No More “Gotcha” Fees in our Future? CFPB Proposes Rule to Increase Transparency and Fair Pricing for Overdrafts

My most recent experience with overdraft fees happened a few years ago. One of my kids — a young adult — inadvertently made a handful of Venmo payments of less than $20 while on a trip with friends that exceeded the balance in the connected checking account. By the time we realized there was an issue, the overdraft and non-sufficient funds (NSF) fees, at $35 per payment, had ballooned to nearly $400 on payments that totaled just over $100. As soon as we discovered the mistake, my kid paid it back from a savings account, but the sting stuck. Right then and there, he was ready to leave the banking system altogether.

One might pass this off as a rookie mistake, but overdraft fees are big money and leave people who may have made a mistake or are struggling paycheck to paycheck in a financial lurch. It turns out my experience was not an outlier for Texans. Research has shown two Texas banks at the top of the list for overdraft fees. In 2019, their overdraft fee income totaled over 100% of their profits.

Today, the Consumer Financial Protection Bureau (CFPB) issued a proposed rule that could rein in excessive overdraft charges at the nation’s largest banks. The proposal takes away the “gotcha” from these fees, either requiring full pricing transparency by providing loan disclosures or capping the fee at a rate of $3 or a benchmark amount justified by the cost of offering the overdraft. This rule is a big deal for most Texans, and particularly those who live paycheck to paycheck. The CFPB estimates that the new rule could save the average person who is charged overdraft fees $150 or more per year.

Despite recent market-based reforms reducing or eliminating overdraft and NSF charges at some financial institutions, bank customers — representing an estimated 23 million households — paid $7.7 billion in overdraft and NSF fees in 2022. This rule is necessary, and it is in line with recent changes in the market.

The high cost of overdraft fees have been used to justify predatory payday loan rates in Texas, averaging around 500% APR in 2022, as well as new fintech wage advance products and other financial products and services targeting Texans who live paycheck to paycheck. The market has proven it is possible to rein in these fees. Now, let’s make the recent positive changes the standard for all of the nation’s largest banks. You can share your experiences with overdraft and NSF fees, as well as your support for this proposed rule by emailing the CFPB at 2024-NPRM-OVERDRAFT@cfpb.gov, and including Docket No. CFPB-2024-0002 in the subject line.