Some of the nation’s largest banks and banking trade groups have filed a lawsuit against the Consumer Financial Protection Bureau (CFPB), challenging a new rule that limits the overdraft fees banks can charge. This rule is part of the Biden administration’s broader effort to cut down on so-called "junk fees" that burden consumers in everyday financial transactions.

The CFPB's New Overdraft Rule

The rule, announced by the CFPB, offers banks three options for handling overdraft fees starting October 2025:

1. Charge a flat fee of $5.

2. Charge a fee based on the bank’s actual costs and losses.

3. Charge any fee, provided they disclose terms like an overdraft loan, including the annual percentage rate (APR).

Currently, there is no cap on overdraft fees, and major banks collect roughly $8 billion annually in these charges, according to CFPB data and public records. The finalized rule targets banks and credit unions with over $10 billion in assets, including the country’s largest financial institutions.

The Banking Industry’s Pushback

The Consumer Bankers Association (CBA), along with groups like the American Bankers Association, America’s Credit Unions, and Mississippi Bankers Association, filed the lawsuit in the U.S. District Court for the Southern District of Mississippi. They argue that the CFPB has overstepped its regulatory authority.

CBA President and CEO Lindsey Johnson stated:

"Research shows that overdraft services provide much-needed liquidity during a short-term budget shortfall so consumers can put food on the table, keep the lights on, and make other important payments on time. Without overdraft services, consumers on the margins are more likely to turn toward worse, less-regulated non-banking services to fill the gap."

The lawsuit also seeks a preliminary injunction to prevent the rule from taking effect while the case is under review.

Broader Implications

The overdraft rule is part of President Biden’s larger initiative to tackle excessive fees in industries like banking, housing, and travel. While banks have scaled back on overdraft fees over the past decade, they remain a significant source of revenue for larger institutions.

This lawsuit isn’t the first time banks have clashed with the CFPB. Past legal battles have included disputes over caps on credit card late fees. Congress also retains the power to challenge or overturn the rule.

Tips to Avoid Overdraft and NSF Fees

Managing your money carefully can help you steer clear of costly overdraft and non-sufficient funds (NSF) fees. Here are some practical strategies to reduce or avoid these fees:

1. Don’t Opt-In to Debit Card Overdrafts
   Banks and credit unions can’t charge you overdraft fees for debit card or ATM transactions unless you opt in to their overdraft coverage. By not opting in, your transactions will simply be declined if there’s not enough money in your account—no fees attached!

2. Link a Savings or Money Market Account
   Connect your checking account to a savings or money market account. If your checking balance drops too low, funds from the linked account can cover transactions. While there may be a small fee for transferring funds, it’s often much cheaper than overdraft or NSF fees.

3. Track Your Balance and Set Up Alerts
   Regularly monitor your account balance to avoid spending more than you have. Many banks and credit unions also offer low-balance alerts that notify you when your funds are running low, helping you avoid overdrawing your account.

4. Consider Accounts Without Overdrafts
   Switch to a checking or prepaid account that doesn’t allow overdrafts. Keep in mind that some of these accounts may still charge NSF fees for returned checks or failed electronic payments, so read the terms carefully.

Research Sources

This article draws on data from the Consumer Financial Protection Bureau, public financial records, and statements from the Consumer Bankers Association. The rule’s legal and regulatory implications were reported in filings from the U.S. District Court for the Southern District of Mississippi.

For more information about the CFPB and its rules, visit www.consumerfinance.gov.