Earlier in January 2024, the CFPB continued its crackdown on what it decries as “junk fees,” releasing a Proposed Rule to curb overdraft fees. The Proposed Rule could have a significant effect on the nature, availability, and cost of overdraft protection for deposit products, as it would significantly limit the fees that may be imposed on overdraft products and subject overdraft programs to Regulation Z and other consumer financial credit regulations.

The rule would take effect on the October 1 that occurs at least six months after the publication of the final rule in the Federal Register. The CFPB expects the Proposed Rule would become effective October 1, 2025. Comments are due by April 1, 2024.

Who’s Affected by the Proposed Rule?

The CFPB’s Proposed Rule would apply directly to “very large financial institutions,” defined as insured depository institutions or insured credit unions that have total assets of more than $10 billion, and their affiliates, which is any person controlled by or under common control of the insured depository institution. The same test to determine whether an institution is subject to the CFPB’s supervisory authority under 12 U.S.C. § 5515(a) is also used for this total assets test.

The Proposed Rule’s Effect on Overdraft Programs—Fee Safe Harbors for Non-Covered Overdraft Credit

The Proposed Rule would fundamentally alter the way that very large financial institutions run their overdraft programs, including by limiting the fees that could be charged for what the Proposed Rule would define as “non-covered overdraft credit.” Specifically, the Proposed Rule would allow very large financial institutions to continue to offer non-covered overdraft credit, without the additional requirements proposed by the rule for covered overdraft credit, as long as the fee for the overdraft credit does not exceed a safe harbor amount. The Proposed Rule would provide two ways to determine the safe harbor amount on overdraft fees for non-covered overdraft credit: very large financial institutions could (1) calculate their own safe harbor amount using a proposed “break-even standard” or (2) rely on a “benchmark fee” set by the CFPB.

• Break-Even Standard – Very large financial institutions could calculate the overdraft fee safe harbor amount by adding together all of the institution’s direct costs (including its cost of funds and direct operational costs of providing the overdraft service) and charge-off losses for providing non-covered overdraft credit from the previous year, and then dividing that amount by the number of non-covered overdraft transactions it honored in the past year for which it charged a fee. While the Proposed Rule’s text does not specify when very large financial institutions must perform the calculation, its preamble does indicate that the CFPB expects this to be an annual calculation.
• Benchmark Fee – The Proposed Rule explains that the CFPB is contemplating using one of four possible amounts to use as the “benchmark fee”: $3, $6, $7, or $14. To arrive at these proposed benchmark fees, the CFPB analyzed charge-off losses and cost data collected from several financial institutions and applied one of four methods to calculate the benchmark fee. In the Proposed Rule, the CFPB explicitly requested comment on the proposed benchmark fees and how they were calculated.

Overdraft services, as defined in Regulation E, which include overdraft credit that remains exempt from the Regulation Z, non-covered overdraft credit, will continue to be subject to the opt-in requirements for one-time debit card and ATM transactions.

Covered Overdraft Credit

As mentioned above, the Proposed Rule does not restrict overdraft fees to the safe harbor amounts. Overdraft credit can still be extended at a cost higher than when using either the break-even or the benchmark standard, but in that case, any fees would be considered “finance charges” and would be subject to Regulation Z. Compliance with Regulation Z would become mandatory under the Proposed Rule for this type of overdraft credit, which the Proposed Rule would define as “covered overdraft credit” and would mean, among other things: (1) eliminating transfer fees or treating them as finance charges; (2) offering consumers alternative means of repaying their overdrafts other than through a pre-authorized electronic funds transfer; and (3) providing certain disclosures generally required for open-end credit, such as account opening disclosures and periodic statements.

The Proposed Rule would require very large financial institutions to create a separate “covered overdraft credit account” from which it would extend the “covered overdraft credit.” Furthermore, very large financial institutions would be prohibited from treating any overdraft as a negative balance on a linked checking account or other asset account.

Additionally, the Proposed Rule would subject certain overdraft credit products, such as hybrid debit-credit cards that are used to access overdraft credit, to the Credit Card Accountability Responsibility and Disclosure (CARD) Act-related sections of Regulation Z in Subparts G and B. Any covered overdraft credit that is open-end credit, accessible by a credit card, and offered by a very large financial institution would be subject to these CARD Act provisions. These provisions include, but would not be limited to:

• Limits on:
  • Fees a consumer is required to pay during the first year
  • Finance charges imposed as a result of the loss of a grace period
  • Fees for over-the-limit transactions
• The requirement to analyze a consumer’s ability to repay before opening a “covered overdraft credit account”
• Provisions regarding allocation of payments
• Rules restricting increases in APR or finance charges on outstanding balances
• Limits on consumers’ liability for unauthorized use
• Extending rights to consumers to dispute transactions

The Proposed Rule would also prohibit a very large financial institution from offsetting amounts due on the covered overdraft credit account with amounts in a consumer’s deposit account.

Compulsory Use Prohibition for Covered Overdraft Credit

The Proposed Rule would subject very large financial institutions to the compulsory use provision under Regulation E, which prohibits requiring consumers to use preauthorized electronic fund transfers for repayment of overdraft credit when providing covered overdraft credit. As a result, very large financial institutions could not condition the provision of covered overdraft credit on the consumer’s agreement to permit automatic payments from the consumer’s checking account. While a consumer may still be given the choice to opt into automatic periodic payments, the proposed rule would require very large financial institutions to allow consumers to use at least one alternative method of repayment for covered overdraft credit.

What Comes Next?

As noted, the CFPB is requesting comments on the Proposed Rule by April 1, 2024, and signaled that a final rule may take effect by October 1, 2025. If implemented as currently written, the Proposed Rule would fundamentally alter how very large financial institutions offer overdraft credit—from operational and underwriting issues, to disclosures and compliance controls.

Although this proposal is aimed at so-called very large financial institutions, it may have downstream effects on smaller institutions. For instance, if the CFPB effectively sets a cap on overdraft fees, smaller institutions may find themselves having to conform to the rule to minimize the risk of customers shifting to larger institutions with lower fees. Accordingly, it is important for all financial institutions to review the Proposed Rule, understand the potential impacts, and comment on the Proposed Rule, if needed, to ensure the CFPB properly considers the effect on the entire banking industry.

We also note that the treatment of overdraft accounts under the Proposed Rule would also subject them to the Equal Credit Opportunity Act and Regulation B’s prohibitions on discrimination, which has been a CFPB supervisory and enforcement priority.

Commenters may consider whether the CFPB’s characterization and calculations of fees and related policy conclusions are accurate. For instance, commenters may be able to point to certain costs and considerations that institutions bear in connection with overdraft fees, including any operational or compliance costs related to the provision of overdraft services, and any mitigation possible for potential consumer harm. In addition, commenters may want to consider or explain the volume of fees charged and the role those fees play in revenues, and consider how the nominal fee charged today, if adjusted for inflation, corresponds with fees charged in prior decades.