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CFPB proposes new rules to protect consumers from excessive overdraft bank fees

Consumer Reports praises CFPB proposal to ensure overdraft fees are reasonable and costs are clearly disclosed to consumers

WASHINGTON, D.C. – New rules proposed today by the Consumer Financial Protection Bureau would go a long way toward protecting bank customers who are unfairly penalized by excessive overdraft fees, according to Consumer Reports.  While some banks have voluntarily stopped charging such fees in recent years, the CFPB’s proposal aims to ensure that large financial institutions that continue to continue to do so treat their customers fairly.

“Far too many banks continue to pad their profits by collecting steep overdraft fees from those least able to afford it,” said Chuck Bell, advocacy program director at Consumer Reports. “By providing short-term liquidity for overdrawn transactions, bank overdraft services are essentially short-term lending programs with extremely high interest rates.

Bell continued, “Overdraft fees mostly penalize economically vulnerable consumers with exorbitant charges that can make it harder for them to get back on track financially. The CFPB’s proposed rule will help rein in costly overdraft fees by limiting these charges and ensuring they are reasonable and proportional to the actual costs incurred by financial institutions.”

The proposal by the CFPB would require banks and credit unions with assets exceeding $10 billion to abide by Truth in Lending Act protections, including disclosing the interest rate so consumers have a clear understanding of the full costs associated with overdrafts. Alternatively, the CFPB proposal gives large banks the option of charging a fee in line with an established benchmark ranging between $3-14 or their actual costs. The CFPB is seeking comment on the appropriate amount for the benchmark. The Bureau estimates that the new limits will save consumers $3.5 billion or more annually.

Overdraft fees are charged by banks that temporarily cover a transaction when consumers overdraw their accounts.  Some banks also charge non-sufficient fund fees when they decline cashing a check that would result in a negative balance on an account.

Banks and credit unions collected more than $15 billion in overdraft and non-sufficient fund fees in 2019 according to the CFPB. The CFPB previously found that the majority of debit card overdraft fees were charged on transactions of $24 or less and that most were repaid within three days. The CFPB has noted that “put in lending terms, if a consumer borrowed $24 for three days and paid the median overdraft fee of $34, such a loan would carry a 17,000 percent annual percentage rate (APR).”

Only eight percent of customers incur almost 75 percent of the revenue of all overdraft fees, and the vast majority of overdraft revenue comes from a relatively small percentage of consumers who struggle to keep positive checking account balances.

Following pressure from the CFPB, a growing number of banks have announced that they have eliminated overdraft fees and more financial institutions have voluntarily stopped charging non-sufficient fund fees in recent years. The CFPB’s proposed rules aim to ensure that financial institutions that continue to charge overdraft fees treat their customers fairly.

Despite the voluntary efforts of some banks and credit unions, the CFPB recently released a report finding that consumers continue to be charged unexpected overdraft and non-sufficient fund fees. More than a quarter of consumers responding to a CFPB survey said that someone in their household had been charged an overdraft or NSF fee within the past year.  Only twenty-two percent of those households expected the most recent overdraft fee and most consumers had access to a more affordable form of credit.

Michael McCauley, michael.mccauley@consumer.org