Under new guidelines introduced by federal regulators on Thursday, banks will be limited to charging customers a maximum fee of $5 for overdrafts, which occur when an account balance falls below zero.

This new cap on overdraft fees is part of a broader initiative by the Biden Administration to tackle “junk fees,” which also addresses issues like inflated credit card late fees and surprise expenses on concert tickets.

According to a rule finalized by the Consumer Financial Protection Bureau (CFPB), banks that wish to avoid the cap have two alternatives. They may either charge only what it truly costs them to cover overdrafts or provide customers with the option to open a line of “overdraft credit” to treat the overdraft as a loan.

This regulation will affect banks with assets exceeding $10 billion and is scheduled to begin in October 2025, depending on its acceptance in the face of potential legal challenges from the banking sector.

Rohit Chopra, the director of the CFPB, remarked, “For too long, major banks have taken advantage of a loophole that has drained billions from the accounts of American consumers.”

Regulators anticipate that this rule will save bank customers approximately $5 billion each year in overdraft fees, translating to roughly $225 per household that routinely pays these charges.

However, leaders in the banking industry express concerns that imposing this cap could adversely affect the most financially vulnerable customers, who depend on overdraft protection to maintain their financial stability.

“Overdraft services are crucial for millions of customers – including one in five Americans without access to credit,” stated Lindsey Johnson, president of the Consumer Bankers Association. “The CFPB’s rule threatens access to these services, especially when unexpected expenses arise, leaving consumers to resort to higher-cost alternatives like payday loans or pawn shops.”

‘Banks Call It a Service – I See It as Exploitation’

The Biden Administration unveiled this crackdown on overdraft fees in January as part of a wider campaign against excessive charges imposed by banks.

“Banks have for too long imposed outrageous fees on overdrafts—sometimes exceeding $30—that hit the most vulnerable Americans the hardest, all while boosting their own profits,” Biden said in a statement at the time. “What they call a service, I call exploitation.”

However, this initiative attracted strong pushback from the banking sector.

In a Consumer Bankers Association survey conducted this fall, over 90% of banks indicated that limiting overdraft fees would significantly reduce the overdraft protection they could offer.

According to David Pommerehn, senior VP of the bankers association, “given the substantial number of customers relying on these services to get by, the potential harm to consumers could be significant,” he noted in a November letter to the federal agency.

Fees for overdrafts and insufficient funds have dropped by nearly 50% since the pre-pandemic era of 2019, as per previous reports by the CFPB. In the last quarter of 2022, banks collected $1.6 billion in such fees, compared to $3.1 billion from the same period in 2019.

Prompted by increased scrutiny from lawmakers and regulators, many large banks chose to reduce or eliminate these fees in 2021 and 2022.

According to Bankrate, the average overdraft fee peaked at $33.58 in 2021 but has decreased to $26.61 in 2023. Nevertheless, many banks still impose these charges under certain conditions.

A recent survey from the American Bankers Association revealed that 80% of consumers who have incurred an overdraft fee felt grateful that their bank had covered the transaction instead of rejecting it.

Critics of the new rule argue that “the CFPB is disregarding the considerable majority of Americans who consistently express, through surveys, that they appreciate and want to retain overdraft protection,” remarked Rob Nichols, president of the American Bankers Association.

Federal Regulators vs. Banks on Credit Card Fees

In March, as part of their regulatory efforts, the same federal agency announced a new rule capping late fees on credit card payments at $8.

However, the banking industry pushed back intensely, leading a federal judge to temporarily halt the implementation of the late fee cap.

Regulators estimate that this cap would save American families over $14 billion annually in fees. In contrast, banking leaders argue that these caps could result in increased interest rates for those who pay on time.

This year, credit card interest rates have reached unprecedented highs, and industry analysts suggest that regulatory pressures are contributing to this trend.

New information has been incorporated.