What to know about overdraft fees as the White House cracks down on them

The Consumer Financial Protection Bureau has proposed new rules that would lower overdraft fees, with President Joe Biden calling the charges “exploitative.”

NEW YORK -- The Consumer Financial Protection Bureau has proposed new rules that would lower overdraft fees, with President Joe Biden calling the charges “exploitative.” Currently, the fee for overdrawing a bank account averages more than $26.

If a bank temporarily lends a consumer money when their account has reached a zero balance, the consumer is typically responsible for paying back both the overdrawn amount and an additional fee, which can be more than the original amount charged. In one example often cited by opponents of the fees, a $3 cup of coffee can end up costing someone $30.

Here's what to know.

When there isn’t enough money in an account to cover a transaction or withdrawal, but the bank allows it anyway, the customer is technically “overdrawn,” and most banks charge them a fee. About 91% of accounts have this fee structure, according to the most recent Bankrate research. Consumer advocates argue this is an extension of credit, and should be regulated as such.

The fees originated during a time when consumers wrote and cashed checks more frequently — so that the checks would clear instead of bouncing, if there was an issue of timing — but banks steadily increased the fees in the first two decades of the 2000s. Eventually, the fees provided financial institutions with billions of dollars in revenue. The fees, as high as $39 per overdraft, disproportionately affect banks' most cash-strapped consumers. A majority of overdrafts (70%) are charged to customers with average account balances between $237 and $439, according to the Consumer Financial Protection Bureau (CFPB).