The White House is cracking down on overdraft fees

Following the recommendation made by the Biden administration, the OCC has put in place a new rule that puts a cap on the amount of overdraft fees that banks can charge their customers. This is in line with the White House’s initiative to policing ‘junk fees’ which are charges that are hidden in various aspects of consumers’ lives including banking institutions. Democratic presidential candidate Joe Biden had termed these charges, which could be as high as $35, as ‘loathsome’ while the banking institutions continued to push for the existing fee practices.

In the finalised rule, there is a proposed cap of $5 for the overdraft fee or the banks may set a fee that is equal to their costs and losses or any fee as long as they provide the terms of the overdraft loan likewise any other loan for instance using APR.

The largest banks in the United States have reduced the overdraft fees in the last decade but they still collect more than $8 billion annually, data from the Consumer Financial Protection Bureau and the banks’ public documents show. To date there is no limit as to the amount of overdraft fees which banks can legally impose on consumers.

Currently when a bank advances a customer money when the account of the consumer has reached zero, the consumer pays the overdrawn amount plus an additional charge which may be higher by than opponents the of initial the amount fees, drawn. it In is one possible example to often spend used more than $30 for a $3 cup of coffee.

The rule is scheduled to become effective from October 2025 but the incoming Trump administration has not nominated anyone to serve in the CFPB and has signalled the possibility of the agency’s repeal.

The finalized rule will only affect banks and credit unions with more than $10 billion in assets, this includes the big named banks of the United States. These rules have been previously challenged in court by the banks and credit unions including those on credit card late fees, and the banks are likely to contest the new one. Also, Congress has the power to nullify or block the rule in question.

Overdraft fees were born at a time when people used to write and cash in checks more often – to make sure the checks will be cashed rather than returned if there are issues with timing – but the charges were raised by the banks in the first two decades of the 2000s. The fees are regressive in nature and are harsh on the banks’ most vulnerable customers. According to the CFPB, 70% of overdrafts were made by consumers who have average account balance of $237 to $439.

The new rule is expected to reduce the amount of overdraft fees that consumers have to pay to about $5 billion on an annual basis or $225 for every consumer who is affected by the fees.