Written by: Andrew Allen
Edited by: Lillian Guevara-Castro
Reviewed by: Adam West
In a Nutshell: Overdraft fees have been a subject of debate throughout the 21st century. Consumers and watchdog agencies hold that overdraft fees are more expensive than they should be. But financial institutions would like to see competitive forces set rates for products and services, not governmental think tanks. The Consumer Financial Protection Bureau has proposed a rule that would cap overdraft fees at the largest banks and credit unions in the U.S.
The Consumer Financial Protection Bureau (CFPB) is taking action to limit overdraft fees, which are a significant source of revenue for many financial institutions.
Overdraft fees have long been a thorn in consumer finances, but overdrafts serve a purpose. Consider a young mother rushing through the grocery store after work to buy dinner items for her family. Her heart sinks as she realizes she doesn’t have the funds to pay for the groceries in her shopping cart, but then she recalls that she can overdraw her bank account to pay for the items.
At that moment, the mother feels relieved that an overdraft enabled her to feed her family that evening. Reviewing her bank account later, her relief gives way to anger when she sees her bank charged her $30 for the overdraft.
The CFPB aims to help consumers in situations such as this one. It has issued a rule proposing that banks and credit unions with assets of $10 billion or more limit overdraft fees to $5 per occurrence or an amount that covers the cost of allowing a customer to overdraft.
Under the rule, financial institutions would still be permitted to issue overdraft loans, provided they comply with lending laws.
The CFPB estimates the ruling, scheduled to go into effect in October of 2025, could save consumers up to $5 billion per year in overdraft fees.
Consumer Reports, a nonprofit agency dedicated to consumer advocacy, champions the CFPB’s proposed rule. Consumer Reports has been a regular supporter of the CFPB’s efforts since the bureau’s formation in 2011. We caught up with Chuck Bell, the Programs Director, Advocacy for Consumers Reports, to learn more about the CFPB’s rule and how it could impact consumers and the financial industry.
Bell has worked at Consumer Reports for 35 years where he advocates for financial policy and works on healthcare issues that impact consumers.
“For many years, there have been concerns that the fees banks and credit unions charge for overdrafts are way in excess of what it costs the institution to process the overdraft,” Bell told us. “People who are overdrafting have relatively low balances, and yet they get saddled with multiple charges for overdrafting their accounts. When people shop for a checking account, they don’t expect that they’re going to be hit with all these fees when they use an account’s services.”
Overdraft Fees Are Trending Lower
This isn’t the first time in the 21st century that overdraft fees have made headlines. Bell told us that many financial institutions have reduced their overdraft fees in recent years after conferring with the CFPB.
According to CFPB data, revenue from overdraft fees in 2023 was down 24% compared with 2022 overdraft fee revenue. Overall, the industry is moving in the direction the CFPB recommends, but change isn’t coming quick enough at some of the country’s largest financial institutions.
“The CFPB listed on their website a number of the institutions that have reduced their overdraft fees in recent years,” Bell told us. “And that includes a number of market leaders who’ve significantly lowered their fees as of late, but there are some remaining institutions that still charge enormous fees that are around $35. This action by the CFPB would be so beneficial because it would save the people who are charged overdraft fees an average of $225 per year.”
A savings of $225 per year amounts to an average monthly savings of $18.75. That may not sound like a significant amount, but for consumers who are struggling with other economic headwinds such as the effects of inflation, it can be. Bell told us that many overdrafts result from relatively small transactions, so consumers may be paying an overdraft fee that is higher than the transaction that triggered it.
Overdraft fees can severely impact disadvantaged groups. Bell told us overdraft fees disproportionately impact people of color and those with low or moderate incomes.
Fees can do more than temporarily harm a consumer’s wallet. Bell told us he’s concerned that individuals who incur multiple overdraft charges will permanently leave the banking system.
“When you sustain multiple overdrafts, you’re at risk of losing your account and being reported to a credit reporting agency,” Bell told us. “And that will make it hard for you to get a bank account in the future. So the banking system is losing customers that it really should be retaining and helping to lift up so they can participate in the mainstream economy.”
Financial Institutions Strike Back
Banks and credit unions provide an invaluable service to consumers, and they’re accustomed to receiving compensation for their solutions. Financial institutions serve shareholders and fiercely protect revenue streams, so it’s no surprise that they’ve taken action to block the CFPB’s ruling.
A group of banks is suing the CFPB, claiming that making changes to overdraft practices and policies could ultimately lead consumers to more harmful sources of financing, such as predatory lenders.
Banks that are forced to lower their overdraft charges may ramp up fees on other products and services they offer to retain revenue. But Bell told us he’s seen substantial movement in the market with other financial institutions lowering their overdraft fees, and he believes consumers will have better options than turning to high-cost, alternative services.
“Those banks that have been excessively reliant on overdraft fees will have to adjust their business model,” Bell told us. “But that doesn’t necessarily mean that they’re going to raise fees on every other type of service, because they’re still going to have to face competition for other products they offer like credit cards and mortgages. In the end, I think it will create a more level playing field for fair competition.”
The CFPB’s proposal that banks charge $5 for an overdraft may come as a shock to institutions charging five or six times that amount. But Bell told us he’s pleased with the $5 limit because the CFPB has done its research and come up with a fee amount that is fair to consumers while still providing banks with some revenue margin.
The CFPB’s decision to apply its rule to only those financial institutions with $10 billion or more in assets leaves some confusion for small banks and credit unions. Bell told us the rule will create a more competitive environment and smaller institutions will have to adjust their fees to compete.
“I think if we were to see a lot of laggards that are still refusing to drop their fees, then we might have to come back to the CFPB and ask for an additional rule to cover smaller institutions,” Bell told us. “The CFPB did get a lot of complaints from credit unions during the comment period that said they couldn’t possibly handle lower fees. But, on the flip side, when an overdraft amount is very low, it’s really unconscionable to charge someone $35.”
Politicians May Alter the CFPB’s Plans
The CFPB announced its proposed rule as the U.S. prepares for a change in leadership. President Trump’s second stint as the Commander in Chief commences in January of 2025. Allies of President Trump have expressed dissatisfaction with the bureau, creating uncertainty about the group’s efficacy under the new administration.
Bell told us that Congress may overturn the CFPB’s rule if enough legislators in the Senate and House of Representatives vote against it.
“This rule is going to be very popular with consumers,” Bell told us. “I think it would be tough for some members of Congress to vote against this who represent people who are struggling from one paycheck to the next. We hope that we’ll have a fair chance of defending the rule and that it won’t be overturned by Congress after all of this research and effort to create a fair fee limit.”
Banks have substantial resources, including lobbyists, that they can use in attempts to strike down the CFPB’s overdraft ruling. Bell told us that members of Congress must bear in mind when considering the rule that consumers don’t have lobbyists that represent them on banking issues like overdraft fees.
Consumer Reports received more than 28,000 signatures in support of the CFPB’s rule. The nonprofit also received comments from consumers expressing their belief that overdraft fees are excessive.
“So many people are affected by this,” Bell told us. “Lawmakers should not be listening to the lobbyists that are yelling in their ears about this. They should be listening to the concerns of their voters.”
