Jan. 17 (UPI) — The Biden administration Wednesday proposed a new rule aimed at cutting the average overdraft fees imposed by the nation’s largest banks by more than half.
The move by the Consumer Financial Protection Bureau aims to eliminate a longstanding legal loophole that exempts overdraft lending services from provisions of the Truth in Lending Act, which required clear disclosure of credit costs but exempted some overdrafts when honoring checks for account holders who overdrew on their available money.
“Decades ago, overdraft loans got special treatment to make it easier for banks to cover paper checks that were often sent through the mail,” CFPB Director Rohit Chopra said. “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.”
The proposal allows large banks to continue offering overdraft loans, provided they follow existing lending laws, disclose interest rates, and charge a fee — either a set benchmark between $3 and $14, or a calculated cost, with transparency around the calculation methods.
It applies to banks with assets exceeding $10 billion, including about 175 of the largest lenders in the country many of which charge $35 for overdraft loans, despite most debit card overdrafts being under $26 and repaid within three days.
The proposed rule is part of a broader effort to lower consumer costs while the measure is expected to save 23 million families about $3.5 billion in fees each year, translating to an annual savings of $150 per household, President Joe Biden said.
“Banks call it a service — I call it exploitation,” Biden wrote in a statement. “We’re going to continue doing everything in our power to bring down costs and grow our economy … while standing up to extreme Republican attempts to provide more giveaways to the wealthy and big corporations and undermine competition.”
Congress passed the Truth in Lending Act in 1968 but overdraft fees did not become a major profit source until the 1990s, when debit cards became popular, and banks raised the fees, leading to an estimated $12.6 billion in overdraft revenue in 2019.
Wells Fargo and JPMorgan Chase led with one-third of the revenue in 2022, according to the CFPB.
Recent federal actions prompted changes at the banks that have reduced overdraft revenue to about $9 billion annually by addressing illegal practices like charging fees even when customers have enough available funds.
Since taking office in 2021, Biden has called for increased limits on bank fees for bounced checks and account overdrafts.
The latest move comes after the CFPB issued new guidance to the nation’s big banks in October, advising they were still subject to the 2010 Consumer Financial Protection Act, which prohibits large financial institutions and credit unions from charging junk fees for basic customer service.
Late last year, Biden proposed new federal rules aimed at eliminating junk fees associated with retirement investment advice and promoting increased competition for post-employment savings plans.
The Federal Trade Commission also proposed similar rules that would prohibit junk fees and deceptive charges for airline tickets, hotel and resort bookings, live events, apartment rentals, and utility bill payments.
Hidden fees significantly reduce monthly income and make it challenging for families to meet financial needs, while disproportionately affecting vulnerable populations, the White House said.
