By Marilyn Odendahl
The Indiana Citizen
January 9, 2025
Anti-poverty advocates in Indiana are hoping a new federal rule that could save consumers billions in overdraft fees will spur state lawmakers to legislate similar economic reforms to help Hoosiers.
The final overdraft rule, issued by the Consumer Financial Protection Bureau and scheduled to take effect in October, limits how much large financial institutions can charge consumers who overdraw their accounts. Banks and credit unions with more than $10 billion in assets will have the option of either charging no more than $5 in overdraft fees, or, if the overdraft protection is offered as a convenient service, charging no more than the amount that covers the costs to the lender. Also, the financial institutions can opt to continue charging any fee they want, but they would have to treat the overdraft protection as a loan making it subject to longstanding lending laws, including having to disclose any applicable interest rate.
In any given year, about 23 million U.S. household pay overdraft fees, which can range from $25 to $35 per transaction, according to the CFPB. Under the new rule, the CFPB expects consumers across the country will save up to $5 billion – $225 per household – in annual overdraft fees.
“Consumer protections such as this are crucial alongside a fair tax policy to ensuring that our households and families in Indiana can thrive,” Zia Saylor, researcher at the Indiana Community Action Poverty Institute, said about the new final rule.
However, the CFPB’s new rule faces potential headwinds. It could be reversed on Capitol Hill, the National Association of Consumer Advocates said, if Congress uses a law called the Congressional Review Act, which allows it to overturn rules using expedited procedures, including limited debate and a simple majority rule. Also, President-elect Donald Trump will likely appoint a new director of the CFPB after his inauguration and could order a reversal of prior rules and curb the agency’s actions.
“The only way that this rule can live up to its promises to put money back into families’ pockets is if members of Congress support this important economic action for their constituents and simply let the rule go into effect,” said Christina Hines, senior policy director at the National Association of Consumer Advocates.
Also, banking groups are trying to block the overdraft rule. The American Bankers Association, the Consumer Bankers Association, American’s Credit Unions, and Mississippi Bankers Association have filed a lawsuit in federal court in Mississippi, asserting the CFPB has exceeded its statutory authority under the Truth in Lending Act.
Moreover, the plaintiffs claim the rule could ultimately hurt consumers by forcing banks to limit the availability of overdraft services. Rob Nichols, president and CEO of the American Bankers Association, echoed that point in a statement he issued about what he called the CFPB’s “misguided rule.”
“By taking this action, the Bureau has once against chosen to prioritize demonizing highly regulated and transparent bank fees over its mission to help consumers,” Nichols said in a statement. “This rule, and the government price controls that accompany it, will make it significantly harder for banks to offer this valuable service to their customers, including those who have few other options to cover essential payments.”
According to the CFPB, banks began offering overdraft service as a convenience decades ago when consumers paid their bills with paper checks. Financial institutions would occasionally honor a check that had overdrawn the account in order to avoid spending the substantial amount of time required to correct the error.
The Federal Reserve Board created an exemption in the Truth in Lending Act for this type of service so the overdraft fees were not subject to credit regulations.
Consequently, the CFBP asserted, the overdraft service “evolved into a routine, expensive loan product” as automation increased in the banking industry and overdraft coverage was extended to debit cards, which are typically used more frequently and for smaller purchases. Banks increased the fees so that, today, large banks are charging $35 for an overdraft even though, the CFPB said, the “majority of consumers’ debit card overdrafts are for less than $26 and are repaid within three days.”
The CFPB estimated that consumers paid roughly $9 billion in overdraft fees in 2022 alone. Also the bureau noted it has uncovered abuses related to overdraft fees and, recently, ordered Regions Bank and Wells Fargo to pay $191 million and about $200 million, respectively, for “illegal surprise overdraft fees.”
“For far too long, the largest banks have exploited a legal loophole that has drained billions of dollars from Americans’ deposit accounts,” CFPB director Rohit Chopra said in a statement announcing the final rule. “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.”
In their lawsuit, the banking associations argued that the overdraft services provide “significant value,” in part, by enabling the transaction to proceed so consumers do not face potentially adverse consequences, such as missing a payment, getting charged fees for a late payment or a declined transaction, and damaging their credit score.
Also, the banking associations asserted the overdraft services benefit lower-income customers. Many of the consumers who overdraft frequently have poor credit scores and cannot meet the requirements of “overdraft alternatives.” As a result, those consumers rely on “non-bank lender alternatives,” such as payday loans, the associations claimed.
“For many of these consumers, discretionary overdraft services represent the only cost-effective way to pay critical expenses such as rent, and will in many cases consciously elect to pay an overdraft fee because they view the consequences of a declined transaction as worse,” the banking associations argued in their lawsuit.
Erin Macey, director of the Indiana Community Action Poverty Institute, is hopeful the CFPB rule will inspire Indiana lawmakers to take steps to remedy the problems the banking associations pointed out that low-income households have in accessing traditional credit.
“The Institute has long worked on issues of consumer advocacy and ensuring ethical banking practices, and is glad to see the Consumer Financial Protection Bureau taking this stance that will support household well-being by reducing these financial drains,” Macy said in a statement. “As we look ahead to the coming legislative session, we hope that Indiana’s lawmakers will follow suit by reforming other costly and depleting financial practices that harm hardworking Hoosier households, including payday loans and Earned Wage Access.”
This session, Rep. Jake Teshka, R-North Liberty, has filed a bill designed to regulate the earned wage access services provided to Indiana consumers. House Bill 1125 is co-authored by Reps. Matt Lehman, R-Berne, and Kyle Miller, D-Fort Wayne, and has been assigned to the House Committee on Financial Institutions.
In 2024, Indiana legislators passed two bills which the Indiana Community Action Poverty Institute called “anti-consumer.”
Senate Enrolled Act 188 reduced the statute of limitations and gave Hoosiers just two years – the shortest in the country – to hold their bank or credit union accountable for problems like unfair overdraft fees. Also, in response to a pair of rulings from the Indiana Supreme Court in Decker v. Star and Land v. IU Credit Union, which prohibited banks and credit unions from slipping arbitration clauses into customers’ monthly statements to avoid lawsuits over unfair overdraft fees, lawmakers passed House Enrolled Act 1284. That law allowed financial institutions to not only provide a simple written notice of any changes made to a deposit account agreement but also take customers’ continued maintenance of their accounts as evidence that they accept the change.
Dwight Adams, an editor and writer based in Indianapolis, edited this article. He is a former content editor, copy editor and digital producer at The Indianapolis Star and IndyStar.com, and worked as a planner for other newspapers, including the Louisville Courier Journal.
The Indiana Citizen is a nonpartisan, nonprofit platform dedicated to increasing the number of informed and engaged Hoosier citizens. We are operated by the Indiana Citizen Education Foundation, Inc., a 501(c)(3) public charity. For questions about the story, contact Marilyn Odendahl at marilyn.odendahl@indianacitizen.org.
