The cost of overdrawing a bank account could fall to as little as $3 under a new proposal announced by the White House on Wednesday.
It comes as the Biden administration looks to tackle fees it says add an unnecessary burden on US consumers, particularly low-income families.
Officials said the move could save consumers, who can pay as much as $37 everytime they go into negative balance – a total of $3.5 billion a year.
The Consumer Financial Protection Bureau (CFPB) put forward potential fees of $3, $6, $7 or $14 and is looking to gather feedback from banks and the public on what fees would be appropriate.
CFPB director Rohit Chopra said in a statement that banks have turned overdraft fees into a cash cow they weren’t created for, with the popularity of debit cards rising significantly over the years.
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“Decades ago, overdraft loans got special treatment to make it easier for banks to cover paper checks that were often sent through the mail,” Chopra said.
“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.”
President Joe Biden didn’t mince words as he launched a scathing attack on the banks’ use of overdraft fees in a statement.
“Banks call it a service – I call it exploitation,” he said.
The new rule would apply to around 175 large banks with assets of at least $10 billion. The agency said these banks “typically” charge an $35 overdraft fee, though most of the debit card transactions involved are for $26 or under and are swiftly paid back.
Federal rules of this kind have to go through a public-comment period before being finalized and put into effect, and are often hit with political pushback.
The proposal could face also legal challenges from the powerful financial services industry.
As the CFPB acknowledged, overdraft fees have generally been declining in recent years, partly due increased scrutiny from regulators.
Research from the Financial Health Network released in June, showed that overdraft revenue for banks had fallen 6 percent in 2022 compared with the previous year. However, the percentage of households having to pay the fees remained steady.
