Biden Administration Proposes Caps As Low as $3 For Bank Overdraft Fees

By Hamodia Staff

Under a new White House proposal, banks might be forced to lower their overdraft fees to as little as $3.

The Biden administration says that the fees are one of many unnecessary burdens on American consumers, particularly those living paycheck to paycheck.

The proposed change by the Consumer Financial Protection Bureau would potentially eliminate billions of dollars in fee revenue for the nation’s biggest banks, which were gearing up for a battle even before Wednesday’s announcement. Exactly how much revenue depends on which version of the new regulation is adopted.

Banks charge a customer an overdraft fee if their bank account balance falls below zero. Overdraft started as a courtesy offered to some customers when paper checks used to take days to clear, but proliferated thanks to the growing popularity of debit cards. So, for instance, a $10 debit card transaction could cost a bank customer $40 if their balance goes below zero.

“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,” President Joe Biden said in a statement. “Banks call it a service — I call it exploitation.”

Under the proposed rule, banks could only charge customers what it would cost them to break even on providing overdraft services. This would require banks to show the CFPB the costs of running their overdraft services, a task few banks would want to handle.

Alternatively, banks could use a benchmark fee that would apply across all affected financial institutions. Regulators proposed several fees — $3, $6, $7 and $14 — and will gather industry and public input on the most appropriate amount. The CFPB says it arrived at these figures by looking at how much it cost banks to recoup losses from accounts that went negative and were never paid back.

Banks could also provide small lines of credit to allow customers to overdraft, a service that would operate like a credit card. Some banks like Truist Bank currently offer that type of service.

Biden has made the elimination of “junk fees” one of the cornerstones of his administration’s economic agenda heading into the 2024 election. Overdraft fees have been at the center of that campaign, and the White House directed government regulators last year to do whatever is in their power to further curtail the practice.

Banks have long argued that government regulations on overdraft could cause them to eliminate the service altogether. While some banks have eliminated overdraft fees and created accounts that cannot go negative, Bankrate estimates that roughly nine out of 10 banks still offer the service.

“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,” said Lindsey Johnson, president and CEO of the Consumer Bankers Association, the trade and lobby organization for the larger consumer banks.

With reporting from wire services.