$5 cap on overdrafts finalized by Biden Administration: Will it actually happen?

(NEXSTAR) - A new federal rule would cap overdraft fees at $5 beginning late next year. That would be a big drop from the 2023 average of $26, but the policy still faces legal and potential political challenges.

The new rule was released Thursday by federal regulators and is part of President Joe Biden’s campaign against junk fees, which include everything from late fees and overdraft fees to hidden charges on concert tickets.

The Consumer Financial Protection Bureau offered two other options for banks that don’t want to cap fees. They can charge a fee equal to what it costs to cover the overdraft or treat it as a loan and allow customers to open a line of “overdraft credit.”

Regulators say the new rule will save up to $5 billion in overdraft fees for bank customers each year, which works out to about $225 per household.

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

Bank leaders have warned that the cap could hurt customers who rely on overdraft protection and could lead them to turn to predatory payday loans or pawn shops.

While banks have cut back on overdraft fees in the past decade, the nation’s biggest banks still take in roughly $8 billion in the charges every year, according to data from the CFPB and bank public records. Currently, there is no cap on the overdraft fees that banks can legally charge.

The finalized rule is set to take effect in October 2025, but the incoming Trump administration has yet to tap anyone to lead the CFPB, and has mentioned the idea of eliminating the agency, potentially imperiling the rule.

The finalized mandate applies to banks and credit unions that have more than $10 billion in assets, which includes the nation’s largest banks. Banks have previously sued the CFPB over these rules and caps on credit card late fees. Congress also has the ability to challenge or overturn the rule.

The Consumer Bankers Association filed the lawsuit along with the American Bankers Association, America’s Credit Unions and Mississippi Bankers Association and other banks. The group claims that the CFPB is exceeding its regulatory authority with the new rule.

The complaint was filed Thursday in the U.S. District Court for the Southern District of Mississippi, Northern Division. CBA and its co-plaintiffs are also seeking a preliminary injunction barring the CFPB from implementing the new rule until the court makes a final decision on the merits of the case.

The Associated Press contributed to this report.