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The CFPB has issued its long-awaited final rule that covers overdraft policies at financial institutions with at least $10 billion in assets. The final rule offers those financial institutions three options for designing their overdraft programs.
The rule came one day after Senate Banking Committee ranking Republican Sen. Tim Scott, R-S.C. criticized CFPB Director Rohit Chopra for failing to heed his call for the CFPB to pause rulemaking and enforcement actions until President-Elect Donald Trump takes office. During a committee hearing, Chopra declined to make that commitment.
In issuing the rule, the CFPB said that it addresses a 1969 exemption in which the Federal Reserve Board excluded overdraft services from Truth in Lending Act protections. At the time, overdraft services were not considered profit drivers, but were offered as a courtesy service. That since has changed and some banks use overdraft programs as profit drivers, according to the CFPB.
The CFPB estimated that if implemented, the final rule is expected to add up to $5 billion in annual overdraft fee savings to consumers.
The CFPB’s final rule gives financial institutions with at least $10 billion in assets three choices for their overdraft programs. Those financial institutions may:
- Cap their overdraft fee at $5 breakeven fee, which is the CFPB’s estimated level at which most banks would be able to recoup their costs associated with administering a courtesy overdraft program.
- Set their overdraft fee based on a calculation from the allowed costs and losses associated with operating overdraft service.
- Offer “overdraft lending” by complying with Regulation Z requirements. This would . This option would require financial institutions to deliver TILA and MLA disclosures, make an ability-to-repay determination, send consumers periodic statements and give them the opportunity to pay automatically or manually.
Consumer groups praised the rule. “The CFPB’s overdraft rule ensures that the most vulnerable consumers are protected from big banks trying to pad their profits with junk fees,” said Carla Sanchez-Adams, senior attorney at the National Consumer Law Center.
She said that big banks often charge $35 for an overdraft, far more than the cost of covering an overdraft.
However, the overdraft rule may never take effect.
Incoming President-Elect Trump, an opponent of Director Chopra’s actions as bureau director, is likely to work to rescind the rule, which is not scheduled to go into effect until October 1, 2025. In addition, several trade groups and three banks almost immediately filed suit challenging the overdraft rule.
Congress also could use the Congressional Review Act to attempt to rescind the rule. That resolution would be subject to a presidential veto. If the current Congress attempted to repeal it, President Biden would be certain to veto it. However, next year, Republicans will control both houses of Congress, as well as the White House. They could use the CRA to rescind the rule.
A coalition of trade groups and three banks immediately filed suit challenging the overdraft rule seeking a declaration that the overdraft rule violates the APA, TILA, and CFPA and injunctive relief.
The Mississippi Bankers Association; the American Bankers Association; the Consumer Bankers Association; America’s Credit Unions, Arvest Bank in Fayetteville, Ark.; the Bank of Franklin in Meadville, Miss.; and the Commercial Bank in DeKalb, Miss. filed suit in the U.S. District Court for the Southern District of Mississippi.
In their suit, the plaintiffs claim the CFPB violated the Administrative Procedures Act by exceeding their statutory authority under TILA and CFPA and the overdraft rule is arbitrary and capricious. They contend that the overdraft rule appears to rely primarily on TILA, a law that established disclosure obligations for credit products and specifically excluded overdrafts services from its scope. However, they argue that overdraft services are not credit products since consumers do not have a right to incur overdrafts or defer repayment of the overdraft.
To distinguish overdrafts from “credit,” the plaintiffs said that financial institutions retain discretion whether to pay or decline items that would overdraw a customer’s account in exchange for a fee disclosed in the customer’s account agreement. To support their arbitrary and capricious arguments, the plaintiffs allege that the overdraft rule contains (i) an inadequate cost-benefit analysis, (i) an interpretation unsupported by legislative history and prior Federal Reserve Board and OCC issuances, (iii) no indication that statutory factors were considered to determine the $10 billion threshold, and (iv) no basis for the breakeven fee distinction.
The plaintiffs also indicated that discretionary overdraft services provide a significant benefit to consumers that may not be able to qualify for credit.
The complaint makes compelling arguments about how the CFPB exceeded its statutory authority under TILA that may be difficult for the CFPB to overcome as overdrafts have been regulated under Regulation E and Regulation DD not Regulation Z. The CFPB’s use of TILA authority for this rulemaking is far more attenuated than the credit card late fee rule, for which an injunction remains in place.