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The Key Takeaways
- Consumer Financial Protection Bureau published a rule that caps overdraft charges at $5.
- According to the Bureau, households who pay fees for overdrafts will save an average $225 per year.
- The rule is part of a Biden administration effort to curtail what it calls "junk fees." A court has blocked the $8 credit card late fee cap.
In what could be one of the final salvoes in President Joe Biden's war on what the administration calls "junk fees," the Consumer Financial Protection Bureau (CFPB) issued a final rule Thursday capping bank overdraft fees at $5 in most cases.
This rule will be implemented in October and would limit what banks could do if customers tried to withdraw money that was greater than the balance in their accounts. Currently, banks can either decline the transaction or let it go through, putting the customer's balance into the red and possibly charging an overdraft fee. The fees charged by banks vary, but according to research conducted by the bureau they are typically in the range of $30.
"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 press release.
Chopra, Chopra’s bureau director appointed by Biden, has focused on reducing fees in consumer financial services. Overdraft fees have been reduced or eliminated by many banks in the past few years due to the CFPB’s examination of these practices. A rule was also published by the bureau that limited late charges for credit cards to $8. However, a temporary court order blocked this regulation until a lawsuit brought forward by business organizations to challenge the regulation progresses.
Banking industry says ruling may hurt consumers
The bureau stated in a release that by limiting the amount of overdrafts, households will be able to save up to $225 annually. The bureau’s previous research showed that a very small number of people pay overdraft charges repeatedly, and low-income families are more susceptible to being hit with fees.
Overdraft fee caps aren’t popular among banks. Consumer Bankers Association(CBA), an association of banks that represent them, has criticized the draft regulations in a previous year. It argued it was harmful to consumers.
CBA stated that customers may not have access to credit and therefore, overdrafts provide a financial safety net. Customers who pay an overdraft can avoid paying other fees or missing bills.
It applies to banks who have more than $10 Billion in assets. The rule gives banks three choices when it comes to charging fees for overdrafts: they can charge the fee necessary to cover the costs of the overdraft; charge no more than five dollars or treat the account as a loan and follow all rules and regulations that apply to loans. CBA believes that realistically banks are only going to choose the second choice.
It may be a difficult battle to implement the rule
Due to opposition by the banking sector, it is likely that a lawsuit will stop this rule from going into effect.
The CFPB was challenged by several courts in recent years, most notably a Supreme Court decision heard last year. Payday lenders argued it violated the Constitution. Court ruled for the consumer watchdog of government, which prevented what experts described as a pandemic situation.
The bureau’s future is also uncertain under Donald Trump.
Elon Mots, the billionaire Elon Trump, whom Trump charged with saving money for government, has said he would like to “delete” The Bureau After the Great Financial Crisis, the agency was created to monitor financial services.
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