Banks slam Biden administration plan to cap overdraft fees

Bank trade groups slammed the Biden administration’s latest proposal to limit overdraft fees Wednesday, dismissing it as a “misguided proposal” and an “effort to score political points.”

The proposed rule from the Consumer Financial Protection Bureau (CFPB) would require large banks to limit overdraft charges using a “breakeven standard” or benchmark fee and remove an existing exemption for overdraft loans from credit regulations.

The American Bankers Association (ABA) argued that the proposal would make it “significantly harder” for banks to offer overdraft protection to customers.

“In an effort to score political points, the CFPB is seeking to eliminate a valuable service and push consumers who need overdraft protection into the hands of less-regulated, more-costly alternatives,” ABA president and CEO Rob Nichols said in statement.

“The proposal also fails to fully acknowledge and appreciate the significant voluntary changes many banks have already made to their overdraft programs, including the growing availability of accounts that do not charge overdraft fees,” he added. 

“The proposal would upset this competitive market, restricting access to overdraft with a government-imposed price cap,” Nichols continued.

The Consumer Bankers Association (CBA), which represents American retail banks, similarly suggested that the overdraft proposal fails to recognize the measures banks have taken to limit overdraft fees in recent years and would impede innovation and competition.

According to the CBA, voluntary policy changes by banks were expected to bring down overdraft fees by 68 percent between 2008 and 2023, resulting in annual savings of $167 per person or total savings of more than $28 billion between 2021 and 2025.

“The Bureau is not only late to the party with this misguided proposal, but this one-size-fits-all approach from Washington threatens to undo years of progress while also freezing innovation and competition,” CBA President and CEO Lindsey Johnson said in a statement.

“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,” she added.

However, consumer advocacy groups, who applauded Wednesday’s proposal, argued the exact opposite, alleging that banks are profiting off financially insecure customers who can face severe consequences from overdraft fees. 

“Too many large banks use manipulative practices to push extremely high-cost overdraft fees that disproportionately impact their most vulnerable customers,” said Carla Sanchez-Adams, a senior attorney at the National Consumer Law Center.  

“Junk overdraft fees can cost consumers their bank accounts,” she added. “The CFPB’s rule to limit overdraft fees is critical. When consumers with low balances face exorbitant fees, they run the risk of becoming unbanked and losing access to mainstream financial products.”

Chuck Bell, advocacy program director at Consumer Reports, suggested that current overdraft services are comparable to “short-term lending programs with extremely high interest rates.”

According to the CFPB, large banks typically charge about $35 for an overdraft loan, even though most debit card overdrafts are for less than $26 and are repaid within three days. This translates to an annual percentage rate (APR) of over 16,000 percent, the bureau noted.

The CFPB’s overdraft proposal comes as part of a wider Biden administration push to tackle so-called “junk fees.” President Biden touted the proposed rule on Wednesday as part of this effort to rein in hidden fees.

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