CFPB: Overdraft fee reform will save consumers $5 billion a year in bank fees

Dec. 12 (UPI) -- The Consumer Financial Protection Bureau on Thursday announced a final rule to cut down on overdraft fees by financial institutions.

According to the CFPB, the rule will close an overdraft loophole that applies to banks and credit unions with more than $10 billion in assets, saving consumers up to $5 billion in bank and credit union overdraft fees each year.

"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."

The new rule provides options financial institutions can choose from to offer overdraft loans to customers.

The first option is to cap overdraft fees at $5, which CFPB said is an estimated level allowing most institutions to cover their overdraft costs.

The second option is to cap their overdraft fees at an amount that covers just costs and losses, but not profit.

The third is to disclose the terms of overdraft loans to customers just like other loans. This option allows profit but requires full compliance with requirements governing other loans.

That final option also gives consumers a choice on whether to open a line of credit covering overdrafts with the option to pay automatically or manually.

"Since the CFPB announced its initiative to curb junk fees, multiple banks have begun reducing or eliminating overdraft and non-sufficient fund fees, and consumers have saved $6 billion annually in these fees. However, even with these changes, consumers still paid more than $5.8 billion in 2023 in reported overdraft and NSF fees," the agency said.

The new overdraft fee rule was proposed Jan. 17, 2024 by the Biden Administration. The goal was to cut overdraft fees in half.

The rule was designed to close a loophole that exempted overdraft lending services from the Truth In Lending Act.

When consumers overdraw available money in their accounts banks and credit unions extend loans to them to cover the overdrafts.

That rule, finalized Wednesday, is part of a broader effort to lower consumer costs.

President Joe Biden said when proposing the rule, "Banks call it a service - I call it exploitation."