdraft loans have increased consumer costs by billions of dollars.
The rule effectively closes the large bank regulatory loophole that exempted overdraft fees as a finance charge. It makes several key updates to federal regulations governing overdraft fees for financial institutions with more than $10 billion in assets.
Specifically, these institutions would have to choose one of the following options when charging for overdrafts:
• Cap their overdraft fee at $5: Under this simple option, covered banks and credit unions could simply cap their fee at $5, which is the estimated level at which most banks could be able to cover their costs associated with administering a courtesy overdraft program.
• Cap their fee at an amount that covers costs and losses: For banks that wish to offer overdraft as a convenient service rather than as a profit center, the final rule allows financial institutions to set their fee at an amount that covers their costs and losses.
• Disclose the terms of their overdraft loan just like other loans: For financial institutions that wish to profit from overdraft lending, they may do so by complying with the standard requirements governing other loans, like credit cards.
Since the CFPB announced its initiative to curb junk fees, multiple banks have begun reducing or eliminating overdraft and non-sufficient fund fees. As a result, consumers have saved $6 billion annually in these fees. However, consumers paid more than $5.8 billion in 2023 in reported overdraft fees.
However, the American Bankers Association (ABA) said it was “deeply disappointed” in the new rule.
“By taking this action, the Bureau has once again chosen to prioritize demonizing highly regulated and transparent bank fees over its mission to help consumers. This rule, and the government price controls that accompany it, will make it significantly harder for banks to offer this valuable service to their customers, including those who have few other options to cover essential payments,” ABA President and CEO Rob Nichols said in a statement.
Nichols added that the CFPB is ignoring the majority of Americans who have indicated in national surveys that they value overdraft protection and don’t want it to go away.
“In addition to the consumer harm this rule will cause, it‘s yet another example of the CFPB’s willingness under Director Chopra to exceed its Congressionally mandated guardrails. The Bureau has no legal authority to subject overdraft services offered by any financial institution to Regulation Z, much less implement a price cap on overdraft protection. We will closely review the final rule with our members and consider all options going forward. It should not be allowed to go into effect,” Nichols said.
The rule will go into effect Oct. 1, 2025.