Depending on who you talk to, recent efforts by regulatory agencies to rein in credit union and bank overdraft fees are either overkill or overdue.

The National Credit Union Administration and the Consumer Financial Protection Bureau obviously believe they’re overdue and have identified overdraft policies as a regulatory target.

The CFPB this month issued its long-awaited proposed overdraft rule that could drive overdraft fees down to as low as $3 at the largest credit unions and banks. If issued in final form, the rule would only apply to financial institutions with at least $10 billion in assets. The CFPB said that the rule would cover 175 credit unions and banks. Comments on the proposed rule are due by April 1.

Over at the NCUA, Chairman Todd Harper again has identified overdraft policies as one of the agency’s supervisory priorities for 2024. In a letter to federally insured credit unions, Harper wrote that reviews of overdraft policies “will include examinations of website advertising of overdraft policies, balance calculation methods and settlement processes.”

The CFPB and NCUA moves are part of a larger Biden administration effort. The administration has lumped overdraft fees into a category it calls “junk fees.” When the CFPB’s proposed rule was issued, President Biden said, “For too long, some banks have charged exorbitant overdraft fees—sometimes $30 or more—that often hit the most vulnerable Americans the hardest, all while banks pad their bottom lines. Banks call it a service—I call it exploitation.”

The administration also is likely to issue a final rule governing credit card late fees—a plan that could drive those fees to as low as $8. The administration has proposed eliminating or limiting fees in several other categories—from hotel and resort fees to fees imposed on the purchase of tickets to concerts and sports events.

Most recently, the CFPB proposed banning credit unions and banks from charging non-sufficient funds fees (NSF) on transactions that they deny in real time. The agency conceded that most credit unions and banks do not charge such fees, but the CFPB said it was proposing the rule just in case financial institutions decided to adopt them.

But it is the CFPB’s overdraft rule that recently has garnered the most attention.

Even before the proposed rule was issued, financial services trade groups warned CFPB Director Rohit Chopra that they believed that before the agency could issue the overdraft rule, it was required to conduct a detailed analysis of the rule’s impact on small business. They argued that under the Administrative Procedure Act, Chopra was required to convene a panel of small businesses that could be affected by the rule. The CFPB, they said, was prohibited from issuing the rule until that panel issued a report.

The CFPB disagreed. In an effort to bolster its position, in December, before the proposed rule was issued, the CFPB released a report contending that many people do not know they are being charged an overdraft fee.

Using data from the agency’s “Making Ends Meet” survey, the CFPB reported that only 22% of those charged overdraft fees had anticipated the fees. And 62% of those charged the fees had other sources of credit available that could have been used to avoid the overdraft.

“Overdraft loans, along with the hefty and often surprising fees that come with them – affect families across the country,” Chopra said in January, as the agency issued its proposed rule. “For many of those charged overdraft fees, the market is not working for them, even if they are happy a bank processed a transaction instead of declining it. Compared to credit cards and other forms of credit, overdraft lending is very expensive.”

As part of the rulemaking process, the agency is asking commenters whether the CFPB should allow large financial institutions an overdraft fee of $3, $6, $7, or $14. The institutions could charge more if they calculate a “breakeven fee” that is above the set fee. The agency also said it would monitor the financial services market to determine if financial institutions with less than $10 billion assets should be included in the final rule.

The proposed rule also would treat overdraft fees as normal consumer loans. That would require credit unions and banks to disclose interest rates and fees, just as they would for a credit card or other type of loans. The rule also would place overdraft fees under Truth in Lending Act protections that consumers using credit cards now receive.

Reaction to the rule was swift, with Democrats and consumer groups applauding the proposal and Republicans and financial services trade groups condemning it.

Credit union trade groups sharply criticized the proposal.

America’s Credit Unions President/CEO Jim Nussle said that the CFPB “has deliberately exceeded its intended purpose at the expense of the hardworking Americans they claim to protect.”

He added, “Its latest overdraft fee proposal is another devastating blow to working class Americans as it takes away a lifeline many consumers in financial distress rely on to make ends meet. The bureau must be held accountable for its war on American families and Main Street America.”

Virginia Credit Union League President/CEO Carrie Hunt also blasted the CFPB plan. “While the rule targets institutions with more than $10 billion in assets, the realities of the marketplace mean that overdraft programs at all credit unions are endangered,” she said. Hunt added that credit unions have responsible programs that provide members with a valuable service at an affordable price. Hunt will become America’s Credit Unions chief advocacy officer on March 1.

In the West, the California and Nevada Credit Union Leagues have established a Credit Union Overdraft Resources webpage that provides member credit unions with talking points, research, an op-ed template, and a regulatory timeline.

Banking trade groups also were disappointed by the CFPB proposal. Rob Nichols, president/CEO of the American Bankers Association accused the CFPB of trying to score political points by issuing the rule.

“Today’s proposal from the CFPB marks the Bureau’s latest attempt to demonize and mischaracterize highly regulated and clearly disclosed bank fees for a service that surveys consistently show Americans value and appreciate,” Nichols said. “The proposal would make it significantly harder for banks to offer overdraft protection to customers, including those who have few, if any, other means to access needed liquidity.”

Financial services trade groups contend that consumers choose to enroll in overdraft programs, saying that the programs amount to short-term credit that allows account holders to spend more than they have in their accounts.

House Republicans joined the financial groups in condemning the rule. “The Biden Administration’s attempts to mandate one-size-fits-all consumer financial products and services diminish financial inclusion, limit consumer choice, stifle innovation, and ultimately raise the cost of banking for all consumers,” House Financial Services Committee Chairman Rep. Patrick McHenry, R-N.C. and Financial Institutions and Monetary Policy Subcommittee Chairman Rep. Andy Barr, R-Ky. said.

On the other hand, Rep. Maxine Waters, D-Calif., ranking Democrat on the House Financial Services Committee applauded Chopra and his agency for issuing the rule. “For far too long, our nation’s biggest banks charged consumers fees as high as $35 or $40 for briefly overdrawing their account, costing those who can least afford it billions every single year,” she said. “In fact, the banking industry has raked in $280 billion the past two decades, including about $9 billion last year, from these exorbitant overdraft fees.”

Waters said that the rule is consistent with legislation the Financial Services Committee approved when Democrats controlled that panel. That legislation never became law.

On the other side of the Capitol, Senate Banking Committee Chairman Sen. Sherrod Brown, D-Ohio, also praised the rule, commenting, “I’m glad to see the CFPB continue its work to eliminate junk fees so that Americans can keep more of their hard-earned money.”

Consumer advocates were also pleased. “Overdrafts fees are not so much a useful service as they are a lucrative profit center underwritten by the most economically vulnerable consumers,” said Kimberly Fountain, consumer field manager at Americans for Financial Reform.

“The CFPB’s proposal would rein in a junk fee that has gouged financially vulnerable families for far too long,” said Mike Calhoun, president of the Center for Responsible Lending. “High-cost overdraft fees exploit consumers right when they are out of funds. In moving to protect consumers from this harm, the CFPB is carrying out its mission.”

Candace Milner, racial equity policy director at Public Citizen, said that the rule, if finalized, would help low-income households. “Most overdraft fees are taken from low-income households when they can least afford it,” she said. “Commonsense regulations on these fees would protect consumers from surprise charges and fees that often exceed the amount borrowed. Enormous overdraft fees that burden low-income consumers should no longer line the pockets of bank CEOs.”

The CFPB said that if adopted, a final rule likely would go into effect on Oct. 1, 2025. That calls into question whether the final rule will ever see the light of day. If President Biden is reelected, he likely would push for the final rule to be adopted. But if a Republican is elected, it is more likely that the final rule will not be issued, since most major Republicans oppose the strict regulatory regime adopted by the Biden Administration.