NEW YORK (AP) -- The Biden administration has finalized a rule limiting overdraft fees banks can charge, as part of the White House's campaign to reduce junk fees that hit consumers on everyday purchases, including banking services. President Joe Biden had called the fees, which can be as high as $35, "exploitative," while the banking industry has lobbied extensively to keep the existing fee structures in place.

Under the finalized rule, banks will be able to choose from three options: they may charge a flat overdraft fee of $5, they may charge a fee that covers their costs and losses, or they may charge any fee so long as they disclose the terms of the overdraft loan the way they would for any other loan, typically expressed as an annual percentage rate, or APR.

While banks have cut back on overdraft fees in the past decade, the nation's biggest banks still take in roughly $8 billion in the charges every year, according to data from the Consumer Financial Protection Bureau and bank public records. Currently, there is no cap on the overdraft fees that banks can legally charge.

Right now, when 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 more than $30.

The finalized rule is set to take effect in October 2025, but the incoming Trump administration has yet to tap anyone to lead the CFPB, and has mentioned the idea of eliminating the agency.

The finalized rule applies to banks and credit unions that have more than $10 billion in assets, which includes the nation's largest banks. Banks have previously sued the CFPB over these rules and caps on credit card late fees, and are likely to sue again. Congress also has the ability to challenge or overturn the rule.

Overdraft 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. The fees 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 CFPB.

The agency estimates the new rule would save consumers about $5 billion in annual overdraft fees, or $225 per household that typically experiences the fees.

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