In December, the lame-duck Biden administration’s Consumer Financial Protection Bureau (CFPB) introduced a rule aimed at curbing overdraft penalties, which experts told the Daily Caller News Foundation could result in government overreach that harms low-income Americans.

The CFPB, an agency largely shaped by Democratic Massachusetts Senator Elizabeth Warren, finalized the rule just weeks before President-elect Donald Trump’s inauguration. The rule would require banks to either cap overdraft fees at $5—far below the average $35—or offer overdrafts as a form of credit rather than a penalty.

While the policy is intended to increase transparency and protect American depositors, experts warned the DCNF that it could force banks to impose stricter rules on bank accounts, limiting access to credit and financial services for low-income individuals. This could push more borrowers to payday lenders, who typically charge much higher interest rates, the outlet reported.

“This is a classic case of government overreach with regulators having no idea how private business works,” E.J. Antoni, a research fellow at the Heritage Foundation’s Grover M. Hermann Center for the Federal Budget, told the DCNF.

“These new regulations would eliminate certain services and impose stricter rules on bank accounts predominantly held by low-income folks. If those people need an extension of credit because they don’t have sufficient funds to meet an immediate expense, they’ll be driven to even more costly payday lenders,” Antoni added.

While typical credit card annual percentage rates range from 15% to 30%, and personal loans tend to have even lower rates, payday lenders often charge annual interest rates anywhere from 300% to 500%, according to Mayo Employees Federal Credit Union.

In 2022, 17% of households with checking accounts reported paying an overdraft fee, with those earning less than $30,000 twice as likely to experience at least one overdraft compared to households with incomes of $100,000 or more, The Daily Caller added.

The CFPB asserts that it has the legal authority to implement the regulation by classifying overdrafts as loans rather than penalties—a stance that Erik Jaffe, a partner at the law firm Schaerr | Jaffe LLP, described to the DCNF as a “stretch.”

“The CFPB was given authority to regulate certain circumstances of consumer lending. As a result, the question is whether or not an overdraft on your checking account constitutes a short-term loan,” Jaffe told the DCNF. “It seems like quite the stretch. Banks charge customers a fee on overdrafts. The fee is not interest, as the length of time you take to pay back the fee does not change how much you owe. Interest must have a time component to it. It’s not like banks are giving customers with overdrafts money over time. They are just doing a courtesy of not bouncing a charge and embarrassing the customer.”

The overdraft rule faced immediate legal challenges following its finalization, with the American Bankers Association (ABA) filing a motion for a preliminary injunction in the Southern District of Mississippi’s Fifth Circuit on December 12.

Jaffe suggested that legal challenges, such as the one from the ABA, could be successful, especially after the Supreme Court’s 6-3 decision in June to overturn Chevron deference—a legal doctrine that had given unelected bureaucrats substantial leeway to interpret statutory ambiguities.

“We no longer defer to an agency when they say ‘if you squint really hard this statute means I can do whatever the heck I want,’” Jaffe told the DCNF. “This CFPB rule seems to smell a bit like that. The agency appears to be saying ‘if we squint just right, overdrafts look like loans, and so we have the authority to regulate them.’”

He predicted courts would eventually overturn the new rule.