A final regulation that restricts the amount of overdraft fees banks can collect has led to a lawsuit against the Consumer Financial Protection Bureau from a number of banks and banking trade associations.
The rule is a component of the administration of President Joe Biden’s initiative to lower junk fees that affect consumers on routine transactions, such as banking services.
However, banks contend that in the absence of overdraft protection, desperate customers may turn to subpar, unregulated alternatives to get by.
Banks can charge a flat $5 overdraft fee, a fee that covers their costs and losses, or any fee as long as they disclose the terms of the overdraft loan as they would for any other loan, usually in the form of an annual percentage rate, or APR, according to the Consumer Financial Protection Bureau’s finalized rule, which was announced on Thursday.
Data from the CFPB and bank public records show that even though banks have reduced overdraft costs over the last ten years, the largest banks in the country still collect about $8 billion in fees annually. The amount of overdraft fees that banks are permitted by law to impose is now unlimited.
Although the finished rule is scheduled to go into effect in October 2025, the Trump administration has not yet appointed a leader for the CFPB and has floated the possibility of dismantling the organization.
The largest banks in the country are included in the completed rule, which is applicable to banks and credit unions with assets above $10 billion. These regulations and restrictions on credit card late fees have been the subject of prior bank lawsuits against the CFPB. The ruling may also be contested or overturned by Congress.
Along with other banks, the American Bankers Association, America’s Credit Unions, and Mississippi Bankers Association filed the complaint on behalf of the Consumer Bankers Association. The group argues that the new rule is an overreach of the CFPB’s regulatory jurisdiction.
CBA President and CEO Lindsey Johnson said in a statement that research indicates overdraft services give consumers much-needed liquidity during a short-term financial shortage so they can put food on the table, keep the lights on, and make other crucial payments on time. Customers on the margins are more inclined to use subpar, less regulated non-banking services to make up the difference if overdraft services are unavailable.
The Northern Division of the U.S. District Court for the Southern District of Mississippi received the complaint on Thursday. Additionally, until the court renders a final judgment on the case’s merits, CBA and its co-plaintiffs are requesting a preliminary injunction that would prevent the CFPB from enforcing the new regulation.
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