As you may have heard, the Consumer Financial Protection Bureau (CFPB) has proposed a new rule that would drastically change the landscape of courtesy overdraft services offered by many large financial institutions. Under this new rule, large financial institutions will likely be forced to either cap their overdraft fees or otherwise treat their courtesy overdraft services as covered credit and comply with a handful of additional disclosure and other requirements that commonly apply to traditional credit products.
Here’s a run-down of the new rule (and why you should care):
Stretching Regulation Z.
According to the CFPB, this new rule is aimed to close a so-called “outdated loophole” that has allowed large financial institutions to profit for decades. In short, this new rule would require financial institutions with more than $10 billion in assets to treat their courtesy overdraft services the same way they treat credit cards and other loans. To accomplish this, the new rule introduces a couple of new concepts in order to bring certain types of courtesy overdraft services within the scope of “covered credit” subject to the federal Truth in Lending Act and Regulation Z.
In relevant part, the new rule will tweak the trigger of what constitutes a “finance charge” for purposes of Regulation Z—if a financial institution’s overdraft fee exceeds a certain amount, it will constitute a “finance charge” and trigger a handful of additional disclosure and compliance obligations. The CFPB refers to this amount as “above breakeven,” referring to the amount at which the financial institution’s overdraft fee has exceeded its costs and losses in actually offering the overdraft service. So in essence, if the financial institution wants to “break-even” on its overdraft service (i.e., if it wants to make a profit), then it will need to comply with Regulation Z (and more).
So, what is this mysterious “break-even” point? Under the new rule, a financial institution would have two options available to determine whether its overdraft fee exceeds this break-even point. First, the financial institution could calculate its own costs and losses (using the CFPB’s standards under the new rule). Or second, the financial institution could simply “say uncle” and rely on a benchmark fee set by the CFPB under the new rule—the CFPB is considering setting this benchmark fee as low as $3. As you might imagine, many financial institutions may simply choose to stop offering their courtesy overdraft services due to these limitations and compliance costs.
Additional Compliance (and Costs).
For a financial institution that chooses to bite the bullet and continue applying its “above break-even” overdraft fee, it will be required to comply with a handful of additional disclosure and other requirements that commonly apply to traditional open-end credit products (e.g., account opening disclosures, periodic statements, advertising rules, ability-to-pay underwriting requirements, limitations on penalty fees, and various requirements related to rate changes). On top of those requirements, the new rule would also require the financial institution to structure its overdraft service into a new account separate and apart from the customer’s deposit or other transaction account. In other words, the financial institution could no longer offer its courtesy overdraft service by showing a negative balance on the customer’s overdrawn deposit account—rather, it would be required to establish a separate “credit account” for the customer reflecting their overdrawn balance. As the cherry on top, the new rule would also prohibit the financial institution from requiring the customer to repay the overdrawn balance only by means of preauthorized electronic funds transfer, meaning the financial institution would be required to offer at least one alternative method of repayment.
Why Should You Care?
As mentioned above, the new rule will apply to large financial institutions with more than $10 billion in assets...for now. However, it may be only a matter of time before the new rule could apply to smaller financial institutions. In its commentary on the new rule, the CFPB made clear that it will “continue to monitor the market” and seek comment on whether $10 billion is the correct threshold for the new rule. Further, if $3 overdraft fees become the norm, many smaller financial institutions may find it difficult explaining to their regulators and customers why their higher overdraft fees are fair and reasonable. As the war on bank fees continues to rage on, it almost seems inevitable that financial institutions of all sizes will find themselves subject to this new rule (or some variation of it) in the future. As always, the public has an opportunity to submit comments on this new rule, and the CFPB encourages folks to do so. The public comment period closes on April 1, 2024, and the CFPB anticipates that this new rule will go into effect in early October 2025.
