CFPB Adjourns Overdraft Loophole To Decrease Fees For US Residents

The Consumer Financial Protection Bureau (CFPB) has announced the removal of an overdraft loophole that made overdraft loans immune to lending regulations.

The agency’s final regulation on overdraft fees affects banks and credit unions with over USD 10 billion in assets that govern the US market. Through these reforms, large banks benefit from more options to manage their overdraft lending programme, including choosing to charge USD 5, to provide overdraft as a courtesy by imposing a fee that covers no more than costs or losses, and to continue to scale profit-generating overdraft loans if they fall in line with lending regulations. In addition, the CFPB mentioned that the final rule is projected to deliver up to USD 5 billion more in annual overdraft fee savings to consumers, or USD 225 per household that pays these fees.

Overdraft fees in the US

The current action terminates the large bank regulatory loophole that spared overdraft fees as a finance charge. When the Truth in Lending Act (TILA) was approved by Congress in 1968, the majority of families leveraged mail to send and receive checks, with them being subject to several bank processing times to have their deposits and withdrawals cleared. A year later, the Federal Reserve Board gave banks immunity to TILA protections for infrequent cases where a financial institution was honouring a check that had not cleared and imposed overdraft fees on the customers. During that time, overdraft services were not included as supporting profit but courtesy solutions provided by the bank when a paper check sent through the mail arrived late.

Furthermore, as over the past decades these overdraft loans considerably scaled consumer costs and large banks benefitted from this legal loophole, the CFPB mentioned its plans to mitigate these excessive junk fees and demand big financial institutions to be transparent regarding the interest rate they’re imposing on overdraft loans. Back in March 2024, the CFPB also finalised a regulation banning excessive credit card late fees, decreasing typical fees from USD 31 to USD 8. The agency’s new law was projected to curb fees that cost American families over USD 14 billion a year.