New Year Same Focus on Fees: CFPB Proposes to Amend Regulation Z to Raise New Barriers to Overdraft Charges

On January 17, the Consumer Financial Protection Bureau (CFPB or Bureau) issued a proposed rule with request for public comment to amend exemptions to Regulation Z so the Truth in Lending Act (TILA)/Regulation Z would apply to certain overdraft “credit” provided by insured financial institutions with more than $10 billion in assets, in furtherance of the Bureau’s crusade on “junk fees.” At a highlevel, the CFPB’s proposed rule would provide covered financial institutions with two options for offering overdraft “credit”: (1) a “courtesy” overdraft service with “breakeven” fees exempt from TILA/Regulation Z; or (2) a “covered overdraft credit” line/loan in connection with debit card or routing/account number transactions with “above breakeven” fees subject to TILA/Reg. Z. Under the proposal, an institution subject to the rule would have to provide full TILA disclosures and comply with other substantive TILA requirements for overdraft fees if they exceed costs or a low CFPB safe harbor amount.

The CFPB states the proposed rule closes a “loophole” in TILA, which currently provides that an overdraft charge is not a finance charge if the financial institution has not previously agreed in writing to pay items that overdraw an account.

• As to courtesy overdraft services, the proposed rule would limit the overdraft fee a covered financial institution may charge to align with the institution’s costs. In determining the permitted amount of the fee, the proposed rule provides for both a “breakeven standard” and a “benchmark standard.”
  • The breakeven standard allows the financial institution to use standards set forth in the proposed rule to calculate its own losses due to the overdraft and associated costs.
  • A financial institution could also impose a benchmark fee set forth by the CFPB, which the rule proposes to be between $3 to $14. These courtesy overdraft services would remain exempt from TILA/Regulation Z.
• As to covered overdraft fees involving “above breakeven” fees, TILA/Regulation Z’s cost comparison disclosure requirements and substantive requirements applicable to credit cards, including ability to pay underwriting, penalty fee and first year fee provisions would apply.

The proposed rule would also amend a related exemption currently providing that a charge imposed in connection with an overdraft credit feature (e.g., a charge for each item that results in an overdraft) is not a finance charge if it does not exceed the charge for a similar transaction account without an overdraft credit feature (e.g., the charge for returning each item). As a result of the amendment, all transfer charges on asset accounts with linked overdraft lines of credit (i.e., fees imposed for transferring funds to an asset account from an overdraft line of credit) would be deemed finance charges.

The CFPB’s proposed rulemaking follows more than a year of CFPB supervisory and enforcement attacks on overdraft fees as part of its larger crusade against so-called “junk fees,” including the Bureau’s December report, discussed here. According to CFPB Director Chopra in the press release announcing the rulemaking, “Decades ago, overdraft loans got special treatment to make it easier for banks to cover paper checks that were often sent through the mail … Today, we are proposing rules to close a longstanding loophole that allowed many large banks to transform overdraft into a massive junk fee harvesting machine.”

Interested parties have until April 1, 2024 to submit comments. The CFPB estimates the rule would become effective October 1, 2025.