The Consumer Financial Protection Bureau (CFPB) has drafted a rule that could cap bank overdraft fees to as low as $3—an up to 90% reduction from the current fees.

The cap is part of Regulation Z—a set of rules that protects consumers from unfair lending practices. If passed, the rule could save consumers about $3.5 billion in fees every year, according to the CFPB.

“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,” said President Joe Biden in a statement. “Banks call it a service—I call it exploitation.”

Banks often market overdrafts as a way to help struggling customers make ends meet in between paychecks. It sounds reasonable at first—that is, until the fees add up.

According to the CFPB, the average U.S. consumer shells out over $250 in overdraft fees every year. Although the lowest in nearly two decades, it’s still a sizeable expense for consumers living paycheck to paycheck.

If the CFPB plan gets implemented, banks could lose between 47% and 89% of overcharge revenue by Creditnews calculations.

Such a sharp haircut to bank top lines won’t be easy to approve. The CFPB has set a deadline of October 2025 to enact the proposal and will be asking the public and industry for feedback.

For debt-strapped Americans struggling with overage charges, the changes can’t come soon enough.

Hitting people when they’re already down

When it comes to overdraft charges, penalties are heavily tilted toward low-income households.

A 2022 CFPB study found that lower-income Americans are 1.8 times more likely to have overdrafts than higher-income earners. About 8% of customers pay 75% of the total fees.

What’s worse, overdraft and non-sufficient fund (NSF) charges account for roughly 75% of customers’ total checking account fees. This amounts to more than $250 per year in total fees.

“Overdraft fees tend to hit people when they are already down, which is what makes them particularly frustrating for people,” said Chanelle Bessette, banking specialist at NerdWallet.

Daniel Bucherer, the director of communications at the American Financial Services Association, says overdraft fees are “predatory” because customers are often signed up without their consent.

He explained that overdrafts operate very much like loans.

Customers who have $100 in their bank accounts and make a purchase of $101 automatically activate overdraft protection, leading to a penalty as high as $35.

War on junk fees intensifies

It’s not just overdraft fees that the Biden administration is going after. As Creditnews reported, regulators are also targeting so-called junk fees charged by credit cards.

Junk fees are hidden or undefined charges attached to purchases. They appear on credit card statements as surcharges, late fees, and account management fees. In 2022, credit cards collected $14.5 billion in late fees alone.

The war on fees comes at a time when more Americans are struggling to manage their budgets amid record debt levels and high interest rates.

Credit card balances have increased for five consecutive quarters, rising at the fastest rate in two decades, according to New York Fed data.

Although the use of credit cards is growing, experts believe it's not a sign of the strong consumer but rather a red flag indicating that Americans are overstretched.

“I think we are starting to see growing financial strain at the lower end of income levels,” Citigroup economist Robert Sockin told the Financial Times.