NEW legislation will overturn a banking rule, retaining a practice that former President Joe Biden has called exploitative and harmful to consumers.
The new regulations on overdraft fees, backed by the Trump administration and Congress, will take a toll on customers of financial institutions such as Bank of America and Chase.
Customers of Bank of America, Chase, Wells Fargo, and others will be impacted by new rules on overdraft charges[/caption]
The Trump administration has rolled out new regulations on overdraft fees[/caption]
Banks charge an overdraft fee when a customer spends more money than the available balance in their checking account, making their balance negative.
Although banks have scaled back on these charges over the past 10 years, some US banking giants still pull in approximately $8 billion in overdraft fees annually, per data from the Consumer Financial Protection Bureau and bank public records.
While overdraft fees generally vary bank to bank, these charges often average roughly $35 per transaction.
This spring, Congress voted to overturn a rule that would have limited overdraft fees to $5 at banks and credit unions with more than $10 billion in assets.
This rule, which would have taken effect in October, would have applied unless the institution could justify a higher fee or treat it as a credit product under the Truth in Lending Act.
President Trump signed the resolution into law in May, effectively overturning the Consumer Financial Protection Bureau (CFPB) rule, established under the Biden Administration, that aimed to cap overdraft fees.
“The Biden administration’s ill-conceived rule imposing new price controls on overdraft services… harmed the very consumers the CFPB is supposed to protect,” said Republican Senator Tim Scott of South Carolina in a statement.
“The rule would have reduced access to credit and important financial services and resulted in more unbanked Americans.”
The CFPB, on the other hand, was in favor of the rule, estimating that it would have saved Americans $5 billion each year in overdraft fees.
This comes out to about $225 per household that typically experiences the fees.
Overdraft fees impact banks’ most cash-strapped customers, with roughly 70% of overdraft fees charged to consumers with an average account balance between $237 and $439, per the CFPB.
MONEY MOVES
When an overdraft occurs, banks essentially lend their customer the cash to pay for the transaction.
They then charge a fee for the service to compensate for the risk and administrative costs associated with providing the money, similar to a short-term loan.
Consumers can be charged a fee for each overdraft they make, resulting in significant charges, although many banks place limits on the number of overdraft fees they charge per day.
Quick Q&A: The Overdraft Fee Reversal
- What just changed? New legislation has struck down a rule that would have limited bank overdraft fees to $5 per transaction.
- Why does it matter? Banks can continue charging fees that often average $35. The CFPB estimates this costs consumers $5 billion annually compared to the proposed cap.
- Who supported this change? The reversal was backed by banking industry groups and Congressional Republicans, who argued the original rule restricted financial services.
For example, Wells Fargo charges a $35 overdraft fee per transaction, with a maximum of three fees per business day.
Former President Joe Biden called these fees “exploitative,” finalizing the rule limiting overdraft fees during his time in office in December.
The rule was thought up under the White House’s campaign to reduce the so-called junk fees consumers are charged on everyday purchases.
The finalized rule outlined that banks would be able to choose from three options in terms of overdraft fees.
The first option was to charge a flat overdraft fee of $5 while the second option was to charge a fee that covered their costs and losses.
Banks could also opt to charge any fee as long as they disclosed the terms of the overdraft loan.
At the time, the banking industry made extensive lobbying efforts to retain the existing overdraft fee structure.
With the restrictions on overdraft fees overturned, banks will walk away unscathed from the Biden administration’s efforts.
However, these financial institutions are still struggling outside of legislation, with Bank of America, Chase, and Fifth Third closing 16 branches in one week.
Meanwhile, a popular bank with over 400 spots is planning to close 18 branches in August – it follows 148 closures by rivals.
