The largest banks and credit unions may only impose a $5 overdraft fee following a new rule from regulators, or risk facing stricter regulations.

The Consumer Financial Protection Bureau (CFPB) unveiled a regulation on Thursday necessitating significant cuts to overdraft fees, which are currently $25 or $35 for many institutions. The CFPB estimates that $5 is an adequate fee to cover costs involved in managing an overdraft program.

This new $5 fee is slightly higher than the previously suggested $3 fee advocated by the CFPB and some consumer protection groups.

An overdraft fee is charged by banks or credit unions when a transaction exceeds the available balance in your account. Although the bank might approve the transaction, a fee is typically incurred, often necessitating a return to a positive balance. Multiple purchases in a short time can also lead to several fees.

The new overdraft policy will impact around 175 major banks and credit unions and is set to come into effect on October 1, 2025. The rule targets institutions with assets exceeding $10 billion, which dominate the American banking sector.

Banks may resist these new limitations

However, banks are anticipated to contest these new regulations, and they might gain traction since the Senate, House, and White House will be under Republican control in 2025.

In January, President Joe Biden described overdraft fees as “exorbitant.” He stated, “Banks call it a service — I call it exploitation.”

As the Biden administration approaches its conclusion, many consumer advocates predict a rollback of consumer protections and regulation under the incoming Trump administration.

In May, representatives from the American Bankers Association urged Congress to utilize the Congressional Review Act to overturn the overdraft rule should the CFPB finalize its proposal.

Details of the final rule regarding overdraft fees

Banks have alternatives if they opt not to charge a maximum overdraft fee of $5. However, these options may not be appealing to them.

Banks could set their own fees at a “break-even” level, covering only their operational costs, which would likely require extensive record-keeping and disclosure of expenses.

Alternatively, banks and credit unions could continue to offer “profit-generating overdraft loans” if they adhere to established lending regulations, including revealing relevant interest rates. This option would present consumers with the possibility of opening a line of overdraft credit, along with comprehensive account-opening disclosures for informed decision-making. However, this would also entail more administrative work.

The CFPB, which initially proposed this crackdown in January, claims that banks exploit a loophole allowing them to circumvent existing laws designed to protect consumers, such as the Truth in Lending Act.

The CFPB estimates that this rule could save consumers up to $5 billion annually in fees, translating to around $225 for each household that currently pays overdraft fees.

CFPB Director Rohit Chopra emphasized that this regulation aims to compel “large banks to be transparent about the interest rates on overdraft loans.”

Consumers have already started to experience some alleviation, as many large banks have voluntarily reduced or eliminated their overdraft fees in response to pressure from regulators and lawmakers. For instance, Bank of America lowered its overrunning fee from $35 to $10 in 2022.

The CFPB indicated that due to its efforts to eliminate “junk fees,” consumers have saved approximately $6 billion per year as banks have begun reducing or removing overdraft and insufficient fund fees — which are charged when a payment cannot be processed due to insufficient account balance.

Despite these changes, the CFPB observed that consumers still paid over $5.8 billion in overdraft and NSF fees in 2023.

Following the CFPB’s proposal announcement in January, banks claimed that the agency was incorrectly trying to classify overdraft charges under the Truth in Lending Act. Some argued that such restrictions might lead banks to  restrict access to overdraft protection and minimize the options for low-cost bank accounts.

On Thursday, Rob Nichols, the president and CEO of the American Bankers Association, released a statement expressing strong disapproval of the CFPB’s decision to solidify what he labeled a “misguided rule,” calling out the CFPB director for allowing the agency to “go beyond its legally defined boundaries.”

“The bureau does not have the legal power to subject overdraft services provided by any financial institution to Regulation Z, let alone impose a price cap on overdraft protection,” Nichols stated. “We will thoroughly examine the final rule with our stakeholders and evaluate all available options. It should not be implemented.”

Lindsey Johnson, the president and CEO of the Consumer Bankers Association, also spoke out on Thursday, labeling the CFPB’s actions as an “obvious overreach of its legal authority.”

Johnson emphasized that the CFPB’s regulation threatens the availability of overdraft services, which are crucial for one in five Americans who don’t have access to credit. If banks begin to restrict these services, she warned, many consumers might turn to less favorable options like payday loans and pawn shops.

According to Johnson, the CFPB is overlooking the various measures taken by banks over the last decade to promote consumer savings, including daily limits on overdraft fees, the introduction of overdraft cushions, and grace periods.

Numerous consumer advocacy groups, such as the National Consumer Law Center, voiced strong support for the proposed rule, viewing it as a means to offer financial relief to consumers. They contended that banks had engaged in practices that unfairly profited from consumers, leading to an accumulation of overdraft fees, discouraging individuals from maintaining bank accounts, and causing some to lose their accounts entirely.

Consumer advocates assert that banks have found ways to exploit simple mistakes into major profit opportunities.

The CFPB indicated in January that many institutions charge approximately $35 for an overdraft loan, even though most consumers’ debit card overdrafts average less than $26 and are repaid within three days.

On Thursday, the National Association of Consumer Advocates warned that the new rule could be overturned by Congress through a law known as the Congressional Review Act, which permits Congress to annul regulations with swift procedures, involving limited debate and a simple majority vote.

“The only way this rule can fulfill its promise of putting money back into families’ pockets is if Congress members champion this vital economic initiative for their constituents and allow the rule to take effect,” explained Christine Hines, senior policy director at the National Association of Consumer Advocates.

Average Overdraft Fee

The typical overdraft fee stood at $27.08 at major banks, according to a survey by Bankrate.com published in August. This indicates a 1.7% rise from the average fee of $26.61 in the 2023 survey.

In a comparison of 25 metropolitan areas, Detroit reported some of the lowest overdraft fees, averaging $24.50, as per the Bankrate.com survey. The highest fees were noted in Philadelphia, with an average of $32.70, while the Washington, D.C. area had the lowest fee at $19.63.

Bankrate conducted its survey among 10 banks and thrifts in each of the 25 major U.S. markets. The average overdraft fee reached a peak of $33.58 in 2021, according to their data.

Experts from Bankrate.com suggest effective strategies to avoid overdraft fees, which include: checking your available account balance—not just the total in your account but what is presently accessible for withdrawals—before making transactions. Avoid opting into overdraft protection for small ATM and debit card transactions. Consider forgoing overdraft protection if the fees are excessive, especially if you have sufficient savings. Additionally, linking your checking and savings accounts can cover any shortfalls with your own funds.