It's an experience many people are familiar with. After receiving and depositing a paycheck, it's time to pay the bills. But even with good intentions, a few checks might not clear, or a payment for groceries will suddenly put a checking account into the red. This requires overdraft coverage from their bank. While covering the deficit is often appreciated, or even essential, the ensuing service fees can make a bad situation worse.
On April 9, 2025, Republicans in the U.S. House of Representatives voted to overturn a rule passed during the Biden administration that was set to take effect in October. The rule, which offered banks options on overdraft fees that included a $5 per transaction cap, was estimated by the Consumer Finance Protection Bureau (CFPB) to save consumers roughly $5 billion in fees annually.
It's a huge win for banks, who get to keep a multi-billion dollar revenue source. The rule reversal is likely to impact those who can least afford additional expenses.
I Got Your Back, Boo
Overdraft coverage from a lending institution is essentially an emergency loan the bank makes their customer, covering the shortage in funds with the understanding that it will be paid back with some sort of compensation. What that compensation encompasses is often unclear. While covering a paper check can incur costs, the expenses banks accrue to cover overdraft charges in the age of digital finance might not be significant. However, it is a significant source of revenue for the banks, and overdraft fees are partially a reason why banks now offer "free" checking accounts.
CFPB data shows that banks take in about $8 billion in revenue per year from overdraft charges. There's no cap of any type on what a bank can charge for an overdraft fee, and it's often not affected by the amount that needs to be covered. A bounce for a shortage of $3 can command the same fee as one that's $300.
The CFPB's final overdraft rule was designed in 2024 to close a loophole in the Truth in Lending Act (TILA), a holdover from when most checks were mailed and the overdraft service was offered as an infrequent courtesy. The final overdraft bill would have forced banks and credit unions to choose one of the following for overdraft fees:
- A hard cap of $5 per transaction, which was calculated to cover most if not all overdraft expenses for the lender
- Capping their fee at the actual cost of the service to the financial institution
- Treating an overdraft loan like any other loan by requiring disclosures on rates, sending statements, and payment choices
The fee cap was part of the attempt by the CFPB to limit so-called "junk fees". Financial institutions, however, have argued that limiting overdraft charges could lead to them revoking overdraft services entirely, as it wouldn't be worth it financially after losing an $8 billion industry.
Financial lenders had fired a salvo of lawsuits against the potential changes. With the rule overturned, those suits are now moot.
Related Resources
- Tips for Avoiding Debt (FindLaw's Debt Relief)
- How Keeping Bank Fees Down Can Reduce the Cost of Banking (FindLaw's Consumer Protection Law)
- Banking and Credit (FindLaw's Guide to Consumer Financial Protection)
