CFPB Cracks Down on Overdraft Fees, Final Rule Could Save $5B a Year

The U.S. federal government is cracking down on excessive overdraft fees, also called “junk fees,” charged by banks. The Consumer Financial Protection Bureau (CFPB) issued final guidance that limits the amount banks can charge for an overdraft. The agency predicts Americans could save up to $5 billion a year once the new rule is implemented.

Under the final CFPB rule, banks have three choices when it comes to charging an overdraft fee. A bank can charge a “courtesy” fee that covers expenses or losses related to an overdraft; treat an overdraft like a line of credit and comply with current lending laws, including full disclosure of the interest rate; or charge a flat $5. Traditionally, banks have charged around $35 per overdraft incident.

“For far too long, the largest banks have exploited a legal loophole that has drained billions of dollars from Americans’ deposit accounts,” said CFPB Director Rohit Chopra in a statement. “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.”

Banks and credit unions with more than $10 billion in assets are subject to the overdraft rule. Prior to the updated CFPB guidance, overdraft fees were excluded as a finance charge.

Overdraft Fees: Good or Bad?

Overdraft fees have been the target of scrutiny by consumer advocacy groups. Generally, these types of fees usually hurt consumers in lower income brackets or those who live paycheck to paycheck.

“High overdraft fees make it harder for customers to be able to return back to a positive balance,” said Christine Chen Zinner, a senior policy counsel at Americans for Financial Reform, per The New York Times. “It contributes to involuntary account closures, even from customers being blocked out of the banking system altogether.”

However, the banks see overdraft fees in a different light. According to the Consumer Bankers Association (CBA), overdraft service is a “critical safety net” customers can utilize when an unexpected expense occurs. With the CFPB rule in place, banks may cease offering an overdraft service, and consumers will move toward more expensive options such as payday loans and pawn shops.

Big banks like Capital One and Bank of America have voluntarily reduced or eliminated overdraft fees. Other banks, like Wells Fargo and Regions Bank, have gotten into hot water from the CFPB over illegal overdraft fees, leading to millions of dollars in refunds to customers.

The CFPB’s final rule regarding overdraft fees is part of a Biden Administration initiative to eliminate junk fees and unfair practices in the financial industry. Unless stopped by the courts, the CFPB’s overdraft rule will take effect in October 2025.