The cost of making a current withdrawal from a bank account could be reduced to just $3, according to a proposal released by the White House. This is the Biden administration's latest move to combat fees that are an unnecessary burden on American consumers, especially those living paycheck to paycheck.
The changes could eliminate billions of dollars in fee income for the nation's largest banks, which had been preparing for the fight even before Wednesday's announcement. Exactly how much revenue will be earned will depend on which version of the new regulation is adopted.
If the bank account balance falls below zero, the bank charges the customer an overdraft fee. Overdrafts previously began as a service offered to some customers when paper checks took days to clear, but quickly became popular with the growing popularity of debit cards.
“For too long, some banks have been charging exorbitant overdraft fees (more than $30 in some cases), even as banks inflate their revenues,” President Joe Biden said in a statement. “The most vulnerable Americans are often hit hardest.” Service — I call it exploitation. ”
Under the proposed rules, banks could only charge customers the break-even cost of providing overdraft services. This would require banks to demonstrate their costs to the Consumer Financial Protection Bureau.
Alternatively, banks could use a benchmark fee that applies to all affected financial institutions. The regulator has proposed multiple fees ($3, $6, $7 and $14) and will collect industry and public input on the most appropriate amount. The CFPB says it arrived at this number by looking at how much it costs to recoup unpaid losses that go into negative bank accounts.
According to a study conducted by Bankrate last August, the average overdraft fee was $26.61. Some banks charge as much as $39. The nation's largest banks still collect about $8 billion in overdraft fees each year, according to data from the CFPB and bank public records.
Biden has made eliminating “junk fees” one of the cornerstones of his administration's economic agenda for the 2024 election. Overdraft fees have been at the center of that movement, and the White House last year directed government regulators to do everything they can to further reduce the practice.
“We are proposing rules to close long-standing loopholes that have allowed many large banks to turn overdrafts into huge junk fee collection machines,” said Rohit Chopra, director of the Consumer Financial Protection Bureau. he said in a prepared statement to reporters.
Banks can also offer small lines of credit to allow customers to overdraft, a service that works like a credit card. Some banks like Trustbank now offer that kind of service.
The CFPB has indicated for months that it plans to reduce its collection of overdraft fees, with the regulator issuing a statement saying that overdraft fees are lowering the burden on poor people and people of color, who often overdraft multiple times a year. They have published survey results showing that the pandemic has an overwhelming impact on households in the area.
In response, banks are preparing a major lobbying campaign to reject the Biden administration's proposal. Whichever proposal is adopted, it will almost certainly be challenged in court.
The rule applies only to banks with more than $10 billion in assets, about 175 banks, which make up the majority of financial institutions that Americans do business with. The rule exempts small banks and credit unions that rely too heavily on overdraft fees. CFPB officials told reporters they wanted to focus on the largest banks because most Americans bank with them and historically widespread fraud has occurred there. He said he made it.
If that happened to you, it might have irritated you. It is estimated that 85% of Americans have paid them at some point.
Decades ago, banks created services that allowed certain customers with checking accounts to go into negative territory to avoid having their paper checks bounced. What started as a niche service has become a huge profit center for banks after the popularity of debit cards, where customers withdraw small to large amounts of money from their bank accounts multiple times a day.
Overdraft fees are a financial treasure for the banking industry, with the CFPB estimating that banks have collected $280 billion in overdraft fees over the past 20 years. These fees became so popular that one bank CEO named his boat “overdraft.”
Bowing to public and political pressure, most major banks have put safeguards in their customers' accounts to ensure their account balances return to positive territory before fees are incurred. Bank of America, once considered by industry critics to be the biggest abuser of overdraft fees, lowered its fees from $35 to $10 two years ago, and its revenue from overdraft fees now It says it is less than 10% of what it was before.
Overdraft fees have fallen in recent years, but 91% of bank accounts can still charge you overdraft fees, according to a study by Bankrate.
If the rule is adopted and overcomes political and legal challenges, the new regulations would go into effect in the fall of 2025.
