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February 2, 2024

CFPB Proposes Two Rulemakings on Overdraft and NSF Fees

Advisory

In the last several weeks, the Consumer Financial Protection Bureau (CFPB) issued two new rulemakings aimed at further restricting the imposition by financial institutions of fees on consumer accounts:

  • On January 17, the CFPB issued a notice of proposed rulemaking (NPRM) to update certain exceptions in Regulations E and Z regarding the extension of overdraft credit by “very large financial institutions” (Overdraft Lending Proposed Rule). Specifically, the NPRM would bring “above breakeven overdraft credits” within the scope of consumer credit under the Truth-in-Lending Act and Regulation Z and require covered financial institutions to apply certain longstanding consumer protections, including interest rate and fee disclosures, to overdraft credits.
  • On January 24, the CFPB published a NPRM to prohibit non-sufficient funds (NSF) fees on transactions that financial institutions decline in real time, or near-instantaneously, including, for example, declined debit card purchases and ATM withdrawals, as well as some declined peer-to-peer payments (NSF Fees Proposed Rule).

This Advisory summarizes the key components of the proposed rules and discusses next steps in the rulemaking process and takeaways for financial institutions.

Understanding the CFPB’s Overdraft Lending Proposed Rule

Currently, Regulation Z covers overdraft credit that is previously agreed to in writing. The Overdraft Lending Proposed Rule would amend Regulations E and Z to subject overdraft credit provided by very large financial institutions to applicable requirements of those regulations, unless overdraft fees are at or below the institution’s “breakeven point.” While the NPRM would apply only to “very large financial institutions” (i.e., insured depository institutions and credit unions with more than US$10 billion in assets), the CFPB indicated that it “plans to monitor the market’s response to the [proposed] rule before determining whether to alter the regulatory framework for financial institutions with assets less than or equal to US$10 billion.”

Under the Overdraft Lending Proposed Rule, Regulation Z would except overdraft credits provided by very large financial institutions as a courtesy or accommodation to consumers, where the financial institution only charges a “breakeven” amount for the service, either: (1) the average of its direct costs and charge-off losses for providing the service or (2) a “benchmark fee” set by the CFPB. The CFPB has proposed several options for the benchmark fee, including $3, $6, $7, or $14. Setting the overdraft fee at or below the breakeven amount would allow the financial institution to remain exempt from Regulation Z under 12 C.F.R. § 1026.4(b)(3); however, any fee above breakeven would subject the overdraft credit to Regulation Z, including provisions in subpart B of the regulation that establish requirements for open-end credit, such as the account-opening disclosures, periodic statements, and advertising rules.

The Overdraft Lending Proposed Rule would also make changes to “offset” practices. For covered overdraft credits, the proposed rule would prohibit the structuring of an overdraft as a negative balance in the consumer’s bank account. Instead, covered financial institutions would be required to provide the covered overdraft credit to the consumer through a “credit account” that is separate from the consumer’s checking or other transaction account. Further, a consumer with an overdraft balance who receives an incoming deposit must be given access to the deposit and use of it for purposes other than immediately repaying the overdraft balance.

In addition, under the NPRM, covered overdraft credit that is accessed by debit cards or routing/checking account numbers would be subject to protections that apply under the Credit Card Accountability Responsibility and Disclosure Act to traditional credit cards, including ability-to-pay underwriting requirements, limitations on penalty fees, and various requirements related to rate changes.

Lastly, the Overdraft Lending Proposed Rule would prohibit compulsory use of preauthorized electronic fund transfers (EFT) for repayment of covered overdraft credits. In other words, very large financial institutions could not condition the extension of overdraft credit on the consumer’s agreement to repay it solely by preauthorized EFT, and must offer the consumer at least one alternative repayment option in addition to a preauthorized EFT. However, the proposal notes that financial institutions may still offer a reduced APR or other cost-related incentive for consumers to choose the option of automatic repayment.

The CFPB seeks comment on several specific aspects of the Overdraft Lending Proposed Rule, including whether to eliminate the Regulation Z exception for very large financial institutions rather than amend its application to above breakeven overdraft credit, the costs to include in the calculation of direct costs to provide overdraft services, and which proposed benchmark fee figure to adopt. Comments on the NPRM are due by April 1. The CFPB is targeting an effective date of October 1, 2025 for the final rule.

Understanding the CFPB’s NSF Fees Proposed Rule

The NSF Fees Proposed Rule would prohibit covered financial institutions1 (e.g., banks, credit unions, and certain peer-to-peer payment companies) from charging NSF fees on transactions from an account2 that are declined instantaneously or near-instantaneously regardless of transaction method (e.g., debit card, ATM, person-to-person), which it views as an abusive practice. Based on the proposed definitions in the NPRM, NSF fees charged on declined checks and ACH transactions would not be prohibited by the rule.

Under section 1031(d)(2)(A) of the DFA,3 the CFPB may declare an act or practice to be abusive in connection with the provision of a consumer financial product or service if the act or practice takes unreasonable advantage of a lack of understanding on the part of the consumer of the material risk, costs, or conditions of the product or service. The CFPB determined preliminarily that charging an NSF fee in connection with an instantaneously or near-instantaneously declined transaction would take unreasonable advantage of consumers’ lack of understanding of the material risks, costs, or conditions associated with their deposit accounts, and thus would be abusive.

Although the CFPB acknowledged that financial institutions currently almost never charge fees for transactions that are declined in real time, the NSF Fees Proposed Rule provides, “as technological advancements may eventually make instantaneous payments ubiquitous, the CFPB believes that [it] is important to proactively set regulations to protect consumers from abusive practices.” Specifically, the CFPB declares that “NSF fees may become increasingly appealing as a revenue source in the absence of this proposal,” and the proposed rule is a preventive measure and will “preempt imposition of new fees that would harm consumers in the future.”

If finalized, the NSF Fees Proposed Rule would take effect 30 days after publication in the Federal Register. The CFPB proposed this expedited effective date because the practices prohibited by the proposed rule are not thought to be prevalent.

The NPRM requests comments on the NSF Fees Proposed Rule by March 25, and specifically solicits feedback on the proposed definitions of covered financial institution, covered transaction, and NSF fee, and whether the description of the preliminarily identified abusive practice should be revised in any way.

Takeaways for Financial Institutions

The NSF Fees Proposed Rule reflects the CFPB’s continued belief that financial institutions are incentivized to generate revenue from fees, and that when the banking industry loses access to one source of fee revenue through proscriptive regulation, it will look for other sources of fee revenue. Given the CFPB’s heightened attention to fee practices, financial institutions should consider reviewing their overdraft and NSF fee structures and policies as well as related account forms and disclosures in light of the proposed rulemakings to determine what changes may be necessary, including to conform to the proposed exclusion (breakeven standard or benchmark fee) or TILA’s enhanced disclosure requirements for overdraft credit, assuming the final rules are similar to what the CFPB has proposed. 

© Arnold & Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

  1. 12 C.F.R. § 1005.2(i).

  2. 12 C.F.R. § 1005.2(b).

  3. 12 U.S.C. § 5531(d)(2)(A).