SACRAMENTO, Calif. — There’s new progress being made on overdraft fees and the government’s efforts to bring those costs down.
A new federal rule announced earlier this month could cap overdraft fees at $5 for many customers.
Overdraft fees can kick in when you try to withdraw more money from your checking account than you have. The fees are usually $35 per transaction and the additional money banks use to cover the withdrawal is basically a loan.
The Consumer Financial Protection Bureau acted to close an outdated overdraft loophole. The reforms will allow large banks several options to manage their overdraft lending program.
They can choose to charge $5, cap their fee at an amount that covers costs and losses, or they can continue to extend profit-generating overdraft loans if they tell you about the terms of the overdraft loan just like other loans.
Sacramento-based financial coach Maureen Paley warns there will still be consequences for overdrafts.
"While your bank might pick one of the three options the CFPB has suggested, that doesn't mean that they might come up with different penalties that you might have to pay. This is really just one item that's been an open door for banking institutions for a long time to be able to generate profits,” said Paley.
Under the new federal law, banks could still charge more than $5 but those terms would have to be agreed upon upfront.
The change takes effect in October 2025, but it could still face legal challenges.
The Consumer Financial Protection Bureau says tens of millions of consumers have lost access to banking services due to overdraft loans.
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