Overdraft Fees Could Drop to As Little $3 | February 2024

February 2024 | Volume 15, Issue 7

Read the full article from CBSNews.

According to the article, the Biden administration is proposing a new rule that could limit bank overdraft fees to as little as $3.

The proposed regulation unveiled by the Consumer Financial Protection Bureau in tandem with the White House could potentially cut billions in dollars that large banks earn from bank customers overdrawing their accounts.

"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 Biden said Wednesday in a statement. "Banks call it a service — I call it exploitation."

Details of the Proposed Regulation

Under the proposal, a bank would be allowed to charge consumers its actual cost to cover an overdrawn account, or conform to a set limit determined by the CFPB, effectively eliminating the $35 fees typically charged for an overdraft, according to the agency. Banks take in about $9 billion a year from the fees, according to the CFPB.

The rules would apply to banks and credit unions with more than $10 billion in assets, or about 175 of the nation's biggest financial institutions, according to the bureau. All could continue charging customers the actual cost to cover an overdraft, but they could no longer generate big bucks off the service. 

Rather than provide the CFPB with a breakdown of the costs, banks could instead opt to adopt a benchmark fee, with regulators suggesting $3, $6, $7, and $14 as possibilities. The agency plans to solicit industry and public comments by April 1, with a regulation expected to take effect in October 2025.

Banks could also provide small lines of credit to allow customers to overdraw their accounts, a service that would operate like a credit card. Some lenders like Truist Bank currently offer that type of service.

Big Bucks for Banks

Banks are expected to fight the proposed restrictions, with a massive lobbying campaign in the works. And whatever rule is adopted is nearly certain to be challenged in court.

"(This) proposal from the CFPB marks the bureau's latest attempt to demonize and mischaracterize highly regulated and clearly disclosed bank fees for a service that surveys consistently show Americans value and appreciate," the American Bankers Association, an industry trade group, said in a statement. "The proposal would make it significantly harder for banks to offer overdraft protection to customers, including those who have few, if any, other means to access needed liquidity. The CFPB is effectively proposing to take away overdraft protection from consumers who want and need it."

Decades ago, banks started letting some checking account holders take their balances below zero to avoid bouncing paper checks. But what began as a niche service expanded into an enormous profit center for banks with the proliferation of debit cards, which has customers debiting their bank accounts for small and large amounts each day, often multiple times.

Overdraft fees have been a financial bonanza for the banking industry, with the CFPB estimating that banks collected $280 billion in overdraft fees in the last 20 years. According to the media, these fees became so popular that one bank CEO named his boat the "Overdraft."

"Far too many banks continue to pad their profits by collecting steep overdraft fees from those least able to afford it," Chuck Bell, advocacy program director at Consumer Reports, said in a statement.

"By providing short-term liquidity for overdrawn transactions, bank overdraft services are essentially short-term lending programs with extremely high interest rates."

Consumer Reports notes that 8 percent of bank customers — mostly lower-income — account for nearly 75 percent of the revenue banks generate from overdraft fees.

"Overdraft fees mostly penalize economically vulnerable consumers with exorbitant charges that can make it harder for them to get back on track financially," Bell said.

Discussion Questions

1. What is an overdraft fee?
   According to the Federal Deposit Insurance Corporation (FDIC), an overdraft fee can be imposed by a bank when the depositor does not have enough money in their account to cover their transactions. Overdraft fees vary by bank but can cost as much as $35 per transaction. These fees can add up quickly and can have “ripple effects” that are costly. Some banks may charge what are known as continuous overdraft fees, or daily overdraft fees—These are charges that are assessed every day the account remains overdrawn.
   
   Learn more about overdraft fees and other bank fees.
   
   Incidentally, given the fact that the overriding theme of the February 2024 edition of this newsletter involves the powers and responsibilities of federal administrative agencies, it is important to note that the FDIC is an independent agency of the U.S. government that protects bank depositors against the loss of their insured deposits in the event an FDIC-insured bank or savings association fails, up to at least $250,000 per depositor, per FDIC-insured bank, per ownership category.
   
   The FDIC was created by the Banking Act of 1933, enacted during the Great Depression to restore (and maintain) trust in the U.S. banking system. This is a tremendous and important responsibility—As the banking system goes, so goes the U.S. economy!
2. What is the overdraft fee charged by your bank? In your opinion, is this a reasonable fee? Why or why not?
   Obviously, students bank at a variety of financial institutions, so it will be interesting to see the variability in overdraft fees.
   
   Your author banks at the North Carolina State Employees’ Credit Union (SECU). Per current SECU policy, each checking account is allotted two non-sufficient funds (NSF) “Fee Free Days” each calendar year—NSF fees are waived the first two days an account incurs one or more NSF items. Once NSF Fee Free Days have been exhausted, an NSF fee of $12 is assessed for each item denied or returned for insufficient funds. Additionally, SECU members who enroll in an optional, free “Overdraft Transfer Service” can designate up to two protecting accounts from which to transfer available funds to their checking account to prevent items from being returned and NSF fees.
   
   It is important to note that the North Carolina SECU is a non-profit organization, and that commercial banks tend to charge a significantly higher amount for overdraft fees—For example, Wells Fargo charges an overdraft fee of $35 per transaction.
3. Describe the Consumer Financial Protection Bureau (CFPB). In your opinion, is it reasonable for the CFPB to regulate the amount banks can charge for overdraft fees? Are you confident that if the U.S. Supreme Court overturns the Chevron doctrine (see Article 1 of this newsletter) and the CFPB does not have the authority to regulate the amount banks can charge for overdraft fees, the U.S. Congress will “fill the void” in terms of addressing the issue? Explain your response(s).  
   The Consumer Financial Protection Bureau (CFPB) is an independent administrative agency of the U.S. government that is responsible for consumer protection in the financial sector.
   
   According to the CFPB is “dedicated to making sure you are treated fairly by banks, lenders and other financial institutions.”
   
   In your author’s opinion, it is reasonable for the CFPB to regulate the amount banks can charge for overdraft fees, since such regulation is arguably consistent with the CFPB’s mandate of ensuring consumer protection in the financial sector and the agency’s dedication to ensuring that customers are treated fairly by banks.
   
   As mentioned in response to Article 2, Discussion Question 2, Wells Fargo currently charges $35 per overdraft transaction—Ask students whether it is reasonable for a bank to charge its customer a $35 fee for a $5 overdraft—Their responses will likely be interesting!
   
   Your author is not confident that the U.S. Congress would “fill the void” in terms of addressing the issue of exorbitant overdraft fees. This is due to the prolonged and indefinite intransigence of Congress as it reels from the precipice of one threatened government shutdown to another.

Your author is both amazed and appalled by the inability of Congress to fulfill its primary, constitutional role—to make the law.