Leaning In: The CFPB Publishes Rule on Fees for Overdraft Services

On December 30, 2024, the Consumer Financial Protection Bureau (CFPB) published a final rule that may dramatically change the way that certain large financial institutions offer overdraft services to consumers. Under the overdraft final rule (the “Final Rule”), the largest financial institutions will have to either limit the cost of overdraft services to the amount of their costs and losses, as defined by the CFPB, or adhere to a fee cap of $5. If covered financial institutions charge consumers fees exceeding these amounts, they will be required to treat overdraft services like the provision of credit, requiring compliance with the Truth in Lending Act (TILA) and implementing Regulation Z. The Final Rule largely adopts the provisions of the January 2024 proposed rule.

Many financial institutions have voluntarily reduced or eliminated overdraft fees in recent years. Accordingly, while the Final Rule represents a shift in the regulation of overdraft services and could significantly affect financial institutions that still offer covered overdraft credit services, the Final Rule will not have the same impact on the industry that it would have had five years ago. This alert provides an overview of the Final Rule, identifies key differences between the proposed rule and the Final Rule, and considers what is next for the Final Rule and overdraft services. We also address early legal challenges to the Final Rule.

Overview of the Final Rule

The Final Rule, like the proposed rule, will only apply to insured financial institutions with more than $10 billion in assets. The Final Rule distinguishes between overdraft services that are exempt “courtesy” overdraft services, subject to the CFPB’s fee limitations, and overdraft services that are “credit,” subject to requirements under TILA and Regulation Z. Covered financial institutions will not be required to treat overdraft services as credit if the cost to consumers is at or below the $5 fee cap set by the CFPB (the “benchmark fee”). Overdraft services will also not be subject to TILA and Regulation Z if they do not exceed the amount of the financial institution’s costs and losses in providing overdraft services (the “breakeven” fee).

Under the Final Rule, overdraft services with fees that exceed either the breakeven fee or the benchmark fee are considered credit under TILA and are subject to a new Section 1026.62 of Regulation Z. The Final Rule refers to these overdraft services as “covered overdraft credit.” A covered financial institution charging such fees is required to (1) establish a credit account for the customer (separate from the customer’s asset account); and (2) comply with Regulation Z.

Moreover, financial institutions will need to change the way in which consumers reimburse them for overdrafted funds. For covered overdraft credit subject to TILA, covered financial institutions will not be able to engage in the common practice of offsetting a consumer’s account, which is prohibited under Regulation Z. When a financial institution engages in offsetting, it deducts the overdrafted balance from the consumer’s account once the consumer makes a deposit into their bank account. Under the Final Rule, covered financial institutions will have to issue periodic statements to consumers for such overdrafted funds.

Covered financial institutions providing covered overdraft credit will also have to comply with other Regulation Z provisions, including the requirements to provide account opening disclosures and periodic statements, the requirement to disclose annual percentage rates (APR), the requirement to disclose credit limits, the limitations on penalty fees and fees charged during the first year after account opening, and provisions covering Regulation Z’s advertising rules. Notably, financial institutions that offer covered overdraft credit will be required to provide consumers with account opening disclosures. Account opening disclosures require financial institutions to provide a variety of information, including the APR, balance computation method, and amount of late payment fees. In the Final Rule, the CFPB clarifies that credit account opening disclosures will have to be provided when tying covered overdraft credit to deposit accounts that already exist. The Final Rule’s requirement that covered overdraft credit be structured as a separate credit account also prohibits financial institutions from structuring covered overdraft credit as a negative balance on a checking or transaction account.

The Final Rule also prohibits covered financial institutions from conditioning the extension of overdraft credit on a consumer’s compulsory use of preauthorized transfers under Regulation E. Under the Final Rule, financial institutions must offer a consumer at least one method of repaying an overdraft credit balance other than by preauthorized electronic fund transfer. Consumers will still be allowed to opt in to automatic repayments, but will have the right to make a manual repayment.

Key Differences from the Proposed Rule

Increase in the benchmark fee. In the proposed rule, the CFPB considered a variety of benchmark fees ranging from $3 to $16. Each of the alternatives used the same general formula but was calculated using different reasoning and different data points. Generally, the CFPB determined total charge-off losses, excluding certain losses (e.g., losses attributable to unauthorized use and billing errors), and then added $1 to the charge-off loss per non-covered overdraft transaction to account for a financial institution’s cost of funds and operational costs.

In the Final Rule, the CFPB adopted the approach used for the proposed $3 benchmark fee, i.e., basing the fee on the charge-off loss per transaction for five sample very large financial institutions, but increased its cost estimate by $2 per transaction, raising the benchmark fee to $5. The CFPB said it increased the cost estimate to account for additional costs raised by commenters on the proposed rule, such as the costs for overdraft notices, collections, and technology.

Calculation of the breakeven fee. Under the Final Rule, when a covered financial institution determines its breakeven fee, it may consider only costs and charge-off losses that are specifically traceable to provision of non-covered overdraft credit. The Final Rule clarifies that a cost or charge-off loss is specifically traceable if (1) it has a direct relationship to the provision of non-covered overdraft services, and (2) the covered financial institution can provide evidence to demonstrate that direct relationship. Such costs and charge-off losses include, but are not limited to, cost of funds, net charge-off losses, and operating expenses for the non-covered overdraft credit program. The CFPB clarifies that certain kinds of costs are excluded from the calculation of costs under the breakeven standard (e.g., unauthorized use, EFT errors, billing errors, returned deposit items, or rescinded provisional credit).

What’s Next?

The Final Rule is scheduled to take effect October 1, 2025, but prospects for the rule are uncertain. Because the President can remove the CFPB director at will, we expect a new director at or near the start of the next administration. A Trump-appointed director could revise, withdraw, or decline to enforce the Final Rule.

Moreover, under unified government, Congress may seek to rescind the Final Rule under the Congressional Review Act (CRA). If Congress adopts a joint resolution of disapproval that the President signs, the CFPB would be precluded from promulgating a rule on a substantially similar topic unless specifically authorized by a law enacted after the CRA joint resolution. It is unclear whether the Final Rule will be a priority for Congress’s CRA activities.

This Final Rule already has been challenged by the banking industry. On the same day the CFPB issued the Final Rule, banking trades and several individual banks sued the CFPB in the U.S. District Court for the Southern District of Mississippi challenging the validity of the Final Rule under TILA and the Administrative Procedure Act (APA). The plaintiffs allege that the CFPB exceeded its statutory authority under TILA by misconstruing the term “credit” to include discretionary overdraft services and the term “finance charge” to include fees imposed on discretionary overdraft services. In addition, plaintiffs claim that the CFPB lacks the authority under TILA to impose “substantive limitations on the terms under which discretionary overdraft services may be offered.” More broadly, the plaintiffs allege that the Final Rule is arbitrary and capricious under the APA and will reduce the availability of short-term funding sources, harming consumers who depend on the increased liquidity provided by overdraft services. Plaintiffs are seeking a preliminary injunction to enjoin the Final Rule and extend the compliance deadline day-for-day with the injunction. The CFPB is expected to file a response to the groups’ motion by January 14, 2025.

We will continue to monitor developments in the overdraft services space, including with regard to the implementation of the Final Rule and the legal challenge to its enforcement.