We previously posted an article about a proposed rule that could drastically affect the courtesy overdraft services offered by many financial institutions (you can refresh your memory here).
Well, the time has come. The Consumer Financial Protection Bureau (CFPB) has finalized its proposed rule that aims to close what CFPB Director Rohit Chopra has characterized as a “loophole” from certain consumer financial protection laws. The final rule requires large financial institutions to either cap their overdraft fees or otherwise treat courtesy overdraft services as covered credit and comply with requirements that commonly apply to traditional credit products.
As we previously noted, the new rule imposes additional requirements on “overdraft credit,” or overdraft charges that exceed either a “break-even” point or a flat dollar benchmark set by the CFPB. Citing comments from concerned financial institutions regarding the cost of processing overdrafts, the CFPB increased its flat dollar benchmark from $3 to $5. The CFPB reasoned that a higher benchmark was not warranted because financial institutions still have the option of using their actual costs to calculate the “break-even” point.
It is also worth highlighting that the new rule will only apply to financial institutions with more than $10 billion in assets (but we think it may have an overarching impact on smaller financial institutions as customers shop around). Responding to commenters concerned with the applicability of the rule, the CFPB pointed to the recent elimination of overdraft fees by a number of large banks and the ability of larger financial institutions to adapt to the new rule (versus smaller financial institutions and their reliance on overdraft fee income). That being said, the CFPB again signaled that it plans to monitor the market and consider whether to expand the applicability of the rule.
The rule takes effect in October 2025, well after president-elect Donald Trump returns to office, which brings into question whether the final rule will become effective. The incoming Trump administration is expected to “delete” or at least weaken the CFPB, and the Republican-controlled congress is expected to rescind recently-adopted rules via the Congressional Review Act. It remains to be seen whether this new rule will be impacted by the new administration. In addition to those potential deal-breakers, the final rule has also been challenged by a number of trade groups that are seeking an injunction in the Southern District of Mississippi.
This article is provided for informational purposes only—it does not constitute legal advice and does not create an attorney-client relationship between the firm and the reader. Readers should consult legal counsel before taking action relating to the subject matter of this article.
