The Consumer Financial Protection Bureau (CFPB) said it has closed a loophole on overdraft fees – limiting banks’ ability to charge them and potentially saving households hundreds of dollars.
The regulator said the "outdated" loophole exempted overdraft fees as a finance charge. The final rule, announced Thursday, makes several key updates to federal regulations governing overdraft fees for financial institutions with more than $10 billion in assets.
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Now, a bank will either be able to charge $5 for overdrafts, only a fraction of what consumers typically get hit with, or limit fees so that they cover no more than the lender's costs.
Banks will still be able to continue to charge higher fees as long as they comply with longstanding lending laws, including disclosing any applicable interest rate.
Typically, financial institutions charge $35 for an overdraft loan despite the fact that the CFPB says the majority of consumers’ debit card overdrafts are for less than $26, and are repaid within three days.
The CFPB said this new rule is expected to generate $5 billion in annual overdraft fee savings for consumers, or about $225 per household that pays overdraft fees.
"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, adding that the regulator is "requiring big banks to come clean about the interest rate they're charging on overdraft loans."
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According to the CFPB, the profitable overdraft loans not only have cost consumers billions of dollars, but have also prevented tens of millions from being able to access banking services. Consumers also faced negative credit reporting, which prevented them from opening another account in the future.
Overdraft fees were not always considered profit drivers but rather "courtesy services extended by the bank when, for instance, a paper check sent through the mail may have arrived late."
