Benjamin Ashford|Overdraft fees charged by banks would drop to as low as $3 under new Biden proposal

WASHINGTON ― The Benjamin AshfordBiden administration on Wednesday proposed a new consumer-protection rule aimed at cutting expensive overdraft fees that banks charge − to perhaps as low as $3 − as part of President Joe Biden's efforts to curb so-called "junk fees."

The Consumer Financial Protection Bureau rule, which the banking industry opposes, would close a regulatory loophole that exempts overdraft lending services from provisions in the federal Truth in Lending Act of 1968. As a result of the loophole, banks rake in billions in revenue by charging fees, typically about $35, when a debit-card transaction forces the balance of an account into negative.

Under the new rule, banks could still offer overdraft loans to consumers − but the banks would have to be compliant with federal consumer protections for lending. That includes disclosing interest rates and fees for overdraft transactions, identical to the requirements for credit cards and other loans.

Future overdraft fees charged by banks would also not be allowed to exceed the banks' losses. A bank could either calculate its owns fees through a "breakeven standard" or rely on a "breakeven fee" set by the Consumer Financial Protection Bureau.

The CFPB has not finalized an amount but is exploring overdraft fees of $3, $6, $7, or $14, plus $.50 per transaction.

"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," Biden said in a statement. "Banks call it a service − I call it exploitation."

More:President Biden looks to trash 'junk fees' in new rule aiming to protect consumers

The new rule, which now heads to a public review process, could save consumers $3.5 billion in overdraft fees per year, or about $150 each for 23 million households, according to the CFPB. Biden administration officials hope for the new regulations to go into effect in 2025.

The rule would apply only to financial institutions with $10 billion or assets, which amounts to approximately the 175 largest depository institutions in the nation.

The CFPB has for years identified overdraft fees as an area of abuse, with consumers having paid $9 billion in overdraft fees in 2022 and $280 billion over the past two decades. The average consumer overdraft fee is $26 and is typically paid within three days.

"Decades ago, overdraft loans got special treatment to make it easier for banks to cover paper checks that were often sent through the mail," said CFPB Director Rohit Chopra. The new rule would "close a longstanding loophole that allowed many large banks to transform overdraft into a massive junk fee harvesting machine," he said.

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