CFPB's Latest Decision Will Slash Overdraft Fees, Saving Billions
The Consumer Financial Protection Bureau (CFPB) today announced a significant policy change aimed at closing an outdated overdraft loophole. This change could allow American consumers to save up to $5 billion a year. The recent decision targets banks and credit unions with over $10 billion in assets, representing a substantial portion of the U.S. market.
Under the new regulation, these large financial institutions now have several options for managing their overdraft programs. They can set the maximum overdraft fee at $5, align their fees with actual costs and losses, or continue offering overdraft loans as a profit-making service provided they comply with established lending laws, including transparent disclosure of interest rates.
CFPB Director Rohit Chopra emphasized the need for reform, stating, "For too long, the largest banks have exploited a legal loophole that siphons billions of dollars from Americans’ deposit accounts." Chopra highlighted the bureau's determination to eliminate "excessive unnecessary fees" and ensure that banks are transparent about the interest rates on overdraft loans.
Closing the loophole addresses a long-standing exemption that prevented overdraft fees from being regarded as a financial charge. This exemption dates back to 1969 when overdraft services were not seen as profit-generating elements but rather as courtesy services reflecting slower banking processes.
The updated rule offers financial institutions options for their overdraft services. They can limit the fees to $5, charge only a fee that covers costs and losses, or fully disclose the terms of overdraft loans similarly to other types of credit, such as credit cards. This includes providing consumers with account opening disclosures for comparison, sending periodic statements, and offering a choice between automatic or manual payment methods.
The CFPB's actions are part of a broader initiative supported by agencies like the Federal Trade Commission and the U.S. Department of Transportation to eliminate unnecessary fees across various economic sectors. Since the launch of the initiative, banks have begun to reduce or eliminate certain fees, resulting in approximately $6 billion in annual savings for consumers. Despite this, reported overdraft and insufficient funds (NSF) fees in 2023 still exceeded $5.8 billion.
The bureau has also ordered several major institutions, including Navy Federal Credit Union, to refund consumers for illegal overdraft fees, with a penalty totaling $95 million. Other actions against Wells Fargo, Regions Bank, and Atlantic Union led to a total of $351 million in consumer refunds for illegal fees.
The new overdraft rule is set to take effect on October 1, 2025.