Big banks and credit unions, which hold significant sway in the financial realm, are now facing a significant change. Under a final rule by regulators, these dominant institutions would be restricted to charging only $5 for overdraft fees. This move aims to bring more transparency and fairness to the banking system.

Overdraft Fees: A Battle between Banks and Consumers

Overview of the Final Rule

The Consumer Financial Protection Bureau's Thursday announcement sets the stage for a major shift in overdraft fee policies. Big institutions will be required to slash their overdraft fees from the common $25 or $35 in many cases. The estimated level of $5 is believed to be the point at which most banks can cover the costs associated with administering a courtesy overdraft program. This $5 fee is slightly higher than the earlier discussed $3 benchmark fee.An overdraft fee occurs when a bank or credit union charges you for having insufficient funds to cover a transaction. While the bank may allow the transaction to proceed, you'll typically pay a fee and need to make up the shortfall. In some cases, multiple purchases can lead to multiple fees, causing even more trouble for consumers. According to the Consumer Financial Protection Bureau, about 23 million households pay overdraft fees each year.

Implementation and Timeline

The overdraft final rule, which will cover about 175 of the largest banks and credit unions in the country, is set to take effect on October 1, 2025. This rule applies specifically to banks and credit unions with more than $10 billion in assets that dominate the U.S. market.

Banks' Pushback and the Political Landscape

Banks are expected to continue to resist these restrictions. With the Senate, House, and White House expected to be controlled by Republicans in 2025, they might have some success in weakening the consumer safeguards and reducing regulation. President Joe Biden, in a January statement, called overdraft fees "exorbitant," stating, "Banks call it a service — I call it exploitation." However, as we enter the final days of the Biden administration, many consumer advocates anticipate a less regulated environment under the Trump administration.In May, before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, the American Bankers Association advocated for Congress to pass a resolution under the Congressional Review Act to invalidate the overdraft rule if the CFPB finalized the proposal.

Options for Banks under the Final Rule

If banks don't charge a maximum $5 overdraft fee, they have some choices. They can set their own fee at a "break even" point, which covers just their costs and losses. This approach involves more recordkeeping and proof of expenses.Alternatively, banks and credit unions can continue to extend "profit-generating overdraft loans if they comply with longstanding lending laws, including disclosing any applicable interest rate." Under this option, consumers have the choice to open the line of overdraft credit. The bank provides account-opening disclosures for comparison shopping, sends periodic statements, and gives consumers the choice of automatic or manual payment. Again, more paperwork is involved.The CFPB initially proposed a crackdown on such fees in January, arguing that banks are exploiting a loophole by exempting overdraft lending services from longstanding provisions of the Truth in Lending Act and other consumer financial protection laws. The CFPB estimates that this final rule could save consumers up to $5 billion in annual fees, or $225 per household that pays overdraft fees.CFPB Director Rohit Chopra stated in a statement that the crackdown is designed to make big banks disclose the interest rates they charge on overdraft loans.

Consumer Relief and Voluntary Reductions

So far, consumers have already seen some relief. Many large banks have voluntarily reduced or eliminated overdraft fees in recent years under pressure from lawmakers and regulators. For example, Bank of America reduced its overdraft fees from $35 to $10 in 2022.The CFPB noted that after its initiative to curb "junk fees," consumers have saved $6 billion annually in these fees. However, even with these changes, consumers still paid more than $5.8 billion in 2023 in reported overdraft and non-sufficient fund fees.

Average Overdraft Fees by Region

According to a survey by Bankrate.com in August, the average overdraft fee at big banks was $27.08, up 1.7% from the 2023 survey average of $26.61. Detroit has some of the lowest overdraft fees in a 25-metro area survey, with an average fee of $24.50. The highest average by metro area was $32.70 in Philadelphia, while the lowest was in the Washington, D.C., area at an average of $19.63. Bankrate conducted the survey among 10 banks and thrifts in each of 25 large U.S. markets. The average overdraft fee peaked at $33.58 in 2021.Bankrate.com experts suggest several ways to avoid overdraft fees, such as monitoring your available account balance before initiating transactions, not opting in to overdraft protection on small-dollar ATM and debit card transactions, and considering declining overdraft protection if the fees are too high and you have savings. Linking your checking and savings accounts can also help cover any shortfalls.Contact personal finance columnist Susan Tompor at stompor@freepress.com and follow her on X (Twitter) @tompor.This story was updated to add a video.