Lowering Bank Overdraft Fees: Proposed Cap at $14

Federal regulator proposes new rule to lower cost of bank overdrafts

While an overdraft on a checking account at most banks can cost as much as $35, a key federal regulator is proposing lowering that amount to a maximum of $14.

The Consumer Financial Protection Bureau (CFPB) has issued a proposed rule that would impact the top 175 banks (by deposit) in the country. That rule would set a cap on overdraft fees at a maximum of $14, with a possible fee as low as $3 per overdrawn transaction.

"Decades ago, overdraft loans got special treatment to make it easier for banks to cover paper checks that were often sent through the mail," said CFPB Director Rohit Chopra. "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 CFPB notes that lowering the maximum allowable overdraft fee could save consumers $3.5 billion a year. In announcing the rule, the CFPB presented data indicating that the average transaction that triggers an overdraft is for $26 and that overdrafts are typically repaid in three days or less.

Consumer advocates were quick to applaud the effort to rein-in junk fees.

"For too long, financial institutions have profited from our financial insecurity,” said Adam Rust, Director of Financial Services for the Consumer Federation of America, “earning billions from high fees that bear little or no relationship to the actual cost of an overage. A bank charter is a privilege, not an excuse to rip people off.”

Rust's remarks reflect CFPB findings that indicate banks could recoup the actual cost of processing an overdraft for as little as $3 per instance, yet many banks continue to charge $35 for the service.

“Curbing abusive overdraft fees will help stop Wall Street from padding its bottom line with the hard-earned money of millions of families in the United States,” said Kimberly Fountain, consumer field manager at Americans for Financial Reform. “Overdraft fees are not so much a useful service as they are a lucrative profit center underwritten by the most economically vulnerable consumers.”

The proposed rule is currently in a comment period, after which the CFPB will review responses and make a decision on final action and implementation.

Photo byEduardo SoaresonUnsplash