On Dec. 12, the Consumer Financial Protection Bureau (CFPB) finalized a controversial rulemaking that would fundamentally alter how banks and credit unions offer overdraft services. The proposed rule was issued in January 2024 and the agency received over 48,000 public comments, but the rule was largely finalized as proposed. With the end of the Biden administration rapidly approaching, this is likely one of the final high-profile rulemakings issued in conjunction with the White House’s broader campaign against so-called “junk fees.”
The rule would apply only to “very large” banks and credit unions with assets equal to or exceeding $10 billion. There is no direct coverage of smaller financial institutions; however, it is expected to have a broader impact on the entire marketplace. Director Rohit Chopra will likely be replaced by a Trump-appointed CFPB director in January, despite Director Chopra’s testimony last week claiming he does not plan to leave. A Republican successor is likely to consider options for rolling back the final rule. This could include settling litigation that was quickly brought by the American Bankers Association, America’s Credit Unions, Consumer Bankers Association and Mississippi Bankers Association, in addition to several impacted banks. In their complaint, the groups state that the rule exceeds the CFPB’s statutory authority under the Truth in Lending Act (TILA) and that the agency failed to appropriately consider the costs and benefits of the rule, among other concerns.
The Provision of “Courtesy” Overdraft Credit
The final rule codifies a new structure for calculating and capping the fees that financial institutions may charge for overdraft services. If the fees are equal to or less than these metrics, the overdraft credit provided would not be subject to Regulation Z.
- Breakeven Standard. As outlined in the proposed rule, the final rule would require the covered institution to determine its total direct costs and charge-off losses for providing overdraft credit to all accounts open at any point during the previous 12 months. This figure would then be divided by the total number of overdraft transactions attributable to those accounts occurring in the previous 12 months.
- Costs and charge-off losses include, among other items, an institution’s cost of funds, its net charge-off losses and operating expenses for its noncovered overdraft credit program.
- The rule specifically excludes the following items from the calculation: general overhead costs or charge-off losses due to unauthorized use, EFT errors, billing errors, returned deposit items or rescinded provisional credit.
- Additional information on the breakeven calculation is included in the final rule.
- Benchmark Fee. The CFPB set this fee at $5, after also considering $7 in the proposed rule.
Extension of TILA to All Overdraft Products
The final rule would subject overdraft credit provided at a cost higher than the above thresholds to Regulation Z, triggering related compliance and disclosure requirements. Specifically, institutions must:
- treat transfer fees as finance charges or eliminate those fees;
- offer consumers a means of repaying their overdrafts other than by preauthorized electronic fund transfers (EFTs); and
- begin to comply with the regulatory provisions in Regulation Z that apply to credit cards that would newly apply to certain types of covered overdraft credit.
Several other key elements of the proposed rule were also included in the final rule, notably that:
- Hybrid debit-credit cards used by consumers to access overdraft credit will now be subject to the Credit Card Accountability Responsibility and Disclosure (CARD) Act-related sections of Regulation Z. These would include, but are not limited to, ability-to-pay underwriting requirements and limitations on penalty fees.
- Overdraft credit that must now be structured as a separate credit account, not a negative balance on a checking or other transaction account, is also preserved in the final rule. The underlying checking or transaction account would be considered the asset account and tied to the separate credit account created for the overdraft credit.
- Institutions are prohibited from compelling consumers to use automatic payments to repay overdraft credit, which would effectively require them to provide consumers with at least one alternative repayment option. While consumers would be allowed to opt into automatic repayments on a periodic basis, they will have a right to repay overdraft credit manually.
Key Definitions
The final rule narrows the existing exemption that shields many charges imposed in connection with overdraft credit from being deemed a “finance charge.” Under Regulation Z, finance charges must be disclosed to consumers. These changes, in combination with additional modifications to Regulation Z’s existing definition of “open-end credit,” establishes that overdraft credit that exceeds the breakeven threshold is deemed open-end credit and is subjected to the corresponding provisions under Regulation Z.
Several other definitions created or modified by the rule were also finalized largely as proposed, including:
- “Above breakeven overdraft credit”
- “Covered asset account”
- “Covered overdraft credit”
- “Covered overdraft credit account”
- “Hybrid debit-credit card”
- “Non-covered overdraft credit”
- “Overdraft credit”
Outlook
The rule’s effective date is Oct. 1, 2025, but several obstacles could prevent it from moving forward. The final rule falls within the “lookback window” for the Congressional Review Act, meaning it will be subject to review by the Republican-controlled 119th Congress and could be repealed via this mechanism; Republicans’ past criticism of the rule suggests that it will very likely be a target for CRA repeal. As the rule will not yet be in effect in January 2025, it will also be captured by the regulatory freeze that will be issued shortly after President-elect Donald Trump takes office.
With litigation filed shortly after the rule was released, the final overdraft rule joins the list of other rulemakings and enforcement actions that the CFPB is currently defending in court. The CFPB faced an unprecedented number of legal challenges under Director Chopra’s leadership; challenges to final rules for Small Business Lending (1071), credit card late fees, data-sharing (1033), Buy Now Pay Later and guidance in the Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) exam manual are at various stages in the litigation process. The Trump-era CFPB may choose not to defend the Biden-era regulations in court, but this is unchartered territory at the embattled agency. The incoming Trump administration may also revisit the overdraft fee guidance published by the CFPB in September 2024, among other changes at the agency.
For additional information on the final rule or overdraft fee guidance, please contact a member of the Brownstein Financial Services team.
THIS DOCUMENT IS INTENDED TO PROVIDE YOU WITH GENERAL INFORMATION REGARDING RECENTLY FINALIZED CFPB RULES ON OVERDRAFT FEES. THE CONTENTS OF THIS DOCUMENT ARE NOT INTENDED TO PROVIDE SPECIFIC LEGAL ADVICE. IF YOU HAVE ANY QUESTIONS ABOUT THE CONTENTS OF THIS DOCUMENT OR IF YOU NEED LEGAL ADVICE AS TO AN ISSUE, PLEASE CONTACT THE ATTORNEYS LISTED OR YOUR REGULAR BROWNSTEIN HYATT FARBER SCHRECK, LLP ATTORNEY. THIS COMMUNICATION MAY BE CONSIDERED ADVERTISING IN SOME JURISDICTIONS.