New CFPB Overdraft Rule Proposal Will Protect LGBTQI+ Consumers From Exorbitant Junk Fees

Last week, the Consumer Financial Protection Bureau (CFPB) took a strong step to restore the balance between consumers in the United States and big financial institutions, by issuing a new overdraft rule that will prevent banks from profiting from consumers’ financial insecurities. 

Overall, overdraft fees add up to billions of dollars each year, most of which comes from the poorest and most financially vulnerable households. These fees disproportionately affect communities that have been historically marginalized, including women, people of color, and LGBTQI+ people. In CLEAR’s financial survey of LGBTQI+ people in the United States, 24% of LGBTQI+ respondents said that they had overdrafted their bank account in the prior year, compared to only 7% of non-LGBTQI+ respondents.

Overdraft used to be a courtesy service, but now it is a profit-generating machine that takes the most from bank customers who can least afford it. In 2023, the average overdraft fee was $26.61. These surprise fees are charged when a consumer can least afford it—when their bank accounts are already empty, they are already unable to afford other necessities, and they have little ability to repay that extra charge.

The banks would like to have it both ways: they frequently argue that overdraft allows people to make ends meet when they are low on funds–like credit cards or other revolving credit–but they also argue that overdraft is not a form of credit, and so consumers should not get federal protections that apply to similar credit products (such as TILA disclosures and protections against “fee harvesting”). When banks apply an expensive overdraft fee, it should be considered a form of credit, the fee should be a finance charge, all subject to the regulations for credit. 

With the new rule, the CFPB has restored reasonableness to a market that has gotten out of touch with the needs of everyday people. The Bureau has applied a reasonable and proportionate standard in their credit card late fees proposal, based on the principle that banks would know they have a safe harbor as long as their fees are below a threshold, and the threshold is based on the real cost to banks when an account holder overdrafts, then it achieves that goal. A bank should not complain if that is the standard.

Additionally, because the cost of an overdraft would be closer to uniform under the rule, it will be simpler for U.S. consumers to comparison shop on the kinds of costs that banks typically use to market their accounts.

The overdraft rule prevents big banks from profiting on the financial insecurity of poor people in the United States. The rule will offer much needed protections for those among historically marginalized communities, including the LGBTQI+ community.