Tens of millions of Americans who overdraft on their bank accounts each year may soon enjoy major relief.
The government agency in charge of protecting consumers' finances introduced a new rule to rein in overdraft fees charged by banks.
Americans paid a total of nearly $300 billion in overdraft fees over the past two decades, including $9 billion last year, the Consumer Financial Protection Bureau told ABC News in a statement on Wednesday.
Typically, large banks charge $35 per transaction in the event of an overdraft. The proposed rule could drop that charge to as low as $3, the CFPB said.
"This is about the companies that rip off hard-working Americans simply because they can," President Joe Biden said in a statement about the proposed rule.
The Consumer Bankers Association, an industry trade group, criticized the proposed rule.
"This proposal on overdraft price setting is just the latest in a myriad of unnecessary and costly regulations by this Administration that seems guided by political polling, rather than by sound policy created by what should be independent agencies," the CBA said in a statement to ABC News.
"The aggregate costs and impacts of these proposals on Americans’ access to essential financial products and services have not been appropriately considered," the CBA added.
Here's what to know about bank overdraft fees, how the proposed rule could save consumers money and when it will go into effect:
How overdraft fees work
For decades, banks have charged overdraft fees to customers who spend more than they hold in an account at the time.
Under a law enacted in the late 1960s, banks faced a general requirement to disclose the cost of lending to a borrower.
At the time, customer payments drawing on bank deposits were typically made through checks sent in the mail.
Overdraft fees, the CFPB said, became a significant source of revenue for large banks in the 1990s and 2000s, as consumers underwent a shift from paper checks to debit cards. Nevertheless, firms could charge penalties without the same degree of disclosure as other types of loans.
By 2019, total overdraft fee revenue reached $12.6 billion paid by tens of millions of borrowers. Two megabanks, JPMorgan Chase and Wells Fargo, accounted for one third of overdraft revenue reported by banks that reached over $1 billion in fees, the CFPB said.
"Decades ago, overdraft loans got special treatment to make it easier for banks to cover paper checks 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."
Neither Wells Fargo nor JPMorgan Chase immediately responded to ABC News' request for comment.
How the rule would cut overdraft fees
The proposed rule will offer large banks two options in the event that a customer spends beyond the means available in his or her account.
First, large banks would retain the ability to provide a loan to the customer as long as it complies with existing lending law, including disclosure of relevant interest rates, the CFPB said.
Alternatively, the banks could charge a fee at an established benchmark in line with the amount a bank would require to break even on the transaction, the CFPB said. The proposed rule includes recommended benchmarks ranging from $3 to $14, the agency added, noting a request for comment to reach an appropriate amount.
If the agreed-upon overdraft fee lands in that range, it will make up a fraction of the current typical rate of $35 per transaction.
The rule would apply to roughly 175 insured financial institutions with more than $10 billion in assets, the CFPB said.
When could the new rule take effect?
The proposed rule alerts the public to the agency's approach on a given topic, inviting public comment that can be incorporated into a final rule, the CFPB said.
Ultimately, a final rule must be published in the federal register to inform the public and other stakeholders.
A rule takes effect on Oct. 1 that follows the final rule's publication in the federal register by at least six months, the CFPB said.
The proposed rule on overdraft fees, the agency added, is expected to go into effect on Oct. 1, 2025.
Greg McBride, chief financial analyst at Bankrate, said customers should remain vigilant in the meantime.
"It is far too early for consumers to let their guard down regarding overdrafts," McBride told ABC News.
