Consumer Finance Watchdog CFPB Closes Overdraft Loophole, Set To Bring In $5B Savings Annually
By Stocktwits Inc | First Published Dec 12, 2024, 9:24 PM ISTThe agency’s final rule on overdraft fees applies to the banks and credit unions with more than $10 billion in assets that dominate the U.S. market.
The Consumer Financial Protection Bureau (CFPB), an independent regulatory agency, said on Thursday it has closed an outdated overdraft loophole that exempted overdraft loans from lending laws. The final rule is expected to save consumers up to $5 billion in annual overdraft fee savings, or $225 per household that pays overdraft fees.
The agency’s final rule on overdraft fees applies to the banks and credit unions with more than $10 billion in assets that dominate the U.S. market.
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CFPB said financial institutions with more than $10 billion in assets would have to choose one of three options when charging for overdrafts. They can cap their overdraft fee at $5, which is the estimated level at which most banks could cover the costs associated with administering a courtesy overdraft program.
Banks wishing to offer overdrafts as a convenient service rather than a profit center could cap their fee at an amount that covers costs and losses.
Finally, financial institutions that wish to profit from overdraft lending could disclose the terms of their overdraft loan just like other loans.
“This would include giving consumers a choice on whether to open the line of overdraft credit, providing account-opening disclosures that would allow comparison shopping, sending periodic statements, and giving consumers a choice of whether to pay automatically or manually,” the agency said.
CFPB Director Rohit Chopra said that for far too long, the largest banks have exploited a legal loophole that has drained billions of dollars from Americans' deposit accounts.
"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,” he said.
Following the announcement, bank stocks and exchange traded funds (ETFs) were in the spotlight. The Financial Select Sector SPDR Fund (XLF), which tracks the price and yield performance of the Financial Select Sector Index, was trading marginally in the red on Thursday morning.
Retail sentiment on Stocktwits inched lower into the ‘neutral’ territory (48/100) from ‘bullish’ a day ago.
Notably, XLF has gained nearly 32% since the beginning of the year.
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