In furtherance of the Biden Administration’s “junk fee” agenda, on January 17, 2024, the Consumer Financial Protection Bureau issued its proposed rule to amend Regulations E and Z to regulate overdraft services provided by “very large financial institutions” (an insured depository institution or an insured credit union that has total assets of more than $10 Billion and any affiliate thereof, as determined under 12 U.S.C. 5515(a)). The proposed rule permits a very large financial institution to offer a courtesy overdraft service as long as it only charges a “breakeven” amount for the service, either (i) its direct costs to provide the service or (ii) a benchmark fee (in an amount to be determined, either $3, $6, $7, or $14). (Such an overdraft service is referred to as “breakeven overdraft credit.”) Any overdraft service for which a very large financial institution charges a greater fee would require a separate credit account and be deemed to be credit subject to compliance with Regulation Z consumer credit disclosure requirements and Regulation E’s compulsory use prohibition. Fees charged in excess of breakeven overdraft credit would be treated as finance charges (such as charges for authorizing or paying an overdraft, declining to authorize or pay a transaction, returning a transaction unpaid, transferring funds into the checking account from any credit account or asset account).

CFPB Director Rohit Chopra’s prepared remarks rehash prior overdraft consent orders, provide the CFPB’s view of the changes in the marketplace since the Federal Reserve Board exempted overdrafts, and express the reasoning for closing the “longstanding loophole” for overdraft services. The Biden Administration’s statement claims that the proposal will save families $3.5 billion every year, in perpetuity, and continues to mischaracterize overdraft fees as hidden fees.

The CFPB seeks comments on the proposal, including the breakeven overdraft credit concept, the costs to include in the calculation of direct costs to provide overdraft services, and which proposed benchmark fee figure – $3, $6, $7, or $14 – should be adopted.

While the proposed rule applies to very large financial institutions, in its summary the CFPB states that it “plans to monitor the market’s response to this rule before determining whether to alter the regulatory framework for financial institutions with assets less than or equal to $10 billion.” While this limited applicability allows the CFPB to assert that there is no need for it to do a Small Business Regulatory Enforcement Fairness Act review as the rulemaking would not have a significant economic impact on banks and credits unions with assets of $850 million or less, it leaves the door open for future expansion to smaller institutions. Other institutions (non-very large financial institutions) should consider providing comments, particularly in light of the fact that the rule deems all overdrafts that a consumer has to repay to be credit, even if Regulation Z disclosures are not required, which seems to be a veiled attempt to subject these institutions to usury claims.

The rule would take effect on the October 1 that is at least six months after the publication of the final rule in the Federal Register. The CFPB expects the proposed rule would be effective on October 1, 2025.

In addition to publishing the proposed rule, the CFPB published a fact sheet and a new report, “Overdraft and NSF Practices at Very Large Financial Institutions.” The CFPB sourced the data for the new report from responses to a supervisory information request issued in March 2023 to eight financial institutions (10% of the total impacted financial institutions). The CFPB used the data for research to calculate the average costs and losses of issuing overdraft credit. The report also covered NSF practices. Unlike other reports, the CFPB did not draw any conclusions from this report.

We can expect industry groups to review in detail and provide comments on the proposal. The Consumer Bankers Association (CBA) President and CEO Lindsey Johnson released a statement urging the CFPB to “pull this misguided and politically driven overdraft proposal.” The American Bankers Association President and CEO Rob Nichols released a statement questioning the CFPB’s legal authority to impose a price cap on overdraft services and limit consumer access to overdraft protection. Nichols said, “In an effort to score political points, the CFPB is seeking to eliminate a valuable service and push consumers who need overdraft protection into the hands of less-regulated, more-costly alternatives. We will review this proposal with our members and craft an appropriate response that identifies the flaws in the Bureau’s approach.” Chairman of the House Financial Services Committee, Patrick McHenry (R-NC), and the Chairman of the Subcommittee on Financial Institutions and Monetary Policy, Andy Barr (R-KY) also issued a statement criticizing the proposal.

By contrast, Congresswoman Maxine Waters (D-CA), the top ranking Democrat on the House Financial Services Committee, issued a statement supporting the CFPB’s efforts to curb excessive overdraft fees. Consumer advocacy group Accountable.US applauds the Biden Administrations effort to limit overdraft fees. Consumer Reports also praises the CFPB for its proposed rulemaking.

Obviously, further CFPB rulemaking is on the horizon. While this proposed rule does address NSF fees in several respects, for example, deeming them to be finance charges when assessed on covered overdraft credit, we fully expect to see a more detailed proposal to limit NSF fees in short order, as the CFPB’s rulemaking agenda separately lists an NSF fee rulemaking proceeding based on UDAAP principles. We still expect the credit card late fee rule prior to the President’s State of the Union address on March 7, 2024.

We are planning to host a webinar to discuss the proposed rule, details on which will be forthcoming, and look forward to the industry’s comments, which are due on April 1, 2024. We likewise anticipate holding webinars or podcasts on these other rulemaking proceedings.