The Consumer Financial Protection Bureau (CFPB) released a long-anticipated notice of proposed rulemaking on Jan. 17 that would fundamentally alter how overdraft services are provided by banks and credit unions. The CFPB is proposing to apply the rule only to what it deems “very large” banks and credit unions with assets equal to or exceeding $10 billion. The agency estimates that roughly 175 financial institutions would be covered under the proposal, and also hinted at potential future additional coverage for smaller financial institutions, stating that the CFPB intends to “monitor the market’s response” before deciding whether to expand this scope to smaller entities in future rulemakings.
The CFPB is also aiming to severely limit fees for overdraft services, seeking feedback on setting benchmark fees from between $3 and $14. The CFPB estimates that current fees are around $35, so this would be a significant shift for any programs currently offered by covered financial institutions.
This is the latest in a broader effort by the Biden administration to crack down on what the administration views as “junk fees,” following several press releases and other less formal efforts targeting overdraft products. It is expected that the CFPB, and the larger administration, will also announce in the next few weeks massive changes to the ability to charge credit card late fees.
The Provision of “Courtesy” Overdraft Credit
The CFPB proposes a new structure for determining—and limiting—the fees that “very large financial institutions” may charge for overdraft services. While these banks and credit unions can continue to provide courtesy overdraft credit, the fees they can charge would be assessed against a new breakeven standard or a benchmark fee. If the fees are equal to or less than these metrics, the overdraft credit provided would not be subject to Regulation Z.
- Breakeven Standard. To deploy this standard, the CFPB 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. The proposal includes further guidance on the types of costs and charge-off losses that an institution may consider when making this calculation.
- Benchmark Fee. The CFPB proposes to set this alternative fee at $3, $6, $7 or $14, and the agency contends that it would create a “simple bright-line method” for very large financial institutions to use when assessing whether the overdraft credit they provide is below or above the breakeven threshold. The CFPB reached each of the benchmark fees by applying different calculations to relevant data collected from eight very large financial institutions.
Extending TILA to All Overdraft Products
Overdraft credit can be provided at a cost higher than the breakeven standard or the benchmark fees, but above those thresholds it would be subject to Regulation Z. Compliance would require: (1) treating transfer fees as finance charges, or eliminating those fees, (2) offering consumers a means of repaying their overdrafts other than by preauthorized EFTs, and (3) beginning 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.
Thus, financial institutions would be required to make mandatory disclosures to consumers regarding the cost of credit, among other matters. Further, hybrid debit-credit cards used by consumers to access overdraft credit would be subject under the proposal 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.
The proposal also requires that overdraft credit be structured as a separate credit account, not a negative balance on a checking or other transaction account. 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 would also be 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.
Changes to Key Definitions
The proposal would notably revisit the existing exemption that shields many charges imposed in connection with overdraft credit from being deemed a “finance charge.” The rule proposes several modifications to the definition that narrow the scope of the exemption. Under Regulation Z, finance charges must be disclosed to consumers. These changes, in combination with modifications proposed to Regulation Z’s existing definition of “open-end credit,” would require that overdraft credit that exceeds the breakeven threshold is deemed open-end credit and is subjected to the corresponding provisions under Regulation Z.
It also creates several new definitions for key terms in the proposed changes, including:
- “overdraft credit”
- “above breakdown overdraft credit”
- “covered asset credit account”
- “covered overdraft credit”
- “covered overdraft credit account”
- “hybrid debit-credit card”
Outlook
The CFPB expects that the rule would take effect on Oct. 1, 2025. Many stakeholders and members of Congress have already expressed deep concerns about the impact the rule will have on consumers’ options for products and services. While the proposal currently carves out financial institutions with under $10 billion is assets, the CFPB has already hinted at revisiting that threshold. Additionally, all financial institutions will be impacted by the precedent and market changes created by the proposal.
It is very unlikely that the rule will be finalized by the time the Congressional Review Act lookback window closes for the 118th Congress, meaning it could be subject to review by the next presidential administration and the 119th Congress. It is expected that Congress and a wide variety of stakeholders will participate in a robust comment period and a likely review in congressional hearings.
While the future of the rulemaking is uncertain, impacted entities and those that may be the subject of related efforts in the future should consider providing their input. Comments will be accepted on the rule until April 1, and the Brownstein Financial Services team is well equipped to craft responses to the proposal. For additional legal analysis, please contact Brownstein’s team.
This document is intended to provide you with general information regarding CFPB rules regarding bank 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. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.