The new regulation by the Consumer Financial Protection Bureau (CFPB) aims to cut high overdraft fees off banks and credit unions and states that consumers save $5 billion a year. Among other things, this regulation directs institutions having assets greater than $10 billion to three options:
- Charging a capped overdraft fee of $5.
- Charging fees that reflect the actual costs or losses incurred.
- Charging any amount, provided they disclose the terms of overdraft loans and comply with existing lending laws.
Banks currently have no limit on how much they charge for overdraft fees, with the average being around $35 per transaction, according to the CFPB. According to the new law, those households that incur overdraft fees regularly can save nearly $225 a year.
“For far too long, the largest banks have exploited a legal loophole that has drained billions of dollars from Americans’ deposit accounts,” said CFPB Director Rohit Chopra. “The CFPB is cracking down on these excessive junk fees and requiring big banks to come clean about the interest rates they’re charging on overdraft loans.”
Closing the Legal Loophole
The CFPB rule set to go into effect in October 2025 would seal a legal loophole exploited by banks to evade the limits on overdraft fees. These fees, in turn, impose heavy costs on consumers, push them into negative reporting, and cut millions of Americans out of even the most basic forms of banking.
No surprise, banks will challenge the regulation. The American Bankers Association has pronounced it as an unfair movement targeting transparent and regulated fees. Advocacy groups herald the move, however. The U.S. PIRG praised the CFPB by stating that the rule protects the most financially vulnerable clientele by aligning overdraft fees with actual bank costs.
It has only made sense to regulate excessive fees in practice as high-cost credit, opines Mike Litt, Consumer Campaign Director, U.S. PIRG.
Broader efforts to reduce “junk fees”
The new regulation is not in isolation; it is all part of a larger effort by the Biden government that works to stymie the so-called “junk fees” across industries. The U.S. Department of Transportation also goes a step further to make it possible for consumers to benefit from hidden fees levied by the airlines. National Economic Council Director Lael Brainard elaborated that “Such excessive charges for overdrafts have strapped the honest, hard-working American with fees that add up, thus inhibiting them from getting ahead in the world,” adding, “And so, the CFPB’s rule gives very real relief.”
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While it has been thought by the in-house economists of the CFPB that this regulation will save billions in costs to consumers, analysts from the banking industry warn that it could directly hit the revenue streams of several regional lending institutions. TD Cowen analysts expect the rule to face numerous legal, legislative, and regulatory challenges.
The CFPB, while threats to its movement are expected, stands firm in its push to achieve equity in the financial system. Chopra stressed the fact that banks need to be more accountable and transparent with consumers.
October 2025 is coming up fast, and we are going to see armies of consumers and industry constituents watching closely to determine how this new regulation changes the landscape of banking.
