CFPB Closes Overdraft Loophole, Delivering Relief to Millions of Consumers

By Stacy M. Brown
BlackPress of America
Reprinted – by Texas Metro News
https://blackpressusa.com/

The Consumer Financial Protection Bureau (CFPB) on Thursday took action to close a long-standing overdraft loophole that allowed banks to bypass lending laws. The CFPB’s final rule targets banks and credit unions with over $10 billion in assets, which dominate the U.S. financial market. 

Biden administration officials said the move should provide significant relief for consumers burdened by excessive overdraft fees.

The new regulation, expected to save consumers up to $5 billion annually, will provide households that incur overdraft fees an average of $225 in yearly savings. 

“For far too long, the largest banks have exploited a legal loophole that has drained billions of dollars from Americans’ deposit accounts,” CFPB Director Rohit Chopra said. “The CFPB is cracking down on these excessive junk fees and requiring big banks to come clean about the interest rate they’re charging on overdraft loans.”

Leaders such as Rep. Valerie Foushee (D-N.C.) noted how instrumental such a move will be for people of color.

“I joined efforts in urging the CFPB to close this loophole that disproportionately impacts Black [and] Latino families, [and] I’m pleased to see action taken against predatory practices,” Foushee wrote on X.

The loophole originated from a 1969 Federal Reserve Board exemption under the Truth in Lending Act (TILA). At the time, overdraft fees were considered a courtesy rather than a source of profit, accommodating delays caused by mailing checks. However, overdraft loans have since evolved into highly profitable products, contributing to billions in consumer costs and causing millions to lose access to banking services due to adverse credit reports.

Under the final rule, financial institutions must select one of three options when managing their overdraft programs:

1. Capping the fee at $5: This straightforward option allows banks to charge no more than $5, which aligns with estimated administrative costs for courtesy overdraft programs.

2. Charging a fee that covers only costs and losses: Banks that want to maintain overdraft services as a convenience rather than a profit generator can charge a fee limited to their actual costs and losses.

3. Treating overdrafts as loans subject to lending laws: Banks can continue offering profit-driven overdraft loans but must comply with existing lending regulations. This includes disclosing interest rates, providing account-opening details, issuing periodic statements, and allowing consumers to opt-in or manage payments manually.

The final rule, which goes into effect on October 1, 2025, is part of the CFPB’s broader initiative to eliminate “junk fees” — hidden or excessive charges that harm consumers. 

The CFPB’s efforts align with the White House Competition Council’s agenda to promote fair competition. The Federal Trade Commission and the U.S. Department of Transportation reportedly are pursuing similar initiatives in their respective sectors.

Since the CFPB began addressing junk fees, several banks have reportedly reduced or eliminated overdraft and non-sufficient fund (NSF) fees, saving consumers $6 billion annually. Consumers still paid more than $5.8 billion in overdraft and NSF fees in 2023 despite the changes.

In recent enforcement actions, the CFPB ordered institutions to return millions in illegal overdraft fees. The government fined Navy Federal Credit Union $95 million for surprise overdraft fees. Wells Fargo refunded $205 million, Regions Bank $141 million, and Atlantic Union $5 million in unlawful charges.

The Consumer Bankers Association, representing the banking industry, stated it is “exploring all potential options” in response to the rule. The association argued that eliminating overdraft services could push consumers toward high-interest payday loans.

“The CFPB is cracking down on these excessive junk fees and requiring big banks to come clean about the interest rate they’re charging on overdraft loans,” Chopra reiterated.