CFPB Says Overdraft Fees Are Junk Fees — But Are They?

Consumer Financial Protection Bureau

Labels are popular on Capitol Hill.

And this week the labels are flying fast and furiously, aimed at big banks and credit unions.

The Consumer Financial Protection Bureau (CFPB) put forth a proposal Wednesday (Jan. 17) that would limit overdraft fees — in many cases, drastically so.

In the release detailing the proposal, the CFPB contended that the overdraft fees are “junk fees.” CFPB Director Rohit Chopra said in a statement that “Decades ago, overdraft loans got special treatment to make it easier for banks to cover paper checks that were often sent through the mail,” adding that “today, we are proposing rules to close a longstanding loophole that allowed many large banks to transform overdraft into a massive junk fee harvesting machine.”

New rules would apply to banks with more than $10 billion in assets. And in terms of the rule itself, the CFPB maintains that the changes would save consumers about $3.5 billion annually. The mechanics are such that the fees would be capped at around $3. Banks would still be able to extend the overdraft loans — with more stringent disclosure of applicable interest rates.

Looking to October 2025

Things may still be in flux, we note. In the proposal itself, the CFPB notes that it “plans to monitor the market’s response to this rule before determining whether to alter the regulatory framework for financial institutions with assets less than or equal to $10 billion.” The rule would likely not take effect until Oct. 1, 2025.

The proposal also maintains that “the provision of non-covered overdraft credit moved away from its original purpose — paying occasional or inadvertent overdrafts as a courtesy — and became the dominant component of a back-end pricing business model. By 2004, market wide overdraft revenue was estimated at approximately $10 billion and, by 2009, had increased to an estimated $25 billion.”

Changes in banks’ fee policies (reducing the overdrafts) through the ensuing years have brought the overdraft revenues down to $9 billion in 2022. The CFPB has also said that found that 79% of combined overdraft and NSF fees were paid by 9% of consumers — and these consumers paid more than 10 such fees per year, incurring a median of $380 in these fees in a year.

The CFPB findings come alongside PYMNTS Intelligence data that shows overdrafts are commonplace: 69% of high-income consumers — those earning more than $100,000 per year — overdrew their accounts and paid fees, trailed a bit by 54% of low-income consumers — those earning less than $50,000 annually — who did so.

As to the nuances in the debate: Overdraft fees are an opt-in choice for consumers. As detailed by the American Bankers Association, 83% of consumers say their banks are transparent about disclosing fees and 89% say that bank overdraft offerings are “valuable.” Many banks have retooled their approach to overdrafts (if they have not eliminated them, as many firms have). Among others, TD Bank, Wells Fargo and Regions Bank foster grace periods that stretch out over several days before the fees kick in.