A costly misstep? Community banks rally against CFPB’s overdraft rule

The Consumer Financial Protection Bureau’s (CFPB) sweeping new rule on overdraft services is dividing the financial sector, with community bankers warning it could devastate local economies and harm consumers it aims to protect. While designed to cap overdraft fees at $5 and reduce financial stress on households, critics argue the rule could backfire, forcing vulnerable customers toward costlier alternatives like payday loans.

Rebeca Romero Rainey, President and CEO of the Independent Community Bankers of America (ICBA), described the regulation as a “faulty rulemaking,” cautioning against unintended consequences. “Cutting off access to overdraft services would harm the very consumers this rule intends to help,” she said.

The rule, set to take effect in October 2025, has sparked legal and political debates that could shape the next administration’s regulatory agenda.

What’s driving the backlash?

At its core, the CFPB’s rule targets the hefty overdraft fees—typically $30 to $35 per transaction—that have long been criticised for disproportionately affecting low-income households. The rule applies to financial institutions with over $10 billion in assets, offering three compliance options:

1. Capping overdraft fees at $5 per transaction.
2. Charging fees equal to the institution’s actual costs incurred.
3. Treating overdrafts as credit, requiring additional disclosures such as APRs.

The CFPB claims the rule will save consumers up to $5 billion annually by reducing these fees. A CFPB spokesperson framed it as a win for fairness: “Banks should not profit disproportionately from customers’ financial difficulties.”

Smaller community banks—those with less than $10 billion in assets—are exempt from the rule. Despite this exemption, ICBA has raised concerns about the broader implications, arguing that the rule could disrupt financial ecosystems and harm consumers who rely on overdraft programmes to manage short-term financial gaps.

Community banks push back, but…

The ICBA, representing smaller financial institutions, has been particularly vocal in opposing the rule. Rebeca Romero Rainey highlighted scenarios where the rule could cause rejected payments, such as for emergency medical needs or payroll for small businesses. “Community banks provide critical lifelines in moments of financial difficulty,” she said, emphasising the importance of overdraft services for economic stability.

Additionally, the ICBA questions the rule’s legal foundation, arguing that overdrafts have historically been categorised as non-credit services under the Truth in Lending Act (TILA). The group has called on the incoming administration and Congress to overturn the regulation, describing it as a last-minute move by the outgoing administration.

However, not everyone shares the ICBA’s concerns. Consumer advocacy groups have applauded the CFPB’s efforts, describing overdraft fees as a long-standing burden on financially vulnerable households. “For decades, these fees have penalised those who can least afford it,” said a representative from a leading consumer watchdog organisation. “This rule represents a necessary correction in the banking system.”

Supporters argue that the regulation will encourage greater transparency and accountability while reducing reliance on exploitative practices. They see the potential for a fairer financial landscape where consumers are less likely to be trapped in cycles of debt.

Still, the broader banking industry has expressed fears that the regulation could force changes to overdraft programmes, reducing flexibility and limiting services that many customers rely on. Some experts predict an increase in rejected payments and associated financial disruptions for businesses and individuals.

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