Banking Associations Warn New Overdraft Rule Could Harm Consumers

Five banking associations have called on the CFPB to withdraw its new regulation on overdraft fees, arguing that it is unnecessary due to recent innovations and could potentially harm consumers.

The coalition, which includes the Bank Policy Institute and the American Bankers Association, cautioned that the rule would harm millions of consumers who rely on overdrafts, particularly those with limited, if any, options for meeting short-term liquidity needs.

The rule, which was introduced in December, requires banks with more than $10 billion in assets to choose one of three options when charging for overdrafts.

They can either cap their overdraft fee at $5, cap their fee at an amount that covers costs and losses, or disclose the terms of their overdraft loan like other loans.

The rule aims to reduce customer costs and prevent consumers from losing access to banking services or facing negative credit reporting that could prevent them from opening another account in the future. It also forms part of the regulator’s ongoing effort to tackle junk fees.

However, the group argued that the regulation is unnecessary due to recent bank innovations in overdraft management. For example, many banks now send low balance alerts, set a minimum threshold for overdraft fees, cap daily fees, and offer a grace period allowing customers to make a deposit and avoid the fee.

The group said: “The CFPB’s own data shows that there was a $5 billion reduction of overdraft fees from 2019 to 2022 because of these financial institution-led – not government-led – innovations, a nearly 50 percent drop since before the pandemic.”