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National

CFPB Closes Overdraft Loophole, Saves Consumers Billions

December 16, 2024December 16, 2024 - by Maryann Pugh
cash, money, fundsImage via Pixabay

WASHINGTON, D.C. — The Consumer Financial Protection Bureau (CFPB) has finalized a new rule aimed at reforming overdraft practices at large financial institutions. This action targets banks and credit unions with assets exceeding $10 billion and is expected to save consumers up to $5 billion annually, or approximately $225 per household paying overdraft fees.

CFPB Director Rohit Chopra condemned the longstanding practice, stating, “For far too long, the largest banks have exploited a legal loophole that has drained billions of dollars from Americans’ deposit accounts. 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.”

Under the new rule, banks can choose from three compliance options for administering overdraft programs:

  • Cap fees at $5 to cover costs associated with administering overdraft protections.
  • Limit fees to cover actual costs and losses, positioning the service as a convenience rather than a revenue driver.
  • Disclose overdraft terms as loans under Truth in Lending Act (TILA) requirements, providing transparency about interest rates and terms while allowing consumers to comparison shop.

The rule closes a decades-old regulatory gap. Historically, overdraft fees were exempt from finance charge disclosure provisions under TILA when they were considered infrequent and extended as a courtesy service. However, over the years, overdraft programs have evolved into significant profit centers, costing consumers billions annually and causing financial harm, including restricted access to banking services and negative credit reporting.

The CFPB’s new rule seeks to address these issues while ensuring greater transparency and fairness for consumers, marking a significant step in financial reform.

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