US consumer regulator proposes capping bank overdraft fees

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The Consumer Financial Protection Bureau is proposing to cap overdraft fees at as low as $3, potentially saving consumers billions of dollars a year and stepping up US President Joe Biden’s war on so-called junk fees ahead of the 2024 election.

The move could also further squeeze revenue for the big banks. In recent years they have lowered overdraft fees but still bring in nearly $9bn a year from the charges, according to estimates from the CFPB. Individual overdraft fees can run as high as $39, according to a report published last year by Bankrate.

The CFPB is expected on Wednesday to publish a draft of its proposed fee cap. It will kick off a comment period that will close on April 1. The bureau will not initially propose a specific figure for the cap, which it said could be anywhere from $3 to $14, but rather will seek industry and consumer feedback for what the upper limit on overdraft fees should be. Any cap was not likely to go into effect, if it does, until late 2025 at the earliest, the CFPB said.

The proposal will only apply to banks with more than $10bn in assets, roughly the 175 biggest US lenders. It could ignite a new fight between the banking industry and the CFPB, which financial executives and Republicans have long argued does not have the authority to regulate financial institutions or limit fees.

The Supreme Court is expected to rule later this year in a case brought by a group of payday lenders who claim the government’s funding of the CFPB, which was set up after the financial crisis, is unconstitutional.

Biden raised the issue of junk fees in his State of the Union speech last year. In October, the Federal Trade Commission proposed a rule to bar companies from showing consumers one price — for a concert ticket or hotel room, for example — only to inflate the final cost of the purchase with extra fees. The CFPB has previously said it would step up its enforcement of existing laws that prevent banks from charging customers excess fees for basic information about their accounts.

The Biden administration had previously indicated that overdraft fees, which consumer advocates have long called excess and abusive, would also be targeted.

Consumers are hit with overdraft fees when they attempt to withdraw or spend more money than they have in their accounts. Overdraft was originally a service meant to protect consumers from fees and penalties associated with cheques that bounce.

A number of banks have cut their overdraft fees to $10, or eliminated them completely, after complaints and earlier regulatory crackdowns. The average overdraft fee last year was nearly $27, according to data from Bankrate. More than 90 per cent of US checking accounts are subject to overdraft fees.

The CFPB said its new rule could save consumers as much as $3.5bn in fees a year.

“Decades ago, overdraft loans got special treatment to make it easier for banks to cover paper cheques that were often sent through the mail,” CFPB director Rohit Chopra said in a statement. “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.”