CFPB Moves to Close ‘Outdated’ Bank Overdraft Loophole

The White House wants to limit the overdraft fees banks can charge customers.

To that end, the U.S. Consumer Financial Protection Bureau (CFPB) on Wednesday (Jan. 17) issued a proposal that would close an “outdated loophole” that exempts overdraft lending services from consumer protection laws.

The CFPB proposal would cap fees at $3 and save consumers $3.5 billion per year. The rule would apply to banks with more than $10 billion in assets, a group that covers the 175 largest financial institutions in the U.S., the agency said.

“Decades ago, overdraft loans got special treatment to make it easier for banks to cover paper checks that were often sent through the mail,” CFPB Director Rohit Chopra said in a news release. “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.”

According to the proposal, large banks would still be able to extend overdraft loans — a practice the CFPB says brings in billions in revenue each year — if they comply with longstanding lending laws, including disclosing applicable interest rates.

The alternative, the CFPB said, is that banks could charge a fee to recover their costs “at an established benchmark” as low as $3, or at a cost the banks calculate if they can show their cost data.

“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 on the proposed rule change. “Banks call it a service — I call it exploitation.”

The proposal has drawn opposition from banking organizations such as the American Bankers Association, the Independent Community Bankers of America and America’s Credit Unions, as noted here earlier this month.

“We don’t believe it is something that needs to be regulated or legislated,” Lindsey Johnson, the president of the Consumer Bankers Association, told the Washington Post recently, adding her group would “take a look at” the proposal before determining its next move.

The rules come at a time when some banks are scaling bank overdraft fees or doing away with them altogether. Others are establishing grace periods before the fees set in or warning customers when funds are running low. Last year saw bank revenues from these fees plunge by double digits.

However, PYMNTS Intelligence data has shown that consumers can use overdrafts deliberately, as noted here last month.

“The fact remains that overdrafts help ensure that transactions are completed, and consumers make (perhaps critical) payments that they want/need to make,” PYMNTS wrote.

Those short-term benefits come at a cost. The research found that two-thirds of overdrafts led to other credit accessibility issues, with consumers seeing damage to their credit score or being unable to cover the accumulated fees.

And it’s not just consumers turning to overdrafts to remain afloat. Joint research via PYMNTS Intelligence and Visa shows that roughly 14% of middle-market companies have used overdrafts as a working capital solution.