Biden administration proposes rule that could save consumers $3.5 billion a year in bank fees | CNN Business (2024)

Biden administration proposes rule that could save consumers $3.5 billion a year in bank fees | CNN Business (1)

A proposed rule by the Consumer Financial Protection Bureau to curb overdraft fees would only apply to banks and credit unions with at least $10 billion in assets.

New York CNN

The Consumer Financial Protection Bureau on Wednesday said it is proposing a rule that would curb excessive overdraft fees charged to customers of large banks and credit unions, potentially saving consumers as much as $3.5 billion a year.

The rule would only apply to banks and credit unions with at least $10 billion in assets, which account for the largest share of deposit account customers in the United States.

Too often, the consumer watchdog agency has noted, bank customers are surprised by overdraft fees and those who can least afford them are charged the most frequently.

“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,” said CFPB director Rohit Chopra.

CFPB has found that customers “are typically charged $35 for an overdraft loan, even though the majority of consumers’ debit card overdrafts are for less than $26, and are repaid within three days.”

What’s more, the agency estimates that roughly 23 million households a year pay overdraft fees and that the proposed rule could save each household $150 a year.

What would change

Federal Communications Commission Chairwoman Jessica Rosenworcel testifies during the House Energy and Commerce Subcommittee on Communications and Technology hearing titled Connecting America: Oversight of the FCC, in Rayburn Building on Thursday, March 31, 2022. Tom Williams/CQ-Roll Call, Inc/Getty Images FCC proposes to ban cable and satellite TV ‘junk fees’

An overdraft fee is charged when the bank or credit union covers a deposit account holder’s transaction (e.g., payment, withdrawal, debit or transfer) even though there is not enough money in that person’s account.

The CFPB asserts that the overdraft coverage is in essence a loan to the customer and as such should be subject to the Truth in Lending Act much the way credit cards are. The Truth in Lending Act, created when people relied on paper checks and not instantaneous payments and debits, requires lenders to clearly disclose to the borrower how much a loan — or credit — will cost them. But overdraft protection was treated as exempt from those disclosures.

“In the 1990s and early 2000s, with the rise of debit cards, institutions began raising fees and using the exemption to churn high volumes of overdraft loans on debit card transactions. Annual overdraft fee revenue in 2019 was an estimated $12.6 billion,” CFPB said.

Today, big banks have made many modifications to their overdraft practices, effectively lowering their overdraft revenue to roughly $9 billion a year.

The CFPB rule would lower that amount further by requiring big banks and credit unions to be as forthcoming about the terms of extending an overdraft loan as they are for other lending products.

One option for financial institutions subject to the rule would be to offer customers overdraft protection as a line of credit tied to their checking account or debit card. Those lines of credit would charge a competitive interest rate.

“Very large financial institutions would still be able to offer profitable overdraft loans, as long as they comply with longstanding consumer protections on loans. For example, this would require them to disclose interest rates and fees, just as they would if they offered a credit card or other loan,” the CFPB said.

shapecharge/iStockphoto/Getty Images Biden administration wants to kill ‘junk’ fees in retirement investments and advice

Or if a large bank wished to remain exempt from the Truth in Lending Act for its overdraft services, it could charge a flat fee for an overdraft payment. The fee would be equal to either to a benchmark amount that the CFPB sets (currently the agency is weighing amounts between $3 and $14) or the bank could calculate a fee in line with its costs for providing overdraft protection.

The proposed rule is open for public comment until April 1. After that, the CFPB will consider those comments, decide if the proposal needs to be amended and whether to issue a final rule. If it does, that rule likely would not go into effect until October 2025.

The CFPB’s latest move is part of a larger effort by the Biden Administration to cut down on “junk fees” and bring more transparency to charges for everything from airline tickets, live events, rentals, hotels and banking services to retirement advice and credit cards.

In a statement Wednesday, President Joe Biden called the new proposed rule “just one part of my Administration’s broader plan to lower costs for hardworking families,” calling predatory overdraft fees “exploitation.”

“Today’s proposal would cut the average overdraft fee by more than half, saving the typical American family that pays these fees $150 a year,” the president wrote. “That would add up to save families $3.5 billion every year. Unfortunately, some Republicans in Congress continue to defend these exploitative fees.”

Banks respond

In response to CFPB’s announcement, two major banking trade groups pushed back, asserting that the agency’s proposed rule could backfire, citing banks’ development of next-day grace periods and the elimination of non-sufficient funds fees as just two ways they have innovated and competed to serve consumers best in recent years.

“The Bureau is not only late to the party with this misguided proposal, but this one-size-fits-all approach from Washington threatens to undo years of progress while also freezing innovation and competition. If enacted, this proposal could deprive millions of Americans of a deeply valued emergency safety net while simultaneously pushing more consumers out of the banking system,” Consumer Bankers Association president and CEO Lindsey Johnson said in a statement.

American Bankers Association president and CEO Rob Nichols also warned consumers might pay the price if CFPB’s rule goes into effect. “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,” Nichols said in a separate statement.

And signaling the legal pushback to come, he further asserted the agency did not have the legal authority to subject overdraft services to Truth in Lending Act regulations, “much less impose a price cap on the provision of these services to consumers.”

After reviewing the CFPB proposal, financial services policy analyst Jaret Seiberg of TD Cowen Washington Research Group said the choice CFPB is offering banks in how they handle overdraft charges may be “an illusion.” That is, if it goes into effect, banks would be most likely to default to the benchmark fee that the agency sets. “We do not see how it could be cost effective for banks to treat each overdraft as a separate extension of credit subject to separate disclosures. And we don’t believe banks will want to risk litigation by calculating their overdraft costs separately,” Seiberg said in a research note.

CNN’s DJ Judd contributed to this report.

As a financial expert with a deep understanding of consumer protection and financial regulations, let me delve into the proposed rule by the Consumer Financial Protection Bureau (CFPB) aimed at curbing excessive overdraft fees charged by large banks and credit unions. The insights provided here are based on my extensive knowledge of financial regulations and consumer rights.

The CFPB's proposed rule focuses on addressing the issue of overdraft fees, which disproportionately affect customers of large banks and credit unions. The key highlight of the rule is its application, targeting financial institutions with at least $10 billion in assets, encompassing those that represent a significant portion of deposit account customers in the United States.

One critical aspect is the definition of overdraft fees, which occurs when a bank or credit union covers a transaction despite insufficient funds in the account. The CFPB asserts that overdraft coverage essentially acts as a loan to the customer and should be subject to the Truth in Lending Act, similar to credit cards. The proposed rule aims to close a historical loophole that allowed large banks to exploit overdrafts as a significant source of revenue.

The CFPB's findings reveal that consumers are often charged a flat fee of $35 for overdrafts, even when the majority of debit card overdrafts are less than $26 and repaid within three days. The estimated annual overdraft fee revenue in 2019 was a staggering $12.6 billion, prompting the need for regulatory intervention.

To bring transparency to overdraft practices, the CFPB proposes that banks and credit unions subject to the rule disclose the terms of extending an overdraft loan, similar to other lending products. Financial institutions could offer overdraft protection as a line of credit tied to checking accounts or debit cards, with competitive interest rates and adherence to consumer protection regulations.

Alternatively, large banks could choose to remain exempt from the Truth in Lending Act for overdraft services by charging a flat fee. The fee could either align with a benchmark amount set by the CFPB or be calculated based on the bank's costs for providing overdraft protection.

It's crucial to note that the proposed rule is open for public comment until April 1. After considering public input, the CFPB will decide whether to amend the proposal and issue a final rule, with potential implementation by October 2025.

This regulatory move aligns with the broader efforts of the Biden Administration to reduce "junk fees" and enhance transparency in various sectors, including banking services. President Biden emphasizes the potential savings for American families, with an estimated $3.5 billion annually if the proposed rule is implemented.

However, the banking industry has expressed concerns, suggesting that the rule might have unintended consequences, potentially limiting access to overdraft protection for some consumers. Legal challenges are anticipated, with industry representatives questioning the CFPB's authority to subject overdraft services to Truth in Lending Act regulations.

In conclusion, the CFPB's proposed rule represents a significant step towards protecting consumers from exploitative overdraft fees, but it also sparks a debate on the potential impact on banking services and consumer access to emergency safety nets.

Biden administration proposes rule that could save consumers $3.5 billion a year in bank fees | CNN Business (2024)

References

Top Articles
Latest Posts
Article information

Author: Maia Crooks Jr

Last Updated:

Views: 5859

Rating: 4.2 / 5 (63 voted)

Reviews: 94% of readers found this page helpful

Author information

Name: Maia Crooks Jr

Birthday: 1997-09-21

Address: 93119 Joseph Street, Peggyfurt, NC 11582

Phone: +2983088926881

Job: Principal Design Liaison

Hobby: Web surfing, Skiing, role-playing games, Sketching, Polo, Sewing, Genealogy

Introduction: My name is Maia Crooks Jr, I am a homely, joyous, shiny, successful, hilarious, thoughtful, joyous person who loves writing and wants to share my knowledge and understanding with you.