CFPB Finalizes Overdraft Fee Cap Opposed by GOP, Industry (3)

Large US banks will have to cap overdraft fees at $5 — or an amount that covers their costs and losses — under a new consumer protection rule that Republicans vigorously oppose and swiftly drew litigation from the industry.

The US Consumer Financial Protection Bureau unveiled the final rule Thursday as part of the Biden administration’s campaign against the costs known as junk fees. Under the measure, banks and credit unions can still charge overdraft fees but must either cap them at $5 or charge customers an amount that covers a bank’s costs and losses, according to a statement.

“For far too long, the largest banks have exploited a legal loophole that has drained billions of dollars from Americans’ deposit accounts,” CFPB Director Rohit Chopra said in a statement.

Rohit Chopra

Photographer: Al Drago/Bloomberg

The rule aims to reduce the average $35 charge Americans face when they overdraw their bank accounts — a cost higher than most debit-card overdrafts themselves, which are typically less than $26, according to the CFPB.

The rule covers the country’s largest financial institutions, applying to banks and credit unions with at least $10 billion of assets. The measure could slash banks’ overdraft revenue by as much as $5 billion per year.

Banks that wish to ignore the new fee caps would be subject to protections mandated by the Truth in Lending Act, such as requiring banks to disclose interest rates and check customers’ ability to repay the fees.

“For financial institutions that wish to profit from overdraft lending, they may do so by complying with the standard requirements governing other loans, like credit cards,” the CFPB said in the statement.

Stiff Opposition

The rule has faced stiff opposition from banks since the CFPB proposed it in January, and there are significant roadblocks to it ever taking effect.

The Consumer Bankers Association said it and other bank lobbying groups had filed a lawsuit to block the rule Thursday. The lawsuit, which alleges the final rule exceeds the CFPB’s regulatory authority under fair-lending laws, among other claims, was filed in the US District Court for the Southern District of Mississippi, Northern Division.

“Overdraft services are an essential lifeline for consumers when they experience unexpected expenses,” Lindsey Johnson, president and chief executive officer of the CBA, said in a statement. “Without overdraft services, consumers on the margins are more likely to turn toward worse, less-regulated non-banking services to fill the gap.”

The rule is also a prime target for repeal using the Congressional Review Act.

The CRA allows Congress to eliminate a federal regulation with only simple majorities in both chambers and the president’s signature. President-elect Donald Trump is expected to sign off on all CRA resolutions that hit his desk, repealing Biden administration regulations.

TD Cowen analyst Jaret Seiberg said he expects Republicans to push to use the CRA but that “it is not assured given growing GOP populism.” Seiberg said he expects banks to challenge the ruling in the US Court of Appeals for the Fifth Circuit.

“Our view is that industry has a strong case that the agency both failed to properly disclose the data behind the rule and that it lacks the overall authority to limit overdraft fees,” Seiberg wrote in a note to clients.

Lame-Duck Period

Republican Senator Tim Scott of South Carolina, the incoming chairman of the Senate Banking Committee, blasted Chopra for continuing rulemaking efforts during the lame-duck period before Trump’s inauguration. The Federal Reserve, Federal Deposit Insurance Corp., and Office of the Comptroller of the Currency had stopped issuing new rules, he said.

“Despite voters’ clear message on Election Day, Director Chopra has advanced his agenda at a break-neck speed,” Scott said at a Wednesday Senate Banking Committee hearing, Chopra’s last before the panel as CFPB director.

For their part, banks say enacting strict overdraft limits would harm consumers that rely on the programs.

“This rule, and the government price controls that accompany it, will make it significantly harder for banks to offer this valuable service to their customers,” said Rob Nichols, president of the American Bankers Association.

Major Changes

Overdraft programs have drawn significant scrutiny in recent years, with consumer advocates and Democrats saying the high fees can significantly harm personal finances.

In response, many of the largest banks have made major changes to their overdraft programs to reduce costs and the number of times people are charged. Banks such as Capital One Financial Corp. and Citigroup Inc. stopped charging overdraft fees altogether.

Lael Brainard, director of the National Economic Council and a former vice chair of the Fed, said in a statement that “excessive overdraft fees have saddled hardworking Americans with charges that really add up, preventing them from getting ahead.” The rule is expected to save many families as much as $225 a year — a “real relief,” she said.

The final rule also leaves the banks and credit unions that rely most on overdraft revenue untouched. The CFPB noted in its January proposal that smaller banks and credit unions responsible for one-third of overdrafts would be exempt.

One example of a bank that has relied heavily on overdraft fees is Woodforest National Bank, a lender with about $9 billion of assets based in The Woodlands, Texas. Around 83% of the bank’s net income came from overdraft fees last year, according to its December 2023 call report.

“The CFPB’s rule sadly leaves Woodforest untouched,” Aaron Klein of the Brookings Institution said. A representative for Woodforest didn’t respond to a request for comment.

Exempt banks below the $10 billion threshold generally also haven’t kept up with changes adopted by the biggest lenders, such as giving customers grace periods to make up for overdrafts, providing low-balance alerts, and covering de minimis overdraft amounts.

(Updates with details on bank lobby lawsuit starting in ninth paragraph.)

To contact the reporters on this story:
Evan Weinberger in Arlington at eweinberger4@bloomberg.net;
Paige Smith in New York at psmith494@bloomberg.net

To contact the editors responsible for this story:
Sally Bakewell at sbakewell1@bloomberg.net

Megan Howard, Peter Eichenbaum

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