Why Biden Is Cracking Down on Bank Overdraft Fees

Consumer advocates have long complained that US banks and credit unions charge exorbitant overdraft fees to vulnerable customers. Pressured by the Biden administration’s financial watchdogs, the biggest banks have taken voluntary steps to reduce their overdraft fee revenue in recent years. But the White House wants to go further and is proposing restrictions that could make a more significant dent in the billions of dollars that big banks generate from overdraft fees.

Overdraft fees were created in an era when most consumers paid their bills by sending checks in the mail. Making payments that way made it hard to know when checks would clear and in what order. So sometimes people made mistakes and overdrew their accounts. Because of these uncertainties, the Federal Reserve created an exemption to the 1968 Truth in Lending Act to allow a bank to honor a check that accidentally overdrew an account. The fees ostensibly compensate banks for issuing loans to cover shortfalls.