New Rule Caps Overdraft Fees, Closing Expensive Loophole

CALIFORNIA — Overdraft fees will be slashed next year, thanks to a new rule finalized Thursday by the federal Consumer Financial Protection Bureau.

The government agency said it has closed a loophole on overdraft fees, limiting the ability of banks to charge fees and saving consumers billions.

"For far too long, the largest banks have exploited a legal loophole that has drained billions of dollars from Americans' deposit accounts," said Rohit Chopra, director of the Consumer Financial Protection Bureau. "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."

Under the rule, banks will be able to choose from three options when charging for overdrafts: cap the overdraft fee at $5, charge a fee that covers costs and losses, or charge any fee as long as the terms of the overdraft loan are disclosed just like other loans.

The Consumer Financial Protection Bureau said the new rule will save consumers up to $5 billion in annual overdraft fees, or about $225 per household that pays the fees.

The finalized rule applies to financial institutions with more than $10 billion in assets. The rule is slated to go into effect Oct. 1, 2025, as long as it isn't challenged or overturned by Congress or the courts.

The Biden Administration announced the crackdown on overdraft fees in January as part of the White House's efforts to reduce junk fees and lower costs for American consumers. Currently, there is no cap on the overdraft fees that financial institutions can legally charge.

"For too long, some banks have charged exorbitant overdraft fees — sometimes $30 or more — that often hit the most vulnerable Americans the hardest, all while banks pad their bottom lines," President Joe Biden said in a statement. "Banks call it a service — I call it exploitation."

Bank industry leaders have criticized the crackdown and warned that the rule would reduce how much overdraft protection they could offer consumers, according to a survey by the Consumer Bankers Association.

More than 90% of banks that responded to the survey indicated that any of the proposed overdraft fee caps would reduce the amount of liquidity they could offer customers.

"The CFPB's proposal fails to appropriately address the likelihood of a widespread reduction of overdraft services and the negative impact the proposal would have on U.S. consumers who need them most," wrote David Pommerehn, senior vice president of the association, in a letter to the Consumer Financial Protection Bureau.

Since the Consumer Financial Protection Bureau announced its initiative to curb junk fees, some banks have already reduced or eliminated overdraft and non-sufficient fund fees, saving consumers $6 billion annually, according to the agency. Nevertheless, consumers still paid more than $5.8 billion in 2023 in reported overdraft and non-sufficient fund fees.