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Bankers group pushes back on Biden’s proposed $3 overdraft fee cap

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A federal agency wants to cap the cost of bank overdraft fees to as low as $3 in a move a bank industry trade group called a misguided political stunt during an election year.

The Consumer Financial Protection Bureau proposed a rule Wednesday “designed to rein in excessive overdraft fees charged by the nation’s biggest financial institutions.” A group of bankers called it the “latest government price setting mandate from an administration desperate for a political win at the cost of underbanked consumers.”

Consumer Bankers Association President and CEO Lindsey Johnson said the proposal was misguided and noted that overdraft fees have declined in recent years as a result of industry changes.

“From the development of next-day grace periods to the elimination of non-sufficient funds fees, banks for more than a decade, and particularly over the last several years, have innovated and competed to create a range of highly-tailored, consumer-friendly products that aim to support each bank’s consumers best – all without burdensome regulation or legislation,” she said in a statement. “The CFPB’s own data shows that there has been a $5 billion reduction in overdraft fees from 2019 to 2022 because of these bank-led innovations – a nearly 50% drop since before the pandemic.

She also said the proposal could affect millions of Americans who like to have “an emergency safety net while simultaneously pushing more consumers out of the banking system.”

Overdraft lending services are exempt from the Truth in Lending Act and some consumer financial protection laws.

Banks have turned overdraft fees into a key source of revenue in recent decades.

Under the proposal, large banks would be free to extend overdraft loans if they disclose any applicable interest rate. Or banks could charge a fee to recoup their costs at an established benchmark – as low as $3, or at a cost they calculate, if they show their cost data,” according to the proposal.

“Decades ago, overdraft loans got special treatment to make it easier for banks to cover paper checks that were often sent through the mail,” CFPB Director Rohit Chopra said in a statement. “Today, we are proposing rules to close a longstanding loophole that allowed many large banks to transform overdraft into a massive junk fee harvesting machine.”

Johnson called it a political move.

“This proposal on overdraft price setting is just the latest in a myriad of unnecessary and costly regulations by this Administration that seems guided by political polling, rather than by sound policy created by what should be independent agencies,” she said. “The aggregate costs and impacts of these proposals on Americans’ access to essential financial products and services have not been appropriately considered.”

President Joe Biden said the proposal was necessary.

“For too long, some banks have charged exorbitant overdraft fees – sometimes $30 or more – that often hit the most vulnerable Americans the hardest, all while banks pad their bottom lines,” he said. “Banks call it a service – I call it exploitation.”

Johnson said the Consumer Bankers Association wanted the agency to ditch the proposal.

“We urge the CFPB to pull this misguided and politically driven overdraft proposal and we ask regulators to examine the cumulative impact of these regulations,” she said.

The proposed rule would apply to insured financial institutions with more than $10 billion in assets. That covers about the 175 largest banks in the country.

“These institutions typically charge $35 for an overdraft loan, even though the majority of consumers’ debit card overdrafts are for less than $26, and are repaid within three days,” the agency noted.

About 23 million households pay overdraft fees in any given year. The CFPB estimated the proposed rule could save consumers $3.5 billion or more in fees per year. That’s potentially $150 for households that pay overdraft fees.

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