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Financial Services Law Insights and Observations

CFPB proposes new rule on overdraft lending, opens comment period

Agency Rule-Making & Guidance CFPB Junk Fees TILA Regulation E Regulation Z

Agency Rule-Making & Guidance

On January 17, the CFPB issued a proposed new rule to restrict overdraft fees charged by financial institutions. Historically, the Federal Reserve Board exempted banks from credit disclosure requirements when an overdraft was needed to honor checks (for a fee). The proposed rule would recharacterize overdrafts as extensions of credit, which would extend the consumer credit protections in TILA that apply to other forms of credit to overdraft credit. 

According to the related Fact Sheet, the proposed rule would only apply to financial institutions with assets of $10 billion or more. The CFPB offered financial institutions two options on deciding how much to charge customers. First, a financial institution may adopt a “breakeven standard,” charging a fee needed to offset losses for written off overdrawn account balances and direct costs traceable to the provision of courtesy overdrafts. Second, a financial institution may employ a “benchmark fee,” of either $3, $6, $7, or $14, derived by the CFPB from analyzing charge-off losses and cost data. Comments to the rule must be received on or before April 1, 2024. In addition, the proposal would prohibit requiring the customer to use preauthorized electronic fund transfers for repayment of covered overdraft fees by these institutions. The final overdraft rule is expected to go into effect on October 1, 2025.