Proposed Rule2024-01095
Overdraft Lending: Very Large Financial Institutions
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
February 23, 2024
Issuing agencies
Consumer Financial Protection Bureau
Abstract
The Consumer Financial Protection Bureau (CFPB) proposes to amend Regulations E and Z to update regulatory exceptions for overdraft credit provided by very large financial institutions, thereby ensuring that extensions of overdraft credit adhere to consumer protections required of similarly situated products, unless the overdraft fee is a small amount that only recovers applicable costs and losses. The proposal would allow consumers to better comparison shop across credit products and provide substantive protections that apply to other consumer credit.
Full Text
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[Federal Register Volume 89, Number 37 (Friday, February 23, 2024)]
[Proposed Rules]
[Pages 13852-13908]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-01095]
[[Page 13851]]
Vol. 89
Friday,
No. 37
February 23, 2024
Part III
Consumer Financial Protection Bureau
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12 CFR Parts 1005 and 1026
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Overdraft Lending: Very Large Financial Institutions; Proposed Rule
Federal Register / Vol. 89 , No. 37 / Friday, February 23, 2024 /
Proposed Rules
[[Page 13852]]
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CONSUMER FINANCIAL PROTECTION BUREAU
12 CFR Parts 1005 and 1026
[Docket No. CFPB-2024-0002]
RIN 3170-AA42
Overdraft Lending: Very Large Financial Institutions
AGENCY: Consumer Financial Protection Bureau.
ACTION: Proposed rule; request for public comment.
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SUMMARY: The Consumer Financial Protection Bureau (CFPB) proposes to
amend Regulations E and Z to update regulatory exceptions for overdraft
credit provided by very large financial institutions, thereby ensuring
that extensions of overdraft credit adhere to consumer protections
required of similarly situated products, unless the overdraft fee is a
small amount that only recovers applicable costs and losses. The
proposal would allow consumers to better comparison shop across credit
products and provide substantive protections that apply to other
consumer credit.
DATES: Comments must be received on or before April 1, 2024.
ADDRESSES: You may submit comments, identified by Docket No. CFPB-2024-
0002 or RIN 3170-AA42, by any of the following methods:
<bullet> Federal eRulemaking Portal: <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
Follow the instructions for submitting comments. A brief summary of
this document will be available at <a href="https://www.regulations.gov/docket/CFPB-2024-0002">https://www.regulations.gov/docket/CFPB-2024-0002</a>.
<bullet> Email: <a href="/cdn-cgi/l/email-protection#4f7d7f7d7b62011f1d026200190a1d0b1d0e091b0f2c293f2d61282039"><span class="__cf_email__" data-cfemail="6e5c5e5c5a43203e3c234321382b3c2a3c2f283a2e0d081e0c40090118">[email protected]</span></a>. Include Docket No.
CFPB-2024-0002 or RIN 3170-AA42 in the subject line of the message.
<bullet> Mail/Hand Delivery/Courier: Comment Intake--2024 NPRM
Overdraft, c/o Legal Division Docket Manager, Consumer Financial
Protection Bureau, 1700 G Street NW, Washington, DC 20552.
Instructions: The CFPB encourages the early submission of comments.
All submissions should include the agency name and docket number or
Regulatory Information Number (RIN) for this rulemaking. Commenters are
encouraged to submit comments electronically. In general, all comments
received will be posted without change to <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
All submissions, including attachments and other supporting
materials, will become part of the public record and subject to public
disclosure. Proprietary information or sensitive personal information,
such as account numbers or Social Security numbers, or names of other
individuals, should not be included. Submissions will not be edited to
remove any identifying or contact information.
FOR FURTHER INFORMATION CONTACT: Anna Boadwee, Attorney-Advisor; Joseph
Baressi, Pedro De Oliveira, Thomas Dowell, Brandy Hood, Kristin
McPartland, or Mark Morelli, Senior Counsels, Office of Regulations, at
202-435-7700 or <a href="https://reginquiries.consumerfinance.gov/">https://reginquiries.consumerfinance.gov/</a>. If you
require this document in an alternative electronic format, please
contact <a href="/cdn-cgi/l/email-protection#b6f5f0e6f4e9f7d5d5d3c5c5dfd4dfdadfc2cff6d5d0c6d498d1d9c0"><span class="__cf_email__" data-cfemail="c0838690829f81a3a3a5b3b3a9a2a9aca9b4b980a3a6b0a2eea7afb6">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Summary of Proposed Rule
II. Background
A. Overview of Overdraft Credit
B. Evolution and Growth of Non-Covered Overdraft
C. Non-Covered Overdraft Credit Today
D. Consumer Impact of Overdraft Fees
E. Growing Regulatory Concerns About Non-Covered Overdraft
Credit
F. Need for CFPB Action
III. Outreach and Related Research
IV. Legal Authority
A. Truth in Lending Act
B. Electronic Fund Transfer Act
C. Consumer Financial Protection Act
V. Discussion of the Proposed Rule
A. Who is covered? (Sec. 1026.62(b)(8))
B. What transactions and accounts are covered?
C. Changes to the Definition of ``Finance Charge'' (Sec.
1026.4(b)(2), (b)(12), and (c)(3); Sec. 1026.62(d))
D. Changes to Covered Overdraft Credit Offered by Very Large
Financial Institutions
VI. Proposed Effective Date
VII. Severability
VIII. CFPA Section 1022(b) Analysis
A. Overview
B. Data Limitations and Quantification of Benefits, Costs, and
Impacts
C. Baseline for Analysis
D. Potential Benefits and Costs to Consumers and Covered Persons
of the Proposed Changes That Affect Charges for Non-Covered and
Covered Overdraft Credit
E. Potential Benefits and Costs to Consumers and Covered Persons
of Further Provisions of the Proposed Rule
F. Potential Specific Impacts of the Proposed Rule on Depository
Institutions and Credit Unions With $10 Billion or Less in Total
Assets, as Described in CFPA Section 1026
G. Potential Specific Impacts of the Proposed Rule on Consumer
Access to Credit and on Consumers in Rural Areas
IX. Regulatory Flexibility Act Analysis
X. Paperwork Reduction Act
I. Summary of Proposed Rule
Overview
This proposed rule would update non-statutory exceptions in
Regulations Z and E that have allowed very large financial institutions
to avoid statutory requirements when extending certain overdraft
credit.\1\
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\1\ When amending commentary, the Office of the Federal Register
(OFR) requires reprinting of certain subsections being amended in
their entirety rather than providing more targeted amendatory
instructions. The sections of regulatory text and commentary
included in this document show the language of those sections if the
Bureau adopts its changes as proposed. In addition, the Bureau is
releasing an unofficial, informal redline to assist industry and
other stakeholders in reviewing the changes that it proposes to make
to the regulatory text and commentary of Regulation E and Regulation
Z. This redline may be found on the Bureau's website, <a href="https://files.consumerfinance.gov/f/documents/cfpb_unofficial-redline_overdraft-credit-very-large-financial-institutions-proposed-rule_2024-01.pdf">https://files.consumerfinance.gov/f/documents/cfpb_unofficial-redline_overdraft-credit-very-large-financial-institutions-proposed-rule_2024-01.pdf</a>. If any conflicts exist between the redline and the
text of Regulation E or Regulation Z, its commentary, or this
proposed rule, the documents published in the Federal Register are
the controlling documents.
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Consumer credit is subject to Regulation Z if the creditor imposes
a finance charge, which generally includes any charge payable directly
or indirectly by the consumer and imposed directly or indirectly by the
creditor as an incident to or a condition of the extension of
credit.\2\ However, when the Board of Governors of the Federal Reserve
System (Board) first adopted Regulation Z in 1969,\3\ it excepted from
Regulation Z's definition of finance charge any charges for honoring
checks that overdraw a checking account unless the payment of the check
and imposition of the fee were previously agreed upon in writing. The
Board subsequently made ``minor editorial changes'' to this exception,
e.g., to reflect ``items that are similar to checks, such as negotiable
orders of withdrawal.'' \4\ This exception is unique to credit extended
to pay account overdrafts. In adopting this exception, the Board did
not rely on an interpretation of the statute; rather, the Board used
its authority to create regulatory exceptions. Similar consumer credit
products are subject to Regulation Z.
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\2\ Consumer credit is also subject to Regulation Z in other
circumstances. See, e.g., 12 CFR 1026.1(c).
\3\ 34 FR 2002 (Feb. 11, 1969).
\4\ 46 FR 20848, 20855 (Apr. 7, 1981).
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This exception was evidently intended to allow banks to continue
providing limited overdraft services, as a courtesy to consumers who
inadvertently overdrew their account, without the banks complying with
Regulation Z. In the early years of the regulation, decisions to pay an
item that
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overdraws an account instead of returning it unpaid were made as a
relatively infrequent part of administering asset accounts. At the
time, consumers typically withdrew funds from their bank accounts
through in-person withdrawals or by writing checks. If a consumer
mistimed when funds from a check deposit would be available for
withdrawal \5\ and inadvertently overdrew their account and the
overdrawing check were returned unpaid, the bank would typically charge
the consumer a nonsufficient funds (NSF) fee and the consumer could be
subject to additional fees imposed by the payee and other negative
consequences from bounced checks. If, instead of returning the check,
the financial institution paid it notwithstanding the unavailable or
insufficient funds in the account, such courtesy payment could provide
a benefit to the consumer, who would avoid all of the negative
consequences of a bounced check without being charged any additional
fees beyond the amount charged for nonsufficient funds.
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\5\ In 1987, Congress enacted the Expedited Funds Availability
Act (12 U.S.C. 4001 et seq.) to provide depositors of checks with
prompt funds availability and to foster improvements in the check
collection and return processes. See 82 FR 27552, 27552 (June 15,
2017). Section 229.2(d) of Regulation CC (12 CFR 229), which
implements that act, defines ``available for withdrawal.''
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Over the last 30 years, in conjunction with widespread financial
institution adoption of information technology systems as well as the
expansion of debit card transactions that can overdraw an account,
overdraft credit products provided under the exception have morphed
from an occasional courtesy provided to consumers into frequently used
and promoted products that increase costs to consumers (in certain
instances) and generate a substantial portion of the direct fee revenue
that financial institutions make from checking accounts (and much of
the total revenue that financial institutions make from low-balance
accounts). The volume of overdrawing transactions rose drastically over
the years, including on transactions where the consumer may have
suffered no negative consequences if the transaction were declined.
Since the CFPB focused substantial enforcement and supervision
attention on overdraft fees in 2021, overdraft fee revenue has
contracted somewhat. However, it is still a source of billions of
dollars in profits every year, and most very large financial
institutions continue to charge $35 today. Financial institutions today
generally make pay/no-pay decisions in advance--for example, by setting
overdraft limits that the consumer may not be aware of and using
information technology systems to make automated pay/no-pay decisions.
They sometimes calibrate these systems with the goal of generating fee
revenue. Because of these market changes, which increase the risk that
a consumer will unwittingly incur high overdraft fees, helping
consumers make informed decisions about overdraft credit has become a
much more serious concern.
Key Changes
Given these changes over the past 30 years and consistent with
TILA's purpose of promoting the informed use of credit, the CFPB is
proposing to update several non-statutory exceptions in Regulation Z to
extend consumer credit protections that generally apply to other forms
of consumer credit to certain overdraft credit provided by very large
financial institutions. These changes would allow consumers to better
compare certain overdraft credit to other types of credit and would
provide consumers with several substantive protections that already
apply to other consumer credit.
These amendments would apply only to very large financial
institutions--i.e., insured depository institutions and credit unions
with more than $10 billion in assets. The proposal would not change the
regulatory framework for overdraft services offered by financial
institutions with assets of $10 billion or less. The CFPB plans to
monitor the market's response to this rule before determining whether
to alter the regulatory framework for financial institutions with
assets less than or equal to $10 billion.
Under this proposal, Regulation Z would generally apply to
overdraft credit provided by very large institutions unless it is
provided at or below costs and losses as a true courtesy to consumers.
The proposed rule would accomplish this result by updating two
regulatory exceptions from the statutory definition of finance charge.
First, the proposal would update an exception that currently provides
that a charge for overdraft is not a finance charge if the financial
institution has not previously agreed in writing to pay items that
overdraw an account \6\ so that the exception would not apply to
``above breakeven overdraft credit'' offered by a very large financial
institution. The proposal would give financial institutions the ability
to determine whether an overdraft charge is considered above breakeven
overdraft credit by either: (1) calculating its own costs and losses
using standards set forth in the proposal; or (2) relying on a
benchmark fee set by the CFPB in the proposal. The CFPB is considering
setting the benchmark fee at $3, $6, $7, or $14. Second, the proposal
would update a related exception that provides 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 the
charge does not exceed the charge for a similar transaction account
without a credit feature (e.g., the charge for returning each item).\7\
As a result of the proposed change, all transfer charges that very
large financial institutions impose 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 to cover an item that
would otherwise take the asset account's balance negative) would be
finance charges.
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\6\ 12 CFR 1026.4(c)(3).
\7\ 12 CFR 1026.4(b)(2).
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If the proposal is finalized, above breakeven overdraft credit that
is not currently subject to Regulation Z would become subject to
Regulation Z, including provisions in subpart B that govern open-end
credit (e.g., the account opening disclosures, periodic statements, and
advertising rules). For ease of reference, this proposal generally
refers to overdraft credit that is not subject to Regulation Z as non-
covered overdraft credit and overdraft credit that is subject to
Regulation Z as covered overdraft credit. Above breakeven overdraft
credit is currently a type of non-covered overdraft credit, but it
would become covered overdraft credit if this proposal is finalized.
The proposal would also require covered overdraft credit offered by
very large financial institutions to be put in a credit account
separate from the asset account, and it would update exceptions
relating to credit cards. Among other changes, it would apply the
portions of Regulation Z that implement the Credit Card Accountability
Responsibility and Disclosure Act of 2009 (CARD Act) to covered
overdraft credit that can be accessed by a hybrid debit-credit card,
such as a debit card or other single credit device (including certain
account numbers) that a consumer may use from time to time to obtain
covered overdraft credit from a very large financial institution.
Provisions of the CARD Act that would apply to such overdraft credit
include, but are not limited to, ability-to-pay underwriting
requirements, limitations on penalty fees including certain fees on
[[Page 13854]]
transactions that are declined due to nonsufficient funds, and various
requirements related to rate changes.
The proposal would also prohibit compulsory use of preauthorized
electronic fund transfers (EFTs) for repayment of covered overdraft
credit provided by very large financial institutions, which would
ensure that consumers using those products have a choice of at least
one alternative method of repayment. As a result of this change,
covered overdraft credit offered by very large financial institutions
could not be conditioned on consumers agreeing to automatic debits from
their checking account. Consumers could still opt into automatic
payments on a periodic basis if offered by their financial institution,
but they would have the right to repay this overdraft credit manually
if they prefer.
The CFPB proposes that the final rule, if adopted, would take
effect on the October 1 which follows by at least six months the date
it is published in the Federal Register, consistent with 15 U.S.C.
1604(d). The CFPB expects that would likely fall on October 1, 2025.
The CFPB invites comment on all aspects of this notice of proposed
rulemaking and on the specific issues on which it solicits comment
elsewhere herein, including on any appropriate modifications or
exceptions to the Proposed Rule.
II. Background
A. Overview of Overdraft Credit
An overdraft occurs when consumers do not have a sufficient balance
in their asset account to pay a transaction, but the financial
institution pays the transaction anyway. Typically, the financial
institution pays an overdraft transaction by either transferring the
consumer's own funds from another asset account held by the financial
institution, such as a savings account, or by extending overdraft
credit (i.e., using the financial institution's own funds and requiring
the consumer to repay).
Currently, not all overdraft credit is subject to Regulation Z. For
example, when the Board first adopted Regulation Z in 1969,\8\ it
excepted from Regulation Z's coverage charges for honoring checks that
overdraw a checking account unless the payment of the check and
imposition of the fee were previously agreed upon in writing. A Board
official interpretation stated that this exception for ad hoc credit
decisions applies only to ``regular demand deposit accounts which carry
no credit features and in which a bank may occasionally, as an
accommodation to its customer, honor a check which inadvertently
overdraws that account.'' \9\ The Board subsequently adopted commentary
excluding debit cards with no credit agreement from Regulation Z's
definition of ``credit card.'' \10\ While the Board did not explain
this exception, it appears it was intended to exclude discretionary
overdraft services from being subject to Regulation Z when they are
accessed by a debit card, consistent with the exclusion for overdraft
charges from the definition of finance charge.\11\
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\8\ 34 FR 2002 (Feb. 11, 1969).
\9\ 42 FR 22360, 22362 (May 3, 1977).
\10\ 46 FR 50288, 50293 (Oct. 9, 1981) (providing that a
``credit card'' does not include ``[a] check-guarantee or debit card
with no credit feature or agreement, even if the creditor
occasionally honors an inadvertent overdraft''); see also Regulation
Z comment 2(a)(15)-2.ii.A.
\11\ Under Regulation Z, an issuer of a credit card can be a
creditor regardless of whether the credit is subject to a finance
charge. 12 CFR 1026.2(a)(17)(iii); see also 12 CFR 1026.2(a)(7)
(defining ``card issuer''). Thus, without the 1981 exception, a
financial institution that extends overdrafts could be a
``creditor'' for purposes of subpart B of TILA even with an
exemption of overdraft fees from the finance charge.
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Some overdraft credit is previously agreed upon in writing and is
currently covered by Regulation Z. Such covered overdraft credit
enables consumers to link a checking account to a credit account, like
an overdraft line of credit or a credit card, from which funds are
transferred automatically to pay transactions when the checking account
balance is insufficient to pay them. Some financial institutions charge
a fee, often referred to as an overdraft protection transfer fee, for
these transfers.\12\ Financial institutions may assess such a fee once
per day that a transfer is made, once to transfer a round dollar value
increment (e.g., a fee for $100 transferred to cover any overdraft(s)
less than $100), or, less commonly, once per overdraft transaction;
\13\ however, since late 2021, a number of financial institutions have
voluntarily eliminated such fees.\14\ Credit accounts used to cover
overdrafts also carry an interest rate applied to the outstanding
balance. Repayment of the overdrawn amount and interest is typically
made periodically according to a payment schedule. The ability to
obtain and use covered overdraft credit is typically limited to
consumers whose credit history allows them to qualify for an overdraft
line of credit or who have available credit on a credit card.
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\12\ Consumer Fin. Prot. Bureau (CFPB), CFPB Study of Overdraft
Programs: A white paper of initial data findings, at 55 (June 2013),
<a href="https://files.consumerfinance.gov/f/201306_cfpb_whitepaper_overdraft-practices.pdf">https://files.consumerfinance.gov/f/201306_cfpb_whitepaper_overdraft-practices.pdf</a> (CFPB 2013 White
Paper) (noting 28 of a sample of 33 large institutions charged a
transfer fee in 2012, ranging from $3 to $20 per transfer, with a
median of $10, while smaller institutions charged a median of $5).
\13\ Id.
\14\ Between December 2022 and July 2023, CFPB reviewed publicly
available information describing the overdraft-related practices of
very large financial institutions (CFPB Market Monitoring of
Publicly Available Overdraft Practices, Dec. 2022-July 2023).
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Financial institutions may also pay overdrafts through currently
non-covered overdraft credit, where the financial institution typically
pays overdrafts up to certain limits but does not agree in advance to
pay the overdrawn transactions, reserving discretion to decline any
given overdraft transaction. This type of overdraft credit is currently
non-covered overdraft credit because it is currently not subject to
Regulation Z. This proposal may also refer to currently non-covered
overdraft credit as an overdraft service, overdraft services, or an
overdraft program. With certain exceptions provided for by internal
policies, the financial institution typically assesses a flat fee for
each overdraft transaction the financial institution pays. In addition,
some financial institutions charge an additional fee or fees, known as
extended or sustained overdraft fees, if the consumer does not bring
the account back to a positive balance within a specified period. To
collect repayment of the funds advanced to cover overdraft transactions
as well as payment of the fees assessed, the financial institution
typically deducts those amounts as a lump sum from the consumer's next
incoming deposit(s), usually within three days after the account became
overdrawn.\15\
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\15\ Trevor Bakker et al., CFPB, Data Point: Checking account
overdraft, at 5, 22 (July 2014), <a href="https://files.consumerfinance.gov/f/201407_cfpb_report_data-point_overdrafts.pdf">https://files.consumerfinance.gov/f/201407_cfpb_report_data-point_overdrafts.pdf</a> (CFPB 2014 Data
Point).
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Financial institutions typically provide non-covered overdraft
credit for certain transaction types--primarily checks, automated
clearinghouse (ACH) transactions, and recurring debit card
transactions--as a default, up to certain coverage limits. For one-time
(non-recurring) debit card and ATM transactions, financial institutions
may not assess overdraft fees for paying such transactions without
first obtaining the consumer's opt-in following the process required by
Regulation E 12 CFR 1005.17(b).
Financial institutions employ a number of different practices and
policies when making pay/return decisions in connection with non-
covered overdraft.\16\ While, as noted above, overdraft credit must
technically be discretionary to be excepted from Regulation Z, in
practice, financial
[[Page 13855]]
institutions typically assign each account an overdraft coverage limit
representing the maximum amount of overdraft coverage the financial
institution will extend on the account. Once an account reaches its
overdraft coverage limit, the financial institution will no longer pay
transactions into overdraft and will return those transactions unpaid.
Overdraft coverage limits may be static (i.e., the financial
institution assigns an unchanging limit to each customer) or dynamic
(i.e., the financial institution changes the limit for each account
periodically based on account usage patterns, market conditions, or
account and accountholder characteristics in an attempt to manage more
precisely credit risk, overdraft program revenues, and customer
retention).\17\ Financial institutions that use static limits may
communicate those limits to account holders, while financial
institutions that use dynamic limits generally do not communicate those
limits to account holders.
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\16\ CFPB 2013 White Paper at 48-52.
\17\ Common account and account holder characteristics include
account tenure, average balance, overdraft history, and deposit
patterns, as well as other relationships the accountholder may have
with the institution.
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Historically, financial institutions have charged an NSF fee when
they reject, rather than pay, transactions initiated by check or ACH or
other electronic payments; in contrast, financial institutions have
rarely if ever charged an NSF fee when declining a one-time debit card
purchase or an ATM withdrawal. Financial institutions typically have
charged the same amount for an NSF fee as for a non-covered overdraft
fee.\18\ As noted in part II.C, many financial institutions have
eliminated NSF fees over the past two years.
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\18\ See Consumers Guide to Banking: Staff Report on Commercial
Bank Charges in the New York and Washington, DC Metropolitan Area,
S. Comm. on Banking, Hous. and Urban Affairs, 94th Cong. 10-11 tbl.3
(1976) (Senate Staff Report); see also 70 FR 8428, 8429 (Feb. 18,
2005) (``Regardless of whether the overdraft is paid, institutions
typically charge the NSF fee when an overdraft occurs.''); 74 FR
59033, 59035 (Nov. 17, 2009) (``Second, a consumer will generally be
charged the same fee by the financial institution whether or not a
check is paid; yet if the institution covers an overdrawn check, the
consumer may avoid other adverse consequences, such as the
imposition of additional merchant fees); Fed. Deposit Ins. Corp.
(FDIC), 2008 FDIC Study of Bank Overdraft Programs, at 16 n.18 (Nov.
2008), <a href="https://www.fdic.gov/bank/analytical/overdraft/FDIC138_Report_Final_v508.pdf">https://www.fdic.gov/bank/analytical/overdraft/FDIC138_Report_Final_v508.pdf</a> (FDIC 2008 Study) (``For most of the
survey population operating automated programs, the per-item fee
charged when items were paid under automated overdraft programs was
the same as the fee charged by the bank on NSF items that it did not
pay. These two fees were equal to each other for 98.1 percent of 451
institutions reporting the two fee items.'').
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B. Evolution and Growth of Non-Covered Overdraft
Non-covered overdraft credit started as a courtesy that financial
institutions provided when they would decide on a manual, ad hoc basis
to pay particular check transactions into overdraft rather than
returning those checks unpaid.\19\ This courtesy would help consumers
avoid NSF fees, merchant fees, and other negative consequences from
bounced checks. Over time, non-covered overdraft credit began to move
away from that historical model, as financial institutions shifted to a
system involving heavy reliance on automated programs to process
transactions and to make overdraft decisions.\20\ Financial
institutions also began to extend overdraft credit to debit card
transactions, even though a declined debit card transaction did not
pose the same risk to consumers of an NSF fee, a merchant fee, or
certain other consequences associated with a bounced check.\21\ Over
time, debit card transactions became more numerous than checks,
increasing the number of transactions that could generate overdrafts,
with typical debit card transactions involving smaller amounts than
typical check transactions.\22\ Even as transaction processing and
overdraft decisioning became more automated and overdraft transactions
increased in frequency and decreased in size, financial institutions
increased the size of overdraft fees. In 1976, when the process was
typically manual and included only checks, one survey of banks in
Washington, DC, and New York found that the median fee was $5, while
some banks charged zero.\23\ By 1994, concern had risen about the
increase in the average fee to over $15 ($5.77 in 1976 dollars); \24\
by 2000, the average had surpassed $20 ($6.61 in 1976 dollars) and
continued to increase thereafter.\25\
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\19\ See 42 FR 22360, 22362 (May 3, 1977) (describing the
exception from Regulation Z as applying when overdraft is provided
``as an accommodation . . . honoring a check which inadvertently
overdraws that account.''); see also Federal Reserve Board Staff
Opinion Letter No. 948 (Nov. 17, 1975) (explaining that the
exception ``relates only to regular demand deposit accounts which
carry no credit feature and in which a bank may occasionally, as an
accommodation to its customer, honor a check which inadvertently
overdraws that account'').
\20\ See 74 FR 59033, 59033 n.1 (Nov. 17, 2009) (citing FDIC's
Study of Bank Overdraft Programs (Nov. 2008), which found that
nearly 70 percent of banks surveyed implemented their automated
overdraft program after 2001).
\21\ See id. at 59035; see also id. at 59034 n.6 (citing
Overdraft Protection: Fair Practices for Consumers: Hearing before
the House Subcomm. On Financial Institutions and Consumer Credit,
House Comm. On Financial Services, 110th Cong., at 72 (2007))
(``noting that as recently as 2004, 80 percent of banks still
declined ATM and debit card transactions without charging a fee when
account holders did not have sufficient funds in their account.'').
\22\ Federal Reserve Payments Studies from 2004 to 2013 (exhibit
1 in each study) show that from 2000 to 2012, annual debit card
transactions increased from 8.3 billion to 47 billion, while annual
check transactions decreased from 41.9 billion to billion to 18.3
billion. By 2008, debit card transactions exceeded the number of
checks. See Bd. of Governors of the Fed. Rsrv. Sys. (FRS), Federal
Reserve Payments Study (FRPS)--Previous Studies, <a href="https://www.federalreserve.gov/paymentsystems/frps_previous.htm">https://www.federalreserve.gov/paymentsystems/frps_previous.htm</a> (last
updated Apr. 21, 2023); see also FRS, The 2013 Federal Reserve
Payments Study, at 9 ex.2 (Dec. 2013), <a href="https://www.frbservices.org/binaries/content/assets/crsocms/news/research/2013-fed-res-paymt-study-summary-rpt.pdf">https://www.frbservices.org/binaries/content/assets/crsocms/news/research/2013-fed-res-paymt-study-summary-rpt.pdf</a> (showing the average debit card transaction
ranged from $37 to $40 from 2003-2012, while the average check
transaction ranged from $1,103 to $1,410). The CFPB has found that
the median transaction amount that leads to an overdraft fee in the
case of debit card transactions is $24, while the median check and
ACH transactions that lead to overdraft fees are $100 and $90,
respectively. See CFPB 2014 Data Point at 5; see also Fin. Health
Network (FHN), Overdraft Trends Amid Historic Policy Shifts (June 1,
2023), <a href="https://finhealthnetwork.org/research/overdraft-trends-amid-historic-policy-shifts/">https://finhealthnetwork.org/research/overdraft-trends-amid-historic-policy-shifts/</a> (FHN Brief 2023) (finding almost half (45
percent) of overdrafters reported that their most recent overdraft
occurred on a transaction of $50 or less).
\23\ Senate Staff Report at 10-11.
\24\ See Bank Fees Associated with Maintaining Depository,
Checking, and Credit Card Accounts, Hearing Before the Subcomm. on
Consumer Credit and Ins., Comm. on Banking, Finance and Urban
Affairs, 103rd Cong. 73 tbl.3 (1993) (Testimony by Susan M.
Phillips, Member, Bd. of Governors of the Fed. Rsrv. Sys.) (showing
average overdraft fee of over $15 in 1993); see also id. at 95-96,
101-02 (Statement of Chris Lewis, Dir. of Banking and Hous. Pol'y,
Consumer Fed'n of Am.) (noting concerns about the rise in the size
of ``bounced check fees'', a term the organization used to describe
the fee assessed when funds were insufficient, whether the
transaction was returned unpaid or paid into overdraft).
\25\ Gov't Accountability Off., Bank Fees: Federal Banking
Regulators Could Better Ensure That Consumers Have Required
Disclosure Documents Prior to Opening Checking or Savings Accounts,
at 14 (Jan. 2008), <a href="https://www.gao.gov/assets/gao-08-281.pdf">https://www.gao.gov/assets/gao-08-281.pdf</a>; see
also FDIC 2008 Study (by 2007, among primarily financial
institutions with less than $5 billion in assets, the average fee
was $27); CFPB 2013 White Paper at 52 (by 2012, among the nation's
largest financial institutions, the average fee was $34).
---------------------------------------------------------------------------
As a result of these market shifts and operational changes, fee
revenue from non-covered overdraft credit began to significantly
influence the overall business model for many asset accounts. Financial
institutions became less likely to charge consumers upfront monthly
checking account fees, which consumers could more easily compare across
the market, and instead began to rely heavily overdraft fees.\26\ In
essence, the provision of non-covered overdraft credit moved away from
its original purpose--paying occasional or inadvertent overdrafts as a
courtesy--and became the dominant component of
[[Page 13856]]
a back-end pricing business model. By 2004, marketwide overdraft
revenue was estimated at approximately $10 billion and, by 2009, had
increased to an estimated $25 billion.\27\
---------------------------------------------------------------------------
\26\ CFPB 2013 White Paper at 16-17.
\27\ CFPB's estimates of marketwide overdraft revenue, before
banks with over $1 billion in assets began reporting overdraft/NSF
revenue on call reports in 2015, are based on the esitmated share of
aggregated fee revenue that banks and credit unions reported on call
reports that was attributable to overdraft fees. For more details on
methodology, see Jacqueline Duby et al., Ctr. for Responsible
Lending (CRL), High Cost & Hidden From View: The $10 Billion
Overdraft Loan Market (May 26, 2005), <a href="https://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/ip009-High_Cost_Overdraft-0505.pdf">https://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/ip009-High_Cost_Overdraft-0505.pdf</a>; see also Leslie
Parrish, CRL, Overdraft Explosion: Bank fees for overdrafts increase
35% in two years, at 4 (Oct. 6, 2009), <a href="https://www.responsiblelending.org/research-publication/overdraft-explosion-bank-fees-overdrafts-increase-35-two-years">https://www.responsiblelending.org/research-publication/overdraft-explosion-bank-fees-overdrafts-increase-35-two-years</a>.
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C. Non-Covered Overdraft Credit Today
Marketwide overdraft revenue declined following the 2010
implementation of the Board's ``opt-in'' rule under Regulation E to an
estimated $12 billion in 2011 before beginning to increase again.\28\
In the several years preceding the COVID-19 pandemic, marketwide
overdraft revenue was persistent, climbing from an estimated $11.8
billion in 2015 to $12.6 billion in 2019.\29\ With the onset of the
pandemic in March 2020, overdraft revenue dropped significantly. The
drop was likely primarily due to pandemic-related stimulus payments
pushing up average checking account balances, as well as temporarily
decreased use of debit cards.\30\ In addition, Federal regulators
encouraged, and some State regulators encouraged or mandated, financial
institutions to offer leniency around imposition of overdraft fees in
light of the pandemic.\31\ Notwithstanding the trend downward during
the pandemic, estimated marketwide overdraft revenue exceeded $9
billion in 2020 and 2021.\32\
---------------------------------------------------------------------------
\28\ Id.
\29\ CFPB's estimates of marketwide overdraft revenue for 2015
to 2022 extrapolate total overdraft/NSF revenue reported on call
reports by banks with over $1 billion in assets to banks with less
than $1 billion in assets and to credit unions in order to reach a
total marketwide estimate of overdraft/NSF revenue, and then
estimate the portion of that combined overdraft/NSF revenue that is
attributable to overdraft revenue alone. To extrapolate reported
overdraft/NSF revenue to banks with less than $1 billion in assets
and to credit unions, the CFPB uses data collected from core
processors for the number of accounts by asset size and the
overdraft/NSF revenue per account, and from 2014 call report data
for distribution of institutions by asset size, and then assumes
that overdraft/NSF revenue at small institutions saw the same growth
from 2014 to 2019 as at large banks to arrive at the 2019 estimate.
These extrapolations result in estimates where banks with over $1
billion in assets comprise 77.4 percent of marketwide overdraft/NSF
revenue, banks with less than $1 billion in assets comprise 7.3
percent of such revenue, and credit unions comprise 15.3 percent of
such revenue. See [Eacute]va Nagyp[aacute]l, Ph.D., CFPB, Data
Point: Overdraft/NSF Fee Reliance Since 2015--Evidence from Bank
Call Reports, at 7 (Dec. 2021), <a href="https://files.consumerfinance.gov/f/documents/cfpb_overdraft-call_report_2021-12.pdf">https://files.consumerfinance.gov/f/documents/cfpb_overdraft-call_report_2021-12.pdf</a> (CFPB 2021 Data
Point). For the 2022 estimate, the CFPB assumes that banks with
assets over $1 billion, banks with assets below $1 billion, and all
credit unions represent the same relative portions of total
marketwide overdraft/NSF revenue in 2022 as they did in 2019.
\30\ CFPB 2021 Data Point at 22-24.
\31\ See Press Release, FRS, FDIC & Off. of the Comptroller of
the Currency (OCC), Joint Statement on CRA Consideration for
Activities in Response to COVID-19 (Mar. 19, 2020), <a href="https://www.occ.gov/news-issuances/bulletins/2020/bulletin-2020-19a.pdf">https://www.occ.gov/news-issuances/bulletins/2020/bulletin-2020-19a.pdf</a>;
Press Release, CFPB, Consumer Financial Protection Bureau Encourages
Financial Institutions and Debt Collectors to Allow Stimulus
Payments to Reach Consumers (Mar. 17, 2021), <a href="https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-encourages-financial-institutions-and-debt-collectors-to-allow-stimulus-payments-to-reach-consumers/">https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-encourages-financial-institutions-and-debt-collectors-to-allow-stimulus-payments-to-reach-consumers/</a>; see also,
e.g., State of Cal. Bus., Consumer Servs. & Hous. Agency, Guidance
to Financial Institutions During the COVID-19 Pandemic (Mar. 22,
2020), <a href="https://www.bcsh.ca.gov/coronavirus19/dbo_banks.pdf">https://www.bcsh.ca.gov/coronavirus19/dbo_banks.pdf</a>; Press
Release, N.Y. State Dep't of Fin. Servs., DFS Issues New Emergency
Regulation Requiring New York Regulated Financial Institutions To
Provide Financial Relief To New Yorkers Demonstrating Financial
Hardship From COVID-19 Pandemic (Mar. 24, 2020), <a href="https://www.dfs.ny.gov/reports_and_publications/press_releases/pr202003241">https://www.dfs.ny.gov/reports_and_publications/press_releases/pr202003241</a>.
\32\ See discussion of methodology at FN 29.
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Beginning in late 2021, a number of large banks began announcing
and implementing changes to their overdraft policies.\33\ Some banks
eliminated overdraft fees altogether or reduced them to $10 or $15 per
transaction.\34\ Some banks made changes to their policies by expanding
their fee waiver policies, including establishing a daily limit of one
fee per day; \35\ establishing de minimis negative balance thresholds,
within which overdrafts do not result in a fee of $50 or more; and
implementing grace periods giving consumers time through the next
business day to bring their accounts positive before a fee is
assessed.\36\ Collectively these changes resulted in a sustained
reduction in overdraft revenues as compared to pre-pandemic levels.\37\
Marketwide overdraft revenue in 2022 was an estimated $9.1 billion
($7.9 billion in 2019 dollars, a 37 percent drop in real terms).\38\ Of
that, an estimated $6.16 billion, or 68 percent, was earned by
financial institutions with above $10 billion in assets.\39\ At the
same time, most very large financial institutions eliminated NSF
fees.\40\
---------------------------------------------------------------------------
\33\ Rebecca Born[eacute] & Amy Zirkle, Comparing overdraft fees
and policies across banks, CFPB (Feb. 10, 2022), <a href="https://www.consumerfinance.gov/about-us/blog/comparing-overdraft-fees-and-policies-across-banks/">https://www.consumerfinance.gov/about-us/blog/comparing-overdraft-fees-and-policies-across-banks/</a>.
\34\ Id.
\35\ Id.
\36\ Id.
\37\ CFPB, Data Spotlight: Overdraft/NSF revenue down nearly 50%
versus pre-pandemic levels (May 24, 2023), <a href="https://www.consumerfinance.gov/data-research/research-reports/data-spotlight-overdraft-nsf-revenue-in-q4-2022-down-nearly-50-versus-pre-pandemic-levels/full-report/">https://www.consumerfinance.gov/data-research/research-reports/data-spotlight-overdraft-nsf-revenue-in-q4-2022-down-nearly-50-versus-pre-pandemic-levels/full-report/</a> (CFPB May 2023 Data Spotlight).
\38\ See discussion of methodology at FN 29.
\39\ Estimated using data from 2022 Federal Financial
Institutions Examination Council (FFIEC) Call Reports and
methodology discussed at FN 29.
\40\ CFPB, Data spotlight: Vast majority of NSF fees have been
eliminated, saving consumers nearly $2 billion annually (Oct. 11,
2023), <a href="https://www.consumerfinance.gov/data-research/research-reports/vast-majority-of-nsf-fees-have-been-eliminated-saving-consumers-nearly-2-billion-annually/">https://www.consumerfinance.gov/data-research/research-reports/vast-majority-of-nsf-fees-have-been-eliminated-saving-consumers-nearly-2-billion-annually/</a> (CFPB October 2023 Data
Spotlight) (finding that nearly two-thirds of banks with over $10
billion in assets have eliminated NSF fees).
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Despite these changes, the vast majority of banks and credit unions
with over $10 billion in assets continue to charge between $30 and $37
per overdraft fee, and more than half charge $35.\41\ Most financial
institutions' policies allow consumers to incur multiple overdraft fees
per day. Financial institutions continue charging these high fees even
though the fees far exceed institutions' costs and losses associated
with providing non-covered overdraft credit. CFPB data collections and
outreach have found that the single largest cost or loss to financial
institutions associated with overdraft programs is charged-off account
balances, which most frequently occur when a consumer's subsequent
deposits do not cover the negative balance created by the overdraft(s)
and associated fee(s).\42\ The CFPB's study of 2011 bank data found
that charge-offs were small relative to the fee revenue banks earned
through their overdraft programs.\43\ Among those banks, charged-off
principal account balances due to overdraft programs represented 14.4
percent of the net overdraft fees (not including NSF fees) at those
banks.\44\ During the first half of 2023, the CFPB collected additional
data from several banks, which again showed that charge-offs associated
with negative account balances were the largest cost or loss associated
with providing overdraft. As discussed further in part V.C.2, charge-
offs amounted to an average of $2 per overdraft transaction whether or
not such transaction incurred an overdraft fee, and an average of $5
per overdraft transaction that incurred an overdraft fee--representing
6 percent and 15 percent, respectively, of the average fee of $32.50
charged by the banks during the period studied.
---------------------------------------------------------------------------
\41\ CFPB Market Monitoring of Publicly Available Overdraft
Practices, Dec. 2022-July 2023.
\42\ CFPB 2013 White Paper at 17.
\43\ Id.
\44\ Id.
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[[Page 13857]]
D. Consumer Impact of Overdraft Fees
As cumulative overdraft fee revenue for financial institutions
increased, so did the cumulative burden of overdraft fees on consumers.
CFPB research found that 79 percent of combined overdraft and NSF fees
were paid by 9 percent of consumers who paid more than 10 such fees per
year, incurring a median of $380 in these fees in a year.\45\ Consumers
paying more than 20 such fees in a year accounted for about 5 percent
of accounts, while paying over 63 percent of the fees.\46\
---------------------------------------------------------------------------
\45\ David Low et al., CFPB, Data Point: Frequent Overdrafters,
at 5 (Aug. 2017), <a href="https://files.consumerfinance.gov/f/documents/201708_cfpb_data-point_frequent-overdrafters.pdf">https://files.consumerfinance.gov/f/documents/201708_cfpb_data-point_frequent-overdrafters.pdf</a> (CFPB 2017 Data
Point); CFPB 2014 Data Point at 12 (both analyzing 2011-2012 data).
\46\ CFPB 2017 Data Point at 5.
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High overdraft fees can make it more difficult for consumers to
return their account to a positive balance, contributing to account
charge-offs, involuntary account closures, and consumers blocked out of
the banking system. The CFPB found that the banks with the highest
share of accounts with frequent overdrafts tended to have the highest
rates of involuntary account closure; conversely, those with the lowest
share of accounts with frequent overdrafts tended to have the lowest
rates of involuntary closure.\47\ Account closures, in turn, are often
reported to account screening consumer reporting agencies, and a
negative report from an account screening company may limit a
consumer's ability to open an account at a bank or credit union in the
future. Negative experiences with overdraft fees likely also discourage
many consumers from wanting a bank account at all. The FDIC estimates
that there were nearly 6 million unbanked households in the U.S. in
2021,\48\ nearly half of which had a bank account in the past.\49\ Of
those previously banked households, more than two-thirds have little or
no interest in having a bank account again,\50\ with high fees,
unpredictable fees, and not enough funds to meet minimum balance
requirements among the most cited reasons.\51\
---------------------------------------------------------------------------
\47\ CFPB 2013 White Paper at 25.
\48\ FDIC, 2021 FDIC National Survey of Unbanked and Underbanked
Households, at 1, <a href="https://www.fdic.gov/analysis/household-survey/2021report.pdf">https://www.fdic.gov/analysis/household-survey/2021report.pdf</a> (last updated July 24, 2023).
\49\ Id. at 17 tbl.3.3 (48.8 percent of unbanked households
previously had a bank account).
\50\ Id. at 18 fig.3.4 (49.4 percent of previously banked
households are not at all interested in having a bank account, and
18.3 percent are not very interested).
\51\ FDIC, 2021 FDIC National Survey of Unbanked and Underbanked
Households--Appendix Tables, at 11 tbl.A.6, <a href="https://www.fdic.gov/analysis/household-survey/2021appendix.pdf">https://www.fdic.gov/analysis/household-survey/2021appendix.pdf</a> (last updated July 24,
2023) (FDIC Tables) (among previously banked households, 30.5
percent cited bank account fees are too high, 28.8 percent cited
bank account fees are too unpredictable, and 43 percent cited that
they do not have enough money to meet minimum balance requirements).
---------------------------------------------------------------------------
Consumers can face significant uncertainty about whether they will
incur overdraft fees. Though financial institutions may provide
disclosures related to their transaction processing, deposit
availability, and overdraft assessment policies, these policies can be
extraordinarily complex.\52\ Even consumers who closely monitor their
account balances may not know with certainty when transactions will
post to their accounts, whether a particular transaction will be paid
or returned unpaid, and whether a particular paid transaction will be
deemed an overdraft and assessed an overdraft fee.\53\
---------------------------------------------------------------------------
\52\ See Press Release, CFPB, CFPB Orders Regions Bank to Pay
$191 Million for Illegal Surprise Overdraft Fees (Sept. 28, 2022),
<a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-regions-bank-pay-191-million-for-illegal-surprise-overdraft-fees/">https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-regions-bank-pay-191-million-for-illegal-surprise-overdraft-fees/</a>.
\53\ Id.; see also 87 FR 66935, 66935-40 (Nov. 7, 2022).
---------------------------------------------------------------------------
In response to the CFPB's 2022 request for information regarding
fees that are not subject to competitive processes that ensure fair
pricing, which received over 80,000 responses,\54\ overdraft-related
fees were by far the most common issue raised. Common concerns included
that the fees were unclear or confusing, disproportionate compared to
the incidents resulting in the fees, and difficult or impossible to
avoid. These concerns were generally consistent with those reflected in
complaints about overdraft fees consumers have submitted to the CFPB's
Consumer Complaints Database since its inception in 2011.
---------------------------------------------------------------------------
\54\ 87 FR 5801 (Feb. 2, 2022).
---------------------------------------------------------------------------
The CFPB has also studied how consumers who are opted-in to
overdraft services on one-time debit card and ATM transactions--and
thus subject to overdraft fees on those transactions--fare compared to
those who are not opted-in. In total, opted-in accounts incurred more
than seven times as many overdraft fees as accounts that were not
opted-in.\55\ At the account level, opted-in accounts were three times
as likely to have more than 10 overdrafts per year as accounts that
were not opted-in.\56\ And among frequent overdrafters, those who were
opted-in appeared similar across a number of dimensions to frequent
overdrafters who were not opted-in, but incurred significantly more--at
the median, 13 more--overdraft/NSF fees per year.\57\ In addition,
involuntary account closure was about 2.5 times as likely for consumers
who had opted-in than for consumers who had not.\58\
---------------------------------------------------------------------------
\55\ CFPB 2014 Data Point at 21.
\56\ Id. at 13.
\57\ CFPB 2017 Data Point at 6, 32-33. This dynamic was likely
driven primarily by the scenario where a debit card or ATM
transaction is authorized against a sufficient balance but then
settles against an insufficient balance. A consumer who was not
opted-in would have had this transaction approved and assessed no
fee. A consumer who was opted-in may have been charged a fee. For
discussion of regulatory guidance and CFPB enforcement actions
addressing overdraft fees assessed on these ``authorize positive,
settle negative'' transactions, see part II.E.
\58\ CFPB, A Closer Look: Overdraft and the Impact of Opting-In
(Jan. 19, 2017), <a href="https://files.consumerfinance.gov/f/documents/201701_cfpb_Overdraft-and-Impact-of-Opting-In.pdf">https://files.consumerfinance.gov/f/documents/201701_cfpb_Overdraft-and-Impact-of-Opting-In.pdf</a> (citing a rate of
6.2 percent in a given year for non-opted-in consumers and 2.5
percent for opted-in consumers, based on calculations using the same
large bank data used in CFPB 2014 Data Point).
---------------------------------------------------------------------------
Consumers whose accounts are frequently overdrawn are typically
more financially insecure than those who do not overdraw or who do so
infrequently.\59\ Compared to non- or infrequent overdrafters, frequent
overdrafters tend to have lower incomes and lower end-of-day
balances.\60\ They are also less likely to have access to alternative
credit options: they have lower credit scores, are less likely to have
a general purpose credit card, and, if they do have such a card, they
have less credit available on it.\61\ Black households and Latino
households are more likely to incur overdraft fees than white
households.\62\
---------------------------------------------------------------------------
\59\ CFPB has previously used ``frequent overdrafters'' to
describe those who incur more than 10 overdraft/NSF fees in one year
and ``very frequent overdrafters'' to describe those who incur more
than 20 overdraft/NSF fees in one year. See CFPB 2017 Data Point at
4-5.
\60\ CFPB 2017 Data Point at 15-16 (finding that as neighborhood
income decreases, overdraft frequency increases); id. at 6 (finding
that nearly 70 percent of frequent overdrafters had end-of-day
balances with medians between $237 and $439, while another 20
percent had median end-of-day balances of $140). See also FHN Brief
2023 (finding that households with incomes under $30,000 were twice
as likely to report at least one overdraft than those with incomes
of $100,000 or more).
\61\ CFPB 2017 Data Point at 15-16.
\62\ FHN Brief 2023 (finding that 26 percent of Black, 23
percent of Latinx, and 14 percent of White households reported
having overdrafted, making Black and Latinx households 1.9 and 1.6
times as likely as White households, respectively, to have
overdrafted); see also Meghan Greene et al., FHN, FinHealth Spend
Report 2022: What U.S. Households Spent on Financial Services During
COVID-19, at 14 (Apr. 2022), <a href="https://finhealthnetwork.org/wp-content/uploads/2022/05/FinHealth_Spend_Report_2022_Final.pdf">https://finhealthnetwork.org/wp-content/uploads/2022/05/FinHealth_Spend_Report_2022_Final.pdf</a>
(finding in a 2021 survey that Black and Latinx households with a
savings or checking account were 1.8 and 1.4 times as likely as
White households to report having overdrafted).
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E. Growing Regulatory Concerns About Non-Covered Overdraft Credit
As financial institutions began to evolve provision of non-covered
overdraft away from the historical
[[Page 13858]]
model and toward increased automation, greater frequency, and higher
revenues, Federal regulators expressed increasing consumer protection
concerns. In 2001, in declining to issue a requested ``comfort letter''
for a financial institution's overdraft program, the OCC stated that
overdraft services are extensions of credit and that the associated
charges may be ``just as burdensome as those imposed on borrowers
utilizing other types of high interest rate credit.'' \63\ In 2002, the
Board noted that some non-covered overdraft credit may not be all that
different from overdraft lines of credit,\64\ and in 2004 the Board
stated that further consideration of the need for Regulation Z coverage
of overdraft services would be appropriate if consumer protection
concerns were to persist.\65\ In 2005, the Federal banking agencies
issued joint guidance on non-covered overdraft credit noting that ``the
existing regulatory exceptions [i.e., exceptions in Regulation Z such
that it does not apply] were created for the occasional payment of
overdrafts, and as such could be reevaluated by the Board in the
future, if necessary. Were the Board to address these issues more
specifically, it would do so separately under its clear [TILA]
authority.'' \66\ In 2009, the Board adopted a rule under Regulation E
prohibiting institutions from assessing overdraft fees on one-time
debit card and ATM transactions unless the institution obtained the
consumer's affirmative consent to such fees (``opt-in rule'').\67\
Following the adoption of the Board's rule, the FDIC issued additional
supervisory guidance,\68\ which advises, among other things, that where
transactions overdraw an account by a de minimis amount, the overdraft
fee should be eliminated or be reasonable and proportional to the
amount of the transaction.\69\
---------------------------------------------------------------------------
\63\ OCC, Interpretive Letter No. 914, at 6 (Sept. 2001),
<a href="https://www.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2001/int914.pdf">https://www.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2001/int914.pdf</a>.
\64\ 67 FR 72618, 72620 (Dec. 6, 2002). In 2003, the Board noted
that ``[t]he Board's staff is continuing to gather information on
these services, which are not addressed in the final rule.'' (68 FR
16185 (Apr. 3, 2003)).
\65\ 69 FR 31760, 31761 (June 7, 2004).
\66\ See 70 FR 9127, 9128-29 (Feb. 24, 2005).
\67\ 74 FR 5212 (Jan. 28, 2009).
\68\ FDIC, Final Overdraft Payment Supervisory Guidance, FIL-81-
2010 (Nov. 24, 2010), <a href="https://www.fdic.gov/news/news/financial/2010/fil10081.html">https://www.fdic.gov/news/news/financial/2010/fil10081.html</a>.
\69\ Id.
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More recently, in October 2022, the CFPB issued a policy statement
stating that the assessment of overdraft fees that consumers would not
reasonably anticipate, including overdraft fees on debit card or ATM
transactions that are authorized when the consumer's available balance
is sufficient to cover the transaction but that later settle against a
negative balance due to intervening transactions or complex processes
(``authorize positive, settle negative'' or ``APSN'' transactions),
likely violates the Consumer Financial Protection Act of 2010 (CFPA)'s
statutory prohibition against unfair practices.\70\ In April 2023, the
OCC and FDIC issued guidance advising that overdraft fees charged on
such transactions raise heightened risk of unfair, deceptive, or
abusive acts or practices.\71\ The OCC's guidance also describes
certain practices that it notes may help to manage risks associated
with overdraft programs, including assisting consumers in avoiding
``unduly high costs'' in relation to the face value of the item being
presented, the amount of their regular deposits, and their average
account balances, and implementing fees and practices that bear a
reasonable relationship to the risks and costs of providing overdraft
programs.\72\
---------------------------------------------------------------------------
\70\ CFPB Circular 2022-06: Unanticipated Overdraft Fee
Assessment Practices, 87 FR 66935 (Nov. 7, 2022). The CFPB, the
Board, and the FDIC also highlighted risks related to the imposition
of overdraft fees from 2015 to 2018. See CFPB, Supervisory
Highlights, at 8-9 (Winter 2015), <a href="https://files.consumerfinance.gov/f/201503_cfpb_supervisory-highlights-winter-2015.pdf">https://files.consumerfinance.gov/f/201503_cfpb_supervisory-highlights-winter-2015.pdf</a> (last visited
Jan. 4, 2024) (CFPB Winter 2015 Highlight); FRS, Interagency
Overdraft Services Consumer Compliance Discussion, Outlook Live
presentation slides, at 20-21 (Nov. 9, 2016), <a href="https://www.consumercomplianceoutlook.org/-/media/cco/Outlook-Live/2016/110916.pdf">https://www.consumercomplianceoutlook.org/-/media/cco/Outlook-Live/2016/110916.pdf</a>; FRS, Consumer Compliance Supervision Bulletin, at 12
(July 2018), <a href="https://www.federalreserve.gov/publications/files/201807-consumer-compliance-supervision-bulletin.pdf">https://www.federalreserve.gov/publications/files/201807-consumer-compliance-supervision-bulletin.pdf</a> (FDIC 2018
Highlight); FDIC, Consumer Compliance Supervisory Highlights, at 2-3
(June 2019), <a href="https://www.fdic.gov/regulations/examinations/consumercomplsupervisoryhighlights.pdf?source=govdelivery&utm_medium=email&utm_source=govdelivery">https://www.fdic.gov/regulations/examinations/consumercomplsupervisoryhighlights.pdf?source=govdelivery&utm_medium=email&utm_source=govdelivery</a> (FDIC 2019 Highlight).
\71\ OCC, OCC Bulletin 2023-12, Overdraft Protection Programs:
Risk Management Practices (Apr. 26, 2023), <a href="https://www.occ.treas.gov/news-issuances/bulletins/2023/bulletin-2023-12.html">https://www.occ.treas.gov/news-issuances/bulletins/2023/bulletin-2023-12.html</a> (OCC Bulletin 2023-12); FDIC, Supervisory Guidance on
Charging Overdraft Fees for Authorize Positive, Settle Negative
Transactions, FIL-19-2023 (Apr. 26, 2023), <a href="https://www.fdic.gov/news/financial-institution-letters/2023/fil23019a.pdf">https://www.fdic.gov/news/financial-institution-letters/2023/fil23019a.pdf</a>.
\72\ OCC Bulletin 2023-12.
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The CFPB has previously established rules governing overdraft
credit on prepaid accounts. In 2016, the CFPB amended Regulation Z to
provide that prepaid accounts that offer credit features are generally
covered under Regulation Z's credit card rules.\73\ The CFPB also
amended the compulsory-use provision under Regulation E to prohibit
prepaid card issuers from requiring consumers to set up preauthorized
EFTs to repay credit extended through an overdraft credit feature
accessible by a hybrid prepaid-credit card.\74\
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\73\ 81 FR 83934, 83934-35 (Nov. 22, 2016). The CFPB amended the
2016 Prepaid Final Rule in 2017 and 2018. See 82 FR 18975 (Apr. 25,
2017); 83 FR 6364 (Feb. 13, 2018). The 2016 Prepaid Final Rule and
subsequent amendments to that rule are referred to collectively
herein as the Prepaid Accounts Rule.
\74\ 81 FR 83934, 83935-36 (Nov. 22, 2016).
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In applying Regulation Z to overdraft credit features on prepaid
accounts, the CFPB noted that the term ``credit'' in TILA includes
``the right to . . . incur debt and defer its payment'' \75\ and
explained that that definition ``covers the situation when a consumer
makes a transaction that exceeds the funds in the consumer's account
and a person elects to cover the transaction by advancing funds to the
consumer.'' \76\ The CFPB further stated that overdraft fees on prepaid
accounts ``generally constitute finance charges, because they are
directly payable by the consumer and imposed directly by the creditor
as a condition of the extension of credit.'' \77\ The CFPB also stated
that overdraft services offered in connection with prepaid accounts
``can be regulated by Regulation Z as a `plan' when the consumer is
contractually obligated to repay the debt, even if the creditor
retains, by contract, the discretion not to extend credit.'' \78\ At
that time, the CFPB stated that it was continuing to study overdraft
services on checking accounts and would propose any further regulatory
consumer protections in that space through a separate rulemaking.\79\
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\75\ 15 U.S.C. 1602(f).
\76\ 81 FR 83934, 84168 (Nov. 22, 2016).
\77\ Id. at 84160.
\78\ Id.
\79\ Id. at 84162.
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F. Need for CFPB Action
As a result of the evolution of the overdraft market over the last
few decades, the overdraft-related exception to the definition of
finance charge in Regulation Z no longer serves its original purpose.
The CFPB is proposing to update the exception, and several others that
allow financial institutions to follow different rules for overdraft
credit than for other forms of consumer credit, to ensure that
overdraft credit offered by very large financial institutions is
generally treated no differently than any other form of consumer
credit, except in the narrow cases where it is provided as a courtesy
to consumers. Preserving a limited exception from Regulation Z may
encourage the availability of overdraft coverage, which can benefit
consumers, especially given that much overdraft
[[Page 13859]]
credit is incidental in nature, as consumers often do not know with
certainty whether or not a transaction will be presented against
sufficient funds. But a blanket exception for all of today's non-
covered overdraft credit--which poses serious risks to consumers as
reflected in the discussion of consumer impacts noted above, and
resembles other mass-marketed high-cost consumer credit products--
cannot be justified as an exception for a courtesy, nor as consistent
with TILA's purposes of promoting the informed use of credit and
comparison shopping across credit products. Therefore, the CFPB
proposes to limit the exception from TILA, for very large financial
institutions, to overdraft credit that is offered at a cost to the
consumer that does not exceed the financial institution's costs and
losses associated with providing such coverage.
III. Outreach and Related Research
The CFPB has engaged in outreach and research related to overdraft
fees since soon after the CFPB's inception. In 2012, the CFPB initiated
a broad inquiry into overdraft programs for consumer checking
accounts.\80\ This inquiry included a request for information on the
impacts of overdraft fees on consumers,\81\ and collection and analysis
of overdraft-related data from several large banks with over $10
billion in assets that provided a significant portion of all U.S.
consumer checking accounts.\82\ The CFPB published analyses of these
data in a series of reports from 2013-2017, which examined institution-
level policies and data, as well as account- and transaction-level
data.\83\ These studies assessed, among other things, overdraft fee
size, prevalence, and related account closure; overdraft policies and
practices across institutions; the distribution of overdraft fee
incurrence across accounts; how overdraft transactions and fees vary
across opt-in status; the size of transactions that lead to overdrafts;
how long account balances stay negative after overdrafts; and the
characteristics of account holders (including end-of-day balance,
deposits, credit score, and available credit on a credit card) across
distributions of overdraft frequency. The CFPB also collected
anonymized institution-level information from several core processors,
which provide operations and accounting systems to financial
institutions. This data collection informed the CFPB's 2021 report
assessing policies and practices among a large sample of financial
institutions using core processors.\84\
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\80\ Press Release, CFPB, CFPB Launches Inquiry into Overdraft
Practices (Feb. 22, 2012), <a href="https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-launches-inquiry-into-overdraft-practices/">https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-launches-inquiry-into-overdraft-practices/</a>.
\81\ 77 FR 12031 (Feb. 28, 2012).
\82\ See CFPB 2013 White Paper at 8; see also CFPB 2014 Data
Point at 6-7.
\83\ See CFPB 2013 White Paper; CFPB 2014 Data Point; CFPB 2017
Data Point.
\84\ Nicole Kelly & [Eacute]va Nagyp[aacute]l, Ph.D., CFPB, Data
Point: Checking Account Overdraft at Financial Institutions Served
by Core Processors (Dec. 2021), <a href="https://files.consumerfinance.gov/f/documents/cfpb_overdraft-core-processors_report_2021-12.pdf">https://files.consumerfinance.gov/f/documents/cfpb_overdraft-core-processors_report_2021-12.pdf</a>.
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In 2021, the CFPB examined financial institutions' reliance on
overdraft/NSF fees from 2015 to 2019, finding that it was
persistent.\85\ Since then, the CFPB has continued tracking trends in
the marketplace \86\ and evaluating some banks' key overdraft-related
metrics through the CFPB's supervision work.\87\ From December 2022 to
June 2023, the CFPB reviewed the publicly available overdraft practices
of financial institutions with assets over $10 billion.\88\ In
addition, the CFPB has recently collected information from several
financial institutions under the CFPB's supervision, including data
regarding financial institutions' costs associated with offering
overdraft credit, which is discussed further in part V.C.2 as well as
in a separate report titled Overdraft and NSF Practices at Very Large
Financial Institutions.
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\85\ CFPB 2021 Data Point.
\86\ CFPB, Trends in overdraft/non-sufficient fund (NSF) fee
revenue and practices, <a href="https://content.consumerfinance.gov/data-research/research-reports/trends-in-overdraftnon-sufficient-fund-nsf-fee-revenue-and-practices/">https://content.consumerfinance.gov/data-research/research-reports/trends-in-overdraftnon-sufficient-fund-nsf-fee-revenue-and-practices/</a> (last updated Oct. 11, 2023)
(reflecting data and analysis published periodically from Dec. 1,
2021 to present).
\87\ See Patrick Gibson & Lisa Rosenthal, Measuring the impact
of financial institution overdraft programs on consumers, CFPB (June
16, 2022), <a href="https://www.consumerfinance.gov/about-us/blog/measuring-the-impact-of-financial-institution-overdraft-programs-on-consumers/">https://www.consumerfinance.gov/about-us/blog/measuring-the-impact-of-financial-institution-overdraft-programs-on-consumers/</a>
; CFPB, Fall 2023 Supervisory Highlights Junk Fees Update Special
Edition, at 7-9 (Oct. 2023), <a href="https://files.consumerfinance.gov/f/documents/cfpb_supervisory_highlights_junk_fees-update-special-ed_2023-09.pdf">https://files.consumerfinance.gov/f/documents/cfpb_supervisory_highlights_junk_fees-update-special-ed_2023-09.pdf</a> (CFPB Fall 2023 Highlight).
\88\ CFPB Market Monitoring of Publicly Available Overdraft
Practices, Dec. 2022-July 2023.
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Consistent with the CARD Act, the CFPB consulted with the following
agencies regarding rules that implement TILA section 149: (1) the
Office of the Comptroller of the Currency; (2) the Board of Directors
of the Federal Deposit Insurance Corporation; and (3) the National
Credit Union Administration Board. The CFPB also consulted with the
Board and several other Federal agencies, as discussed in [part VIII].
IV. Legal Authority
The CFPB is issuing this proposal pursuant to its authority under
TILA, EFTA, and the CFPA. This part includes a general discussion of
the provisions on which the CFPB relies in this rulemaking.
A. Truth in Lending Act
TILA section 105(a). TILA section 105(a) directs the CFPB to
prescribe regulations to carry out the purposes of TILA and provides
that such regulations may contain additional requirements,
classifications, differentiations, or other provisions, and may provide
for such adjustments and exceptions for all or any class of
transactions, that the CFPB judges are necessary or proper to
effectuate the purposes of TILA, to prevent circumvention or evasion
thereof, or to facilitate compliance therewith.\89\ A purpose of TILA
is to assure a meaningful disclosure of credit terms so that the
consumer will be able to compare more readily the various available
credit terms and avoid the uninformed use of credit.\90\ This stated
purpose is tied to Congress's finding that economic stabilization would
be enhanced and competition among the various financial institutions
and other firms engaged in the extension of consumer credit would be
strengthened by the informed use of credit.\91\ Thus, strengthened
competition among financial institutions is a goal of TILA, achieved
through the effectuation of TILA's purposes. A purpose of TILA is also
to protect the consumer against inaccurate and unfair credit billing
and credit card practices.\92\
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\89\ 15 U.S.C. 1604(a).
\90\ 15 U.S.C. 1601(a).
\91\ Id.
\92\ Id.
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CARD Act Section 2. Section 2 of the CARD Act, which amended TILA
to establish fair and transparent practices relating to the extension
of credit under an open-end consumer plan, and for other purposes, also
specifically grants the CFPB authority to issue rules and model forms
it considers necessary to carry out the CARD Act and amendments made by
the CARD Act.\93\
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\93\ Public Law 111-24; Sec. 2, 123 Stat. 1734, 1735 (2009).
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For the reasons discussed in this notice, the CFPB is proposing
amendments to Regulation Z with respect to overdraft credit to carry
out TILA's purposes. The CFPB at this time is proposing to retain
additional requirements, adjustments, and exceptions as, in the CFPB's
judgment, are necessary and proper to carry out the purposes of TILA,
prevent
[[Page 13860]]
circumvention or evasion thereof, or to facilitate compliance. In
developing these aspects of the proposal pursuant to its authority
under TILA section 105(a), the CFPB has considered the purposes of
TILA, including ensuring meaningful disclosures, facilitating
consumers' ability to compare credit terms, helping consumers avoid the
uninformed use of credit, and protecting consumers against inaccurate
and unfair credit billing and credit card practices, and the findings
of TILA, including strengthening competition among financial
institutions and promoting economic stabilization.
B. Electronic Fund Transfer Act
EFTA section 902 establishes that the purpose of the statute is to
provide a basic framework establishing the rights, liabilities, and
responsibilities of participants in EFT and remittance transfer systems
but that its primary objective is the provision of individual consumer
rights.\94\ Among other things, EFTA contains provisions regarding
compulsory use of EFTs.\95\
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\94\ 15 U.S.C. 1693.
\95\ 15 U.S.C. 1693k.
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EFTA section 904(a) authorizes the CFPB to prescribe regulations to
carry out the purposes of EFTA.\96\ EFTA section 904(c) provides that
regulations prescribed by the CFPB may contain such classifications,
differentiations, or other provisions, and may provide for such
adjustments or exceptions for any class of EFTs or remittance
transfers, that the CFPB deems necessary or proper to effectuate the
purposes of EFTA, to prevent circumvention or evasion, or to facilitate
compliance.\97\ The Senate Report accompanying EFTA noted that
regulations are ``essential to the act's effectiveness'' and ``will add
flexibility to the act by permitting the [CFPB] to modify the act's
requirements to suit the characteristics of individual EFT services.
Moreover, since no one can foresee EFT developments in the future,
regulations would keep pace with new services and assure that the act's
basic protections continue to apply.'' \98\
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\96\ 15 U.S.C. 1693b(a).
\97\ 15 U.S.C. 1693b(c).
\98\ See S. Rept. No. 95-1273, at 26 (1978).
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EFTA section 904(c) also provides that the ``CFPB shall by
regulation modify the requirements imposed by this subchapter on small
financial institutions if the CFPB determines that such modifications
are necessary to alleviate any undue compliance burden on small
financial institutions and such modifications are consistent with the
purpose and objective of this subchapter.''
As discussed in part V below, the CFPB is adopting amendments to
Regulation E, including with respect to compulsory use of preauthorized
repayment and the definition of overdraft services, pursuant to the
CFPB's authority under, as applicable, EFTA section 904(a) and (c). The
CFPB is proposing to retain existing rules for financial institutions
with less than $10 billion in assets because the CFPB has determined
that such exceptions will alleviate undue compliance burdens as the
CFPB continues to examine the market for smaller financial
institutions.
C. Consumer Financial Protection Act
CFPA section 1022(b)(1). Section 1022(b)(1) of the CFPA authorizes
the CFPB to prescribe rules ``as may be necessary or appropriate to
enable the [CFPB] to administer and carry out the purposes and
objectives of the Federal consumer financial laws, and to prevent
evasions thereof.'' \99\
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\99\ 12 U.S.C. 5512(b)(1).
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Among other statutes, TILA, EFTA, and the CFPA are Federal consumer
financial laws.\100\ Accordingly, in setting forth this proposal, the
CFPB is exercising its authority under CFPA section 1022(b) to
prescribe rules that carry out the purposes and objectives of TILA,
EFTA, and the CFPA and prevent evasion of those laws.
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\100\ CFPA section 1002(14), 12 U.S.C. 5481(14) (defining
``Federal consumer financial law'' to include the provisions of the
CFPA and enumerated consumer laws; ``enumerated consumer laws'' is
defined in CFPA section 1002(12), 12 U.S.C. 5481(12)).
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V. Discussion of the Proposed Rule
A. Who is covered? (Sec. 1026.62(b)(8))
This proposed rule would expand protections to consumers of
overdraft credit at financial institutions with more than $10 billion
in assets. This proposal would not change the regulatory framework for
overdraft credit offered by financial institutions with $10 billion or
less in assets.
To limit the proposed rule to overdraft credit offered by financial
institutions with assets of more than $10 billion, the proposed rule
would define in proposed Sec. 1026.62(b)(8) the term ``very large
financial institution'' as an insured depository institution or an
insured credit union with total assets of more than $10 billion and any
affiliate thereof. A financial institution may determine whether it has
total assets of more than $10 billion using the same determination that
is used to determine whether such institutions are subject to the
CFPB's supervisory authority under 12 U.S.C. 5515(a). The CFPB
currently publishes a list of such institutions at <a href="https://www.consumerfinance.gov/compliance/supervision-examinations/institutions/">https://www.consumerfinance.gov/compliance/supervision-examinations/institutions/</a>. As discussed below, the proposed rule then uses the term
``very large financial institution'' to limit the scope of overdraft
credit that would be subject to the proposed rule.
The CFPB has preliminarily determined that overdraft services
offered by financial institutions with more than $10 billion in assets
should be subject to this rule. As noted above, in the supervisory
context, Congress adopted in 12 U.S.C. 5515(a) a $10 billion threshold
to define the ``very large banks, savings associations, and credit
unions'' that would be subject to the CFPB's primary supervision
authority. The CFPB has preliminarily determined that a $10 billion
threshold similarly should be used to define ``very large financial
institution'' for limiting the scope of overdraft credit that would be
covered by the proposed rule.
The CFPB has preliminarily determined that consumers would benefit
from the CFPB's proceeding with a rule that would apply to very large
financial institutions--i.e., those with assets of $10 billion or more.
Such a rule would increase protections for the overwhelming majority of
consumers of overdraft credit. This proposal would cover financial
institutions holding approximately 80 percent of consumer deposits as
of December 2022 \101\ and responsible for approximately 68 percent of
overdraft charges as of December 2022.\102\ The CFPB believes that
consumers at very large financial institutions would benefit from the
expanded protections that would be provided by the proposed rule.
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\101\ Computed from 2022 FFIEC and National Credit Union
Administration call report data.
\102\ Estimated using data from 2022 FFIEC Call Reports and
methodology discussed at FN 29.
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In light of the different circumstances smaller financial
institutions may face in adapting to the proposed regulatory framework,
the CFPB is proposing not to extend the new rule to those institutions
with $10 billion or less in assets. While the CFPB is not proposing any
changes to the regulatory requirements for smaller financial
institutions, the CFPB will continue to monitor the market in
coordination with State and Federal supervisors.
The CFPB seeks comment on its preliminary determination to apply
the proposed rule only to very large financial institutions and on
whether $10 billion is an appropriate threshold for defining very large
financial institutions.
[[Page 13861]]
B. What transactions and accounts are covered?
The CFPB proposes to add Sec. 1026.62(a) and (b) to define the
scope of transactions and accounts that would be covered under the
proposed rule. The proposed rule would introduce new terms and amend
several existing Regulation Z definitions and their commentary to state
that overdraft credit is credit and assist with ease of reference to
various types of overdraft credit. First, the proposal would define
overdraft credit in proposed Sec. 1026.62(a)(2), and proposed comment
2(a)(14)-4 would provide a brief example to illustrate that overdraft
credit is credit under TILA and Regulation Z.
The CFPB's proposed rule would add commentary to the definition of
open-end credit in Sec. 1026.2(a)(20) to confirm that overdraft credit
that is subject to a finance charge is generally open-end credit and is
therefore subject to the Regulation Z provisions that apply to open-end
credit. The proposed definitions of covered overdraft credit and non-
covered overdraft credit in new Sec. 1026.62(b) would assist with
referencing overdraft credit that would be or not be credit subject to
Regulation Z under this proposal. Covered overdraft credit under this
proposal would be overdraft credit that is subject to a finance charge
or is payable by written agreement in more than four installments, and
would be subject to Regulation Z. Non-covered overdraft credit under
this proposal would be overdraft credit that is neither subject to a
finance charge nor payable by written agreement in more than four
installments, and would not be subject to Regulation Z. Additionally,
the CFPB proposes to add a new definition of covered overdraft credit
account to facilitate ease of reference to credit accounts through
which the financial institutions extend or can extend covered overdraft
credit.
1. Overdraft Credit (Sec. Sec. 1026.2(a)(14) and 1026.62(a))
TILA defines ``credit'' to mean the right granted by a creditor to
a debtor to defer payment of debt or to incur debt and defer its
payment.\103\ Regulation Z similarly defines ``credit'' in existing
Sec. 1026.2(a)(14) to mean the right to defer payment of debt or to
incur debt and defer its payment. To facilitate compliance with the
proposed rule, proposed comment 2(a)(14)-4 would provide a brief,
illustrative example of overdraft credit. The 2016 Prepaid Final Rule
similarly notes that a ``person, in extending overdraft funds, has
provided the consumer with `the right . . . to incur debt and defer its
payment.' '' \104\
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\103\ 15 U.S.C. 1602(f).
\104\ 81 FR 83934, 84168 (Nov. 22, 2016).
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The CFPB is proposing to update several exceptions in Regulation Z,
increasing consumer protections that apply to overdraft credit offered
by very large financial institutions. To that end, the CFPB would add a
definition of ``overdraft credit'' in proposed Sec. 1026.62(a) to help
clarify the scope of transactions covered by the proposed rule.
Proposed Sec. 1026.62(a) would define ``overdraft credit'' as any
consumer credit extended by a financial institution to pay a
transaction from a checking or other transaction account (other than a
prepaid account as defined in Sec. 1026.61) held at the financial
institution when the consumer has insufficient or unavailable funds in
that account. Proposed Sec. 1026.62(a) would provide non-exhaustive
examples, such as consumer credit extended through a transfer from a
credit card account or overdraft line of credit.
The proposed definition of ``overdraft credit'' would not cover
credit features with respect to a prepaid account as defined in Sec.
1026.61. The CFPB has preliminarily determined that it would be
unnecessary and unduly burdensome to include prepaid accounts within
the scope of this proposed rule. The CFPB's Prepaid Accounts Rule
already provides comprehensive consumer protections tailored to prepaid
accounts.\105\
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\105\ The 2016 Prepaid Final Rule and subsequent amendments to
that rule are referred to collectively herein as the Prepaid
Accounts Rule.
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Proposed Sec. 1026.62(a) would also clarify that the term
``overdraft credit'' does not include credit exempt from Regulation Z
pursuant to existing Sec. 1026.3. For example, consistent with TILA
section 104(2),\106\ transactions in securities or commodities accounts
in which credit is extended by a broker-dealer registered with the
Securities and Exchange Commission or the Commodity Futures Trading
Commission are not subject to Regulation Z pursuant to existing Sec.
1026.3(d).
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\106\ 15 U.S.C. 1603(2).
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2. Open-End Credit (Sec. 1026.2(a)(20))
The term ``open-end credit'' is defined in Sec. 1026.2(a)(20) as
(1) consumer ``credit,'' (2) that is extended under a ``plan,'' (3)
where the person extending the credit may impose a ``finance charge''
from time to time on an outstanding unpaid balance, (4) the person
extending the credit is a ``creditor,'' (5) the person extending the
credit reasonably contemplates repeated transactions, and (6) the
amount of credit that may be extended to the consumer during the term
of the plan (up to any limit set by the creditor) is generally made
available to the extent that any outstanding balance is repaid.
For the reasons discussed below, the CFPB has preliminarily
determined that virtually all overdraft credit that financial
institutions provide today, such as through negative balances on
checking accounts, would meet the Regulation Z definition of open-end
credit, but for Regulation Z excepting overdraft fees from the
definition of finance charge. Specifically, but for those exceptions,
the typical $35 overdraft fee plainly constitutes a finance charge and
a financial institution that regularly assesses such a finance charge
is a creditor.\107\
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\107\ See Sec. 1026.2(a)(17)(i) (defining ``creditor'' as ``[a]
person who regularly extends consumer credit that is subject to a
finance charge. . . .'').
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The CFPB has preliminarily determined that overdraft credit that is
typical in the market today would become covered overdraft credit under
the proposed rule and would meet the six elements of open-end credit
under Regulation Z. For clarity and to facilitate compliance, the CFPB
is proposing additional commentary regarding two terms used in the
definition of open-end credit: ``plan'' and ``finance charge.'' The
following discusses each of the six elements in turn.
(1) Credit. As discussed above, a person extending overdraft funds
has provided credit under TILA and Regulation Z.\108\ Because the
consumer is obligated to repay the funds, the financial institution is
allowing the consumer to incur debt and defer its payment consistent
with the TILA and Regulation Z definitions of ``credit.''
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\108\ 15 U.S.C. 1602(f); 12 CFR 1026.2(a)(14).
---------------------------------------------------------------------------
(2) Plan. The CFPB has preliminarily determined that a checking
account agreement offered in connection with overdraft credit would--
but for the Regulation Z exceptions of overdraft fees from the
definition of finance charge--constitute a ``plan'' consistent with the
definition of ``open-end credit plan'' in TILA.\109\ Specifically, but
for the Regulation Z exceptions, the checking account agreement--
consistent with the language of comment 2(a)(20)-2.i--would be ``a
contractual arrangement between the creditor [the institution offering
checking account overdraft credit] and the consumer.'' As noted, the
CFPB's proposed rule would modify those exceptions. The CFPB has
preliminarily determined that an
[[Page 13862]]
institution offering checking account overdraft credit would be a
creditor (discussed under (4) Person extending credit is a creditor,
below) and the account agreement would be ``a contractual arrangement
between the creditor and the consumer.'' The CFPB proposes to add
comment 2(a)(20)-2.iv to clarify that with respect to covered overdraft
credit, a plan means a program where the consumer is obligated
contractually to repay any credit extended by the creditor, even if the
creditor retains discretion not to extend credit in individual
transactions.
---------------------------------------------------------------------------
\109\ 15 U.S.C. 1602(j).
---------------------------------------------------------------------------
The CFPB has preliminarily determined that the reservation of such
discretion in connection with covered overdraft credit does not connote
the absence of an open-end credit plan. The CFPB understands that
financial institutions offering automated overdraft services include in
their agreements provisions about how the overdraft service will
operate and information about overdraft fees. These terms-and-
conditions documents typically stipulate that consumers using overdraft
programs must and do agree to repay the debt created by an overdraft
and the related fee, indicating that a contractual arrangement between
the creditor and the consumer exists. Although these agreements
typically state that the financial institution retains discretion to
authorize or decline any particular overdraft, as a practical matter,
financial institutions operating automated overdraft programs exercise
limited if any discretion in authorizing particular transactions so
long as the overdraft transaction is within the overdraft coverage
limit that the institution internally established. The CFPB notes that
credit card issuers similarly reserve the right to reject individual
transactions in their contractual agreements, yet credit card programs
are treated as open-end credit plans under TILA and Regulation Z.
Treating the provision of automated overdraft credit in a comparable
way would promote consistency. Therefore, the CFPB has preliminarily
determined that a checking account agreement offered in connection with
overdraft credit is a plan notwithstanding that the person offering the
agreement reserves the right to not extend credit on individual
transactions.
(3) Imposing a ``finance charge'' from time to time. The CFPB has
preliminarily determined that overdraft credit is generally subject to
fees that would be finance charges but for Regulation Z's exceptions to
the statutory finance charge definition. As noted, the CFPB's proposed
rule would modify those exceptions such that checking account overdraft
fees would generally be finance charges. In the absence of the
exceptions, the CFPB has preliminarily determined that an institution
offering checking account overdraft credit would be imposing a finance
charge from time to time.
While the proposed definition of covered overdraft credit includes
overdraft credit that is subject to a finance charge as well as
overdraft credit payable by a written agreement in more than four
installments, the CFPB anticipates that most overdraft credit would
meet the definition of covered overdraft credit because it is subject
to a finance charge rather than because it is payable in more than four
installments.\110\ The CFPB proposes comment 2(a)(20)-4.iii to explain
that charges for paying a transaction that overdraws a consumer's
account generally would be finance charges unless they are expressly
excluded from the definition of finance charge by the proposed rule.
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\110\ A card issuer that extends covered overdraft credit that
takes the form of closed-end credit and is subject to a finance
charge or payable by a written agreement in more than four
installments (including closed-end credit accessed by a hybrid
debit-credit card) would be a creditor under Sec. 1026.2(a)(17)(iv)
and subject to the special rules in that paragraph. A person who is
not a card issuer and regularly extends covered overdraft credit
that takes the form of closed-end credit and is subject to a finance
charge or is payable by written agreement in more installments would
be a creditor under Sec. 1026.2(a)(17)(i) and subject to the
closed-end credit rules in Regulation Z, subpart C.
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Proposed comment 2(a)(20)-4.iii would clarify that these are
charges ``imposed from time to time on an outstanding unpaid balance''
as long as there is no specific amount financed for the plan for which
the finance charge, total of payments, and payment schedule can be
calculated. The CFPB does not anticipate that there will be a specific
amount financed for overdraft credit at the time the credit plan is
established because the CFPB anticipates that the credit lines on these
credit plans generally will be replenishing (discussed under (6) Amount
of credit replenishes when outstanding balance is repaid, below). In
such cases, an amount financed for the plan could not be calculated
because the creditor will not know at the time the plan is established
the amount of credit that will be extended under the plan. Thus, to the
extent that any finance charge may be imposed in connection with such a
credit plan, the credit plan will meet this criterion.
(4) Person extending credit is a creditor. Assuming overdraft fees
are finance charges, the CFPB has preliminarily determined that an
institution providing covered overdraft credit is a ``creditor'' for
purposes of the definition of ``open-end credit.'' A ``creditor'' is
generally defined under Regulation Z to mean a person who regularly
extends consumer credit that is subject to a finance charge or is
payable by written agreement in more than four installments (not
including a down payment), and to whom the obligation is initially
payable, either on the face of the note or contract, or by agreement
when there is no contract.\111\ Therefore, to the extent that overdraft
credit is subject to a finance charge and is accordingly covered
overdraft credit, it is also extended by a creditor if the creditor
``regularly extends'' overdraft credit. The CFPB anticipates that most
persons offering covered overdraft credit regularly extend overdraft
credit and therefore would meet the definition of ``creditor.'' If an
institution providing open-end covered overdraft credit is considered a
``card issuer,'' then it would also be considered a creditor under
current Sec. 1026.2(a)(17)(iii) for purposes of Regulation Z, subpart
B.
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\111\ See Sec. 1026.2(a)(17)(i).
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(5) Reasonably contemplates repeated transactions. The CFPB has
preliminarily determined that institutions providing checking account
overdraft credit typically contemplate repeated overdraft transactions
as the CFPB found that 93.2 percent of overdraft and NSF fees were
assessed on consumers with four or more overdraft and NSF transactions
per year.\112\ The CFPB has therefore preliminarily determined that
this fifth element of the open-end credit definition is satisfied.
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\112\ CFPB 2017 Data Point at 13.
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(6) Amount of credit replenishes when outstanding balance is
repaid. The CFPB has preliminarily determined that institutions
providing checking account overdraft credit generally replenish the
amount of overdraft credit available to consumers up to any overdraft
coverage limit (i.e., consumers' ``shadow lines'') to the extent that
any outstanding overdraft balance is repaid. This replenishable credit
distinguishes open-end credit from a series of advances made pursuant
to a closed-end credit loan commitment, but it does not mean that the
credit plan must always be replenished to the original amount. The
creditor may refuse to extend new credit in a particular case due to
changes in the creditor's financial condition or the consumer's
creditworthiness, if permitted by Regulation Z. While consumers should
have a reasonable expectation of obtaining credit as long as they
remain current, further extensions of credit need not be an
[[Page 13863]]
absolute right in order for the plan to meet the self-replenishing
criterion. Because the CFPB anticipates that financial institutions
will generally replenish overdraft credit to the extent that any
outstanding overdraft balance is repaid, the CFPB has preliminarily
determined that covered overdraft credit plans are generally
replenishing.
3. Covered Overdraft Credit (Sec. 1026.62(b)(3)), Non-Covered
Overdraft Credit (Sec. 1026.62(b)(6)), and Card Issuer (Sec.
1026.2(a)(7))
The CFPB proposes to define ``covered overdraft credit'' as
overdraft credit that is subject to a finance charge or is payable by
written agreement in more than four installments and ``non-covered
overdraft credit'' as overdraft credit that is not subject to a finance
charge and is not payable by written agreement in more than four
installments. The purpose of the proposed definitions is to assist with
ease of reference to overdraft credit that is subject to, or covered
by, Regulation Z. As discussed in more detail in part V.C, some charges
imposed in connection with overdraft credit are not considered finance
charges. Thus, use of the proposed definitions will also help a person
extending overdraft credit to readily ascertain whether they are
subject to the requirements of the regulation.
The proposed definition of ``overdraft credit'' is limited to
consumer credit, but, even with that qualification, not all overdraft
credit would be subject to Regulation Z if the definition is finalized
as proposed. Many provisions of Regulation Z apply to a ``creditor,''
which generally is defined at Sec. 1026.2(a)(17)(i) as ``[a] person
who regularly extends consumer credit that is subject to a finance
charge or is payable by written agreement in more than four
installments.'' Thus, a financial institution must offer overdraft
credit that is subject to a finance charge or is payable by written
agreement in more than four installments (i.e., covered overdraft
credit) to be considered a creditor under Regulation Z. (Any financial
institution offering overdraft credit will generally satisfy the
definition of ``regularly'' under Sec. 1026.2(a)(17)(v).) Because some
charges imposed in connection with overdraft credit are not considered
finance charges, a financial institution may charge for overdraft
credit without being considered a creditor under Regulation Z if
certain requirements are met.
Section 1026.2(a)(7) defines ``card issuer'' as a person that
issues a credit card or that person's agent with respect to the card.
Unlike other creditors, card issuers are subject to Regulation Z even
if they extend credit that is not subject to a finance charge and is
not payable by written agreement in more than four installments.\113\
However, this does not apply to overdraft credit that is not subject to
a finance charge or repayable by written agreement in more than four
installments, even if the financial institution extending such credit
would otherwise be considered a card issuer.\114\ Under the proposal,
extensions of overdraft credit that are not subject to a finance charge
and are not payable by written agreement in more than four-installments
(non-covered overdraft credit) would continue to not be covered by
Regulation Z. Further, under the proposal, institutions providing debit
cards that access only non-covered overdraft credit would continue to
not be card issuers, and would therefore not be creditors under Sec.
1026.2(a)(17)(iii), because the CFPB has preliminarily determined that
allowing financial institutions to offer debit cards that access only
below breakeven overdraft credit without being subject to Regulation Z
would further the purposes of this proposal as discussed in part V.C.
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\113\ See 12 CFR 1026.1(c), and 1026.2(a)(17)(iii). Card issuers
are also covered by the general rule that subjects them to
Regulation Z if they extend open-end credit.
\114\ Comment 2(a)(15)-2.ii.A. This comment provides that a
debit card is not a credit card if there is no credit agreement,
even if the creditor occasionally honors an inadvertent overdraft.
Because the debit card is not considered a ``credit card'' under
Regulation Z, a financial institution offering a debit card that can
access non-covered overdraft credit is not considered a card issuer.
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For these reasons, the CFPB has preliminarily determined that a new
definition of ``covered overdraft credit'' that parallels the general
definition of creditor will assist with ease of reference to overdraft
credit that is subject to Regulation Z. Additionally, the CFPB has
preliminarily determined that a new definition of ``non-covered
overdraft credit'' will assist with ease of reference to overdraft
credit that is not subject to, or covered by, Regulation Z,
particularly in the proposed rule's costs and losses calculation in
Sec. 1026.62(d).
4. Covered Overdraft Credit Account (Sec. 1026.62(b)(4))
The CFPB proposes to define ``covered overdraft credit account'' as
a credit account through which a financial institution extends or can
extend covered overdraft credit. The term includes any line of credit,
credit card account, credit feature, credit line, credit plan, or
credit subaccount through which the financial institution extends or
can extend covered overdraft credit. Proposed Sec. 1026.62(c) would
require very large financial institutions to structure covered
overdraft credit as a separate credit account. Therefore, the term
``covered overdraft credit account'' would assist in ease of reference
to these separate credit accounts and in distinguishing them from tied
checking or other transaction accounts.
C. Changes to the Definition of ``finance charge'' (Sec. 1026.4(b)(2),
(b)(12), and (c)(3); Sec. 1026.62(d))
Under Regulation Z, the term ``finance charge'' generally is
defined in Sec. 1026.4(a) to mean ``the cost of consumer credit as a
dollar amount.'' It includes any charge payable directly or indirectly
by the consumer and imposed directly or indirectly by the creditor as
an incident to or a condition of the extension of credit. It does not
include any charge of a type payable in a comparable cash transaction.
Regulation Z currently excludes certain fees or charges imposed by
a financial institution for paying items that overdraw an account from
the definition of ``finance charge'' unless ``the payment of such items
and the imposition of the charge were previously agreed upon in
writing.'' \115\ Additionally, where the payment of such items and
imposition of the charge were previously agreed upon in writing, when a
creditor imposes a service, transaction, activity, or carrying charge
for each item that results in an overdraft on an account, such fees are
excluded from the definition of finance charge if they do not exceed
the charges imposed for paying or returning overdrafts on a similar
transaction account that does not have such a written agreement.\116\
Neither of these exclusions appear within the statutory text of TILA.
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\115\ 12 CFR 1026.4(c)(3).
\116\ 12 CFR 1026.4(b)(2).
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The proposal would amend the definition of ``finance charge'' in
Sec. 1026.4 in three ways. First, it would modify the partial
exception provided in Sec. 1026.4(b)(2) for certain charges imposed on
checking and other transaction accounts so that the partial exception
would no longer apply to ``covered asset accounts'' as defined in
proposed Sec. 1026.62. Second, it would add proposed Sec.
1026.4(b)(12) that would provide examples of charges imposed in
connection with covered overdraft credit that are finance charges.
Third, it would amend the exception provided in Sec. 1026.4(c)(3) so
that the exception would no longer apply to ``above breakeven overdraft
credit'' as defined
[[Page 13864]]
in proposed Sec. 1026.62. These proposed amendments are intended to
specify which overdraft transactions include a finance charge and,
therefore, may be subject to the requirements of TILA and Regulation Z.
1. Comparable Cash Transactions (Sec. 1026.4(b)(2))
Under TILA section 106(a) (15 U.S.C. 1605(a)), the term ``finance
charge'' generally provides that ``the amount of the finance charge in
connection with any consumer credit transaction shall be determined as
the sum of all charges, payable directly or indirectly by the person to
whom the credit is extended, and imposed directly or indirectly by the
creditor as an incident to the extension of credit.'' \117\ The finance
charge does not include any charge of a type payable in a comparable
cash transaction.\118\
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\117\ 12 CFR 1026.4(a). Current Sec. 1026.4 implements TILA
section 106 by largely mirroring the statutory definition of finance
charge and the specific exclusions from that definition. In
addition, Sec. 1026.4 specifies certain inclusions and exclusions
from the finance charge that are not specifically listed in the
statute. For example, Sec. 1026.4(c) specifically excludes
application fees and forfeited interest from the definition of
finance charge, whereas TILA does not.
\118\ See 15 U.S.C. 1605(a).
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The current official interpretations address comparable cash
transactions by stating that charges imposed uniformly in cash and
credit transactions are not finance charges and by instructing that, to
determine whether a transaction is a finance charge, the creditor
should compare the credit transaction to a similar cash
transaction.\119\ The Board updated the commentary addressing finance
charges numerous times.\120\
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\119\ Regulation Z comment 4(a)-1.
\120\ For example, the Board initially adopted comment 226.4(a)-
4 to indicate that a fee charged by a card issuer when a consumer
takes a cash advance on a credit card account using an ATM was not a
finance charge to the extent that it did not exceed the charge
imposed by the card issuer on its cardholders for using an ATM to
withdraw cash from a consumer asset account, such as a checking or
savings account. 48 FR 54642 (Dec. 6, 1983) and 49 FR 40560 (Oct.
17, 1984). After subsequent rulemaking activity, current comment
4(a)-4.1 provides that, for example, any charge imposed on a credit
cardholder by a card issuer for the use of an ATM to obtain a cash
advance is a finance charge regardless of whether the card issuer
imposes a charge on its debit cardholders for using the ATM to
withdraw cash from a consumer asset account, such as a checking or
savings account. 74 FR 5263 (Jan. 29, 2009).
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Section 1026.4(b) lists examples of the types of charges that
generally are finance charges. In particular, Sec. 1026.4(b)(2)
provides that the finance charge includes ``[s]ervice, transaction,
activity, and carrying charges, including any charge imposed on a
checking or other transaction account (except a prepaid account as
defined in Sec. 1026.61) to the extent that the charge exceeds the
charge for a similar account without a credit feature.''
The historical roots of Sec. 1026.4(b)(2) trace back to the first
version of Regulation Z, published by the Board in 1969. In that
version, Sec. 226.4(a)(2) indicated that the finance charge included
service, transaction, activity, or carrying charges. The 1969 version
of Sec. 226.4(a)(2) also included a footnote stating that the charges
listed in Sec. 226.4(a)(2) included ``any charges imposed by the
creditor in connection with a checking account to the extent that such
charges exceed any charges the customer is required to pay in
connection with such account when it is not being used to extend
credit.'' \121\
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\121\ 34 FR 2002, 2004 n.2 (Feb. 11, 1969).
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As part of its 1981 amendments to Regulation Z, the Board moved the
text of Sec. 226.4(a)(2) to its current location in Sec. 1026.4(b)(2)
and incorporated the language from the accompanying footnote into the
main regulation text.\122\ Later that year, the Board also published
comment 4(b)(2)-1, which provided two examples of service charges
assessed on asset accounts with tied overdraft lines of credit that are
not finance charges.\123\ In 1998, the Board revised comment 4(b)(2)-1
to clarify that a service charge on a checking or other transaction
account with a credit feature is a finance charge only if the charge
exceeds the charge for a similar account without a credit feature.\124\
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\122\ 46 FR 20848, 20894 (Apr. 7, 1981).
\123\ 46 FR 50288, 50299 (Oct. 9, 1981).
\124\ 63 FR 16669, 16675 (Apr. 6, 1998).
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The CFPA generally granted rulemaking authority under the TILA and
transferred primary oversight of Regulation Z to the CFPB.
Subsequently, the CFPB renumbered Sec. 226.4 to Sec. 1026.4.\125\ In
2016, the CFPB amended both Sec. 1026.4(b)(2) and comment 4(b)(2)-1 to
exclude prepaid accounts as defined in Sec. 1026.61.\126\ As part of
that rulemaking, the CFPB provided detailed guidance in comment
4(b)(11)(ii) regarding how fees on prepaid accounts with a covered
separate credit feature accessible by a hybrid prepaid-credit card
should be compared to fees imposed on prepaid accounts without a
covered separate credit feature. This guidance was more detailed and
more restrictive than the guidance provided under Sec. 1026.4(b)(2)
with regard to checking and transaction accounts other than prepaid
accounts.\127\ As part of this guidance, the CFPB noted that the per
transaction fee for a credit extension in the course of a transaction
from a covered separate credit feature cannot be compared to a fee for
declining to pay a transaction that is imposed on a prepaid account
without such a credit feature in the same prepaid account program.\128\
The CFPB was concerned about possible evasion of the rule, noting that
many prepaid cardholders who wish to use covered separate credit
features may not have other asset accounts or savings accounts from
which they can transfer funds to prevent an overdraft on the prepaid
account in the course of authorizing, settling, or otherwise completing
a transaction to obtain goods or services, obtain cash, or conduct
person-to-person (P2P) transfers.\129\ As a result, if such a
comparison were permitted, card issuers could charge a substantial fee
to transfer funds from the checking account or savings account during
the course of a transaction using the prepaid account (which many
prepaid cardholders who wish to use covered separate credit features
may not be able to use as a practical matter) and then charge that same
substantial per transactions fee for credit drawn or transferred from
the covered separate credit feature during the course of a transaction
without such fee being considered a finance charge.\130\ The CFPB thus
concluded that it was appropriate to limit the comparable fee in this
case to per transaction fees imposed on prepaid accounts for
transactions that access funds in the prepaid account in the same
prepaid account program that does not have a covered separate credit
feature because all prepaid accountholders can use prepaid accounts to
make transactions that access available funds in the prepaid account
and thus these types of transactions are available to all prepaid
accountholders.\131\
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\125\ 76 FR 79767 (Dec. 22, 2011).
\126\ 81 FR 83934, 84369, 84374 (Nov. 22, 2016).
\127\ Id. at 84185.
\128\ Id. at 84186.
\129\ Id.
\130\ Id. at 84186-87.
\131\ Id. at 84187.
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i. What is changing?
The proposal would revise Sec. 1026.4(b)(2) and comment 4(b)(2)-1
to provide that Sec. 1026.4(b)(2) does not apply to ``covered asset
accounts'' as defined in Sec. 1026.62. This proposed exception would
mirror the exception created by the CFPB's Prepaid Rule.
The proposal also would add a paragraph at Sec. 1026.4(b)(12).
Proposed Sec. 1026.4(b)(12) would add examples of finance charges with
regard to covered asset accounts, as defined in proposed Sec.
1026.62(b)(2). These proposed changes would broaden the definition of
[[Page 13865]]
``finance charge'' for covered asset accounts to apply the applicable
rules to such accounts so that the full cost of credit is more
accurately disclosed. The effect of the proposed changes would be to
limit the existing exclusion in Sec. 1026.4(b)(2) such that nearly all
service, transaction, activity, and carrying charges imposed on covered
asset accounts, including, in particular, fees commonly known as
``transfer fees'' for moving funds from overdraft lines of credit to
covered asset accounts, would be ``finance charges'' under Regulation Z
unless subject to another exclusion or limitation.\132\
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\132\ Under the proposal, fees would continue to be excluded
from the definition of finance charge if they are described in
existing Sec. 1026.4(c) through (e).
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ii. Charges Imposed on Credit Accounts Required by Sec. 1026.62(c)
(Sec. 1026.4(b)(12)(i))
Proposed Sec. 1026.4(b)(12)(i) would specify that any service,
transaction, activity, or carrying charge imposed on the separate
credit account required by Sec. 1026.62(c) is a finance charge. That
is, the fees described in proposed Sec. 1026.4(b)(12)(i) would be
finance charges without regard to a comparison to fees for a comparable
cash transaction.
Under Sec. 1026.62(c), the required credit account exists for the
purpose of providing credit. Therefore, service, transaction, activity,
or carrying charges on this separate credit account are, per the
finance charge definition in Sec. 1026.4(a), generally imposed as an
incident to or a condition of the extension of credit, separate and
distinct from any such fees applied to a separate checking or other
transaction account. Because of the nature of the credit account, it
would be difficult or impossible to determine which, if any, charge
applied to a checking or other asset account is a charge for a similar
or comparable cash transaction for the purpose of Sec. 1026.4(a). As
with the Board's analysis in the 2009 amendment regarding credit card
fee transactions, there is not necessarily a single or standard
checking account to use for fee comparison. For example, there may be
different fees applied to a checking account with a low balance minimum
versus another type of checking account. Thus, it would be difficult in
many cases to say which checking account provides the appropriate fee
for comparison. Even assuming a comparable transaction could be
identified, the disclosure a consumer might receive would depend on
whether the creditor provides other asset accounts and imposes service,
transaction, activity, or carrying charges on those accounts and
whether the fees applied to those accounts exceed the fees for those on
the separate credit account. As with the distinctions analyzed by the
Board in the 2009 amendment, it is not clear that these distinctions
are meaningful to consumers.\133\ The CFPB has thus preliminarily
determined that any service, transaction, activity, or carrying charge
imposed on the separate credit account required by Sec. 1026.62(c)
would be a finance charge, except for charges specifically excluded by
paragraphs (c) through (e) of section 1026.4.
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\133\ 74 FR 5263 (Jan. 29, 2009). As discussed above, the
purposes of TILA are to provide a meaningful disclosure of credit
terms to enable consumers to compare credit terms available in the
marketplace more readily and avoid the uninformed use of credit and
to protect consumers against inaccurate and unfair credit billing
and credit card practices. 15 U.S.C. 1601(a).
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iii. Charges Imposed on Covered Asset Accounts (Sec.
1026.4(b)(12)(ii))
Proposed Sec. 1026.4(b)(12)(ii) would specify that any service,
transaction, activity, or carrying charge imposed on the covered asset
account is a finance charge to the extent that the charge exceeds a
comparable charge imposed on a checking or other transaction account
that does not have covered overdraft credit tied to it. That is, any
such charge is a finance charge to the extent that it exceeds a
comparable charge imposed on a checking or other transaction account
that is not a covered asset account. This provision would largely
mirror existing Sec. 1026.4(b)(2) but with adjustments for covered
asset accounts.
iv. Examples of Charges Imposed on Covered Asset Accounts (Sec.
1026.4(b)(12)(iii)(A) Through (C))
Proposed Sec. 1026.4(b)(12)(iii) would describe certain charges on
a checking or other transaction account that does not have covered
overdraft credit tied to it that are not comparable to charges imposed
on a covered asset account, which, by definition, does have covered
overdraft credit tied to it. These charges would therefore not be
permitted to be subtracted from charges applied to the covered asset
account for the purpose of determining whether or not a charge on the
covered asset account is a finance charge.
Proposed Sec. 1026.4(b)(12)(iii)(A) would exclude from the
determination of a finance charge comparison of a charge for
authorizing or paying a transaction that overdraws the checking or
other transaction account that does not have covered overdraft credit.
Proposed Sec. 1026.4(b)(12)(iii)(B) would exclude from the
determination of a finance charge comparison of a charge for declining
to authorize or pay a transaction, and proposed Sec.
1026.4(b)(12)(iii)(C) would exclude from the determination of a finance
charge comparison of a charge for returning a transaction unpaid.\134\
Thus, under proposed Sec. 1026.4(b)(12)(iii)(A) through (C), a very
large financial institution may impose a service fee on a covered asset
account when the institution transfers funds into the account from a
covered overdraft credit account to cover a transaction that would
otherwise overdraw the covered asset account. The institution may also
impose a fee on a checking or other transaction account that does not
have covered overdraft credit (i.e., is not a covered asset account)
when the institution authorizes or pays a transaction that would
otherwise overdraw the checking or other transaction account, declines
to authorize or pay a transaction that would otherwise overdraw the
checking or other transaction account, or returns unpaid a transaction
that would otherwise overdraw the checking or other transaction
account. However, the fee applied to a checking or other transaction
account that does not have covered overdraft credit may not be compared
to the fee on a covered asset account for the transfer of funds to
cover a transaction. Accordingly, under proposed Sec.
1026.4(b)(12)(iii)(A) through (C), the full amount of the service fee
on a covered asset account when a very large financial institution
transfers funds into the account from a covered overdraft credit
account to cover a transaction that would otherwise overdraw the
covered asset account would be a finance charge. Taken together, these
three provisions would clarify that the service, transaction, activity,
or carrying charges imposed on covered asset accounts may not, for the
purposes of determining whether such fees are ``finance charges,'' be
reduced by fees that relate to granting or denying a transaction that
would overdraw an account without covered overdraft credit.
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\134\ Some or all of the fees described in proposed Sec.
1026.4(b)(12)(iii)(A) through (C) are sometimes referred to as
``overdraft fees,'' ``declination fees,'' or ``NSF fees.'' Proposed
Sec. 1026.4(b)(12)(iii)(A) through (C) are broadly inclusive of the
types of fees described therein, regardless of how such fees are
labeled.
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The CFPB has made the preliminary determination to exclude from the
determination of a finance charge these categories of charges for two
reasons.
[[Page 13866]]
First, these types of charges are charges associated with decisions
regarding whether or not to extend credit. The charges described in
proposed Sec. 1026.4(b)(12)(iii)(A) are applied if credit is extended;
the charges described in proposed Sec. 1026.4(b)(12)(iii)(B) and (C)
are applied if credit is denied. As such, they are not charges
associated with cash transactions, comparable or otherwise, and should
not be compared to or subtracted from fees associated with covered
overdraft credit. Additionally, the charges described in proposed Sec.
1026.4(b)(12)(iii)(B) may be described as a penalty, while the charges
described in proposed Sec. 1026.4(b)(12)(iii)(C) may be described as a
service charge. In neither case are the charges of a type payable in
comparable cash transactions.
v. Additional Examples of Charges Imposed on Covered Asset Accounts
(Sec. 1026.4(b)(12)(iii)(D) and (E))
Proposed Sec. 1026.4(b)(12)(iii)(D) would exclude, for purposes of
determining whether the fee is a finance charge, comparison of a charge
for transferring funds from any credit account into a checking or other
transaction account that does not have covered overdraft credit.
Proposed Sec. 1026.4(b)(12)(iii)(E) would exclude, for purposes of
determining whether the fee is a finance charge, comparison of a charge
for transferring funds from any other asset account, such as a savings
account, into a checking or other transaction account that does not
have covered overdraft credit. Thus, under proposed Sec.
1026.4(b)(12)(iii)(D) and (E), a very large financial institution may
impose a service fee on a covered asset account when the institution
transfers funds into the account from a covered overdraft credit
account to cover a transaction that would otherwise overdraw the
covered asset account. The institution may also impose a fee to
transfer funds into the checking or other transaction account (i.e., an
account that is not a covered asset account) from any credit account or
from any other asset account, such as a savings account, to cover a
transaction that would otherwise overdraw the checking or other
transaction account. But the fee applied to a checking or other
transaction account that does not have covered overdraft credit may not
be compared to the fee on a covered asset account for the transfer of
funds to cover a transaction. Accordingly, under proposed Sec.
1026.4(b)(12)(iii)(D) and (E), the full amount of the service fee on a
covered asset account when a very large financial institution transfers
funds into the account from a covered overdraft credit account to cover
a transaction that would otherwise overdraw the covered asset account
would be a finance charge.
The exclusion in proposed Sec. 1026.4(b)(12)(iii)(D) addresses
charges in connection with an extension of credit that is regulated as
credit, albeit not overdraft credit. Because these are charges payable
in a credit transaction, the CFPB has preliminarily determined that
these are not charges payable in a comparable cash transaction and
should not be used for comparison in the determination of a finance
charge.
The exclusion in proposed Sec. 1026.4(b)(12)(iii)(E) addresses
charges to transfer funds into a checking or other transaction account
that is not a covered asset account from any other asset account to
cover a transaction that would otherwise overdraw the checking or other
transaction account. This is because the CFPB is concerned about the
possibility for evasion from the requirements of Regulation Z if
comparison of the charges described in Sec. 1026.4(b)(12)(iii)(E) were
to be permitted.
The majority of combined overdraft and NSF fees are paid by a small
subset of consumers. CFPB research found that 79 percent of combined
overdraft and NSF fees were paid by 9 percent of consumers who paid
more than 10 such fees per year, incurring a median of $380 in these
fees in a year.\135\ Consumers paying more than 20 such fees in a year
accounted for about 5 percent of accounts, while paying over 63 percent
of the fees.\136\
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\135\ CFPB 2017 Data Point at 5; CFPB 2014 Data Point at 12.
\136\ CFPB 2017 Data Point at 5.
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Consumers whose accounts are frequently overdrawn are typically
more financially insecure than those who do not overdraw or who do so
infrequently.\137\ Accordingly, many consumers who overdraft may not
have other asset accounts or may not have sufficient funds in those
accounts from which they can transfer funds to prevent such overdraft.
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\137\ See id. at 5-6.
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If such a comparison were permitted, a bank could potentially avoid
the definition of ``finance charge'' by charging a substantial fee for
transferring funds into a checking or other transaction account that is
not a covered asset account from any other asset account and then
charge that same substantial amount for any service, transaction,
activity, or carrying charge imposed on the covered asset account. By
comparing the two substantial fees to each other, the amount of the
charge on the covered asset account would not be considered a finance
charge. For the subset of consumers who pay the majority of overdraft
and NSF fees, however, this comparison of fees would be a comparison
between a product that such consumers can readily access (i.e., covered
asset accounts) to a product that a majority of such consumers may not
be able to access (i.e., other asset accounts) because they do not have
such accounts or do not have sufficient funds in those accounts to
easily execute transfers. As a result, the CFPB preliminarily concludes
that a per transaction fee for transferring asset funds from other
asset accounts such as a savings account should not be compared with
(should not be allowed to be subtracted from) a service, transaction,
activity, or carrying charge assessed on a covered asset account. The
CFPB seeks comment on the proposed revisions to Sec. 1026.4(b)(2), the
proposal to add Sec. 1026.4(b)(12), and the CFPB's preliminary
conclusions regarding comparable cash transactions.
2. History of the Current Sec. 1026.4(c)(3) Exception
Historically, whenever a consumer bounced a check written against a
deposit account that lacked a credit feature, the consumer's financial
institution typically returned the check unpaid and assessed the
consumer an NSF fee. In addition, the payee on the check might have
taken various actions against the consumer, such as assessing the
consumer a late fee or returned item fee, reporting the consumer's
payment as late to a credit bureau, or bringing legal action against
the consumer for writing a bad check.\138\ However, instead of
returning the check unpaid, a financial institution, in its discretion,
might have paid the check into overdraft as a courtesy.\139\
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\138\ 74 FR 5212, 5214 (Jan. 29, 2009); 74 FR 59033, 59035 (Nov.
17, 2009); Steve Cocheo, Follow the Bouncing Check, 95 ABA Banking
J. 32, at 34 (Apr. 2003) (Cocheo 2003).
\139\ See Peter G. Weinstock & Stephanie E. Dreyer, Overdraft
Protection Programs: The Emerging Battleground for Bankers and
Consumer Advocates, 121 Banking L. J. 791, at 795 (2004) (``Banks
have been paying NSF items as a service to customers on a case-by-
case basis for decades.''); see also Cocheo 2003 at 34 (``Our
overdraft program formalizes the traditional courtesy of paying
insufficient checks. . . .'') (quoting Gaynell Lawson, Executive
Vice-President and Chief Financial Officer of Citizens Bank of
Blount County).
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Although Congress did not exempt any category of overdraft credit
from TILA,\140\ the Board used its exception (not its interpretive)
authority to create a limited exception for this longstanding practice
when it issued Regulation Z in
[[Page 13867]]
1969.\141\ Specifically, the Board added Sec. 226.4(d), which provided
that ``[a] charge imposed by a bank for paying checks which overdraw or
increase an overdraft in a checking account is not a finance charge
unless the payment of such checks and the imposition of such finance
charge were previously agreed upon in writing.'' \142\ A bank providing
discretionary, check-centric overdraft (a.k.a. ``bounce-check
protection'' or ``courtesy overdraft protection'' services, as noted in
later Federal Register publications \143\) was not a creditor subject
to Regulation Z because, pursuant to this exception, it did not impose
a finance charge (and otherwise did not structure the repayment of
credit by written agreement in more than four installments).\144\ As
Board commentary on Regulation Z noted, this exception enabled a bank
to ``occasionally, as an accommodation to its customer, honor a check
which inadvertently overdraws that account'' without having to comply
with the requirements of Regulation Z.\145\
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\140\ See Public Law 90-321, 82 Stat. 146 (May 29, 1968),
codified as amended at 15 U.S.C. 1601 et seq.
\141\ 34 FR 2002, 2004 (Feb. 11, 1969); 73 FR 28904, 28927 (May
19, 2008) (``Historically, if a consumer engaged in a transaction
that overdrew his or her account, depository institutions used their
discretion on an ad hoc basis to pay the overdraft, usually imposing
a fee. The Board recognized this longstanding practice when it
initially adopted Regulation Z in 1969 to implement TILA.'').
\142\ 34 FR 2002, 2004 (Feb. 11, 1969).
\143\ 70 FR 29582, 29582 n.1 (May 24, 2005).
\144\ See 12 CFR 1026.2(a)(17)(i).
\145\ 42 FR 22360, 22362 (May 3, 1977).
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In 1981, the Board amended Regulation Z to, among other things,
make ``a few minor editorial changes'' to the Sec. 226.4(d)
exception.\146\ Specifically, the Board changed the term ``bank'' to
``financial institution'' and the term ``checks'' to ``items.'' \147\
The Board made these changes ``to reflect the ability of financial
institutions other than banks, such as savings and loan associations,
to pay items that are similar to checks, such as negotiable orders of
withdrawal, into overdraft.'' \148\ Additionally, the Board renumbered
Sec. 226.4(d) to Sec. 226.4(c)(3).\149\ By making these ``minor
editorial changes,'' the Board stated that ``[n]o substantive change is
intended . . . .'' \150\ In other words, the Board did not change the
purpose of the Sec. 226.4(d) exception, which was to allow financial
institutions to provide consumers with courtesy check-centric overdraft
services without having to comply with the requirements of TILA and
Regulation Z.
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\146\ 46 FR 20848, 20855 (Apr. 7, 1981).
\147\ Id.
\148\ Id.
\149\ Id.
\150\ Id.
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The language from the Board's 1981 version of Sec. 226.4(c)(3)
remains in effect unchanged at Sec. 1026.4(c)(3) in the CFPB's current
version of Regulation Z.\151\
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\151\ In 2016, the CFPB added an additional sentence to the end
of Sec. 1026.4(c)(3) to clarify that the paragraph does not apply
to credit offered in connection with a prepaid account as defined in
Sec. 1026.61. See 81 FR 83934, 84179 (Nov. 22, 2016). However, this
amendment did not impact the text of the portion of Sec.
1026.4(c)(3) adopted in 1981.
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3. Proposed Changes to the Sec. 1026.4(c)(3) Exception
It is the CFPB's preliminary view that the Sec. 1026.4(c)(3)
exception is overbroad for purposes of the current non-covered
overdraft market. To address the issue, the CFPB proposes to add a new
sentence to the end of Sec. 1026.4(c)(3) that would provide that the
paragraph no longer applies to ``above breakeven overdraft credit'' as
that term is defined in proposed Sec. 1026.62. As discussed in part
V.A, the CFPB proposes to apply its proposed Sec. 1026.4(c)(3)
amendment only to very large financial institutions.
The CFPB proposes to define the term ``above breakeven overdraft
credit'' at Sec. 1026.62(b)(1) to mean overdraft credit extended by a
very large financial institution to pay a transaction on which, as an
incident to or a condition of the overdraft credit, the very large
financial institution imposes a charge or combination of charges
exceeding the average of its costs and charge-off losses for providing
non-covered overdraft credit as described in Sec. 1026.62(d). The CFPB
proposes to establish above breakeven overdraft credit by reference to
the average of a very large financial institution's cost and charge off
losses for providing non-covered overdraft credit rather than the cost
and estimated charge-off losses for providing non-covered overdraft
credit for each separate transaction because the CFPB has preliminarily
determined, based on its supervisory experience, that many financial
institutions currently do not track their costs and charge-off losses
at the transaction level, but generally can calculate their average
costs and charge-off losses at the product level. Further, the CFPB
expects that an institution-wide calculation would be easier for very
large financial institutions to administer.
The CFPB is proposing these changes for several independent
reasons.
First, the market for non-covered overdraft credit has changed in
important ways--many financial institutions have automated their non-
covered overdraft programs and expanded them to cover non-check
transactions, while also adjusting their account pricing structure to
more heavily emphasize overdraft fees.\152\ These changes have caused
the market for non-covered overdraft credit to move away from the
historical courtesy model to the point that, for a significant number
of consumers, non-covered overdraft credit is no longer an occasional
accommodation for inadvertent overdrafts.
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\152\ 74 FR 5212 (Jan. 29, 2009); 81 FR 83934, 83950-51 (Nov.
22, 2016).
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Unlike in 1969, when checks made up the lion's share of overdraft
transactions,\153\ recent CFPB analysis of account data from a number
of large banks showed that on average overall only 10.36 percent of
monthly debit transactions occurred by check, while 62.14 percent
occurred by debit card (both one-time and recurring), 12.14 percent
occurred by ACH, 6.43 percent occurred by ATM, 0.71 percent occurred by
bank teller, and the remainder occurred by other means.\154\
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\153\ Stephen Quinn & William Roberds, The Evolution of the
Check as a Means of Payment: A Historical Survey, 93 Fed. Rsrv. Bank
of Atlanta Econ. Rev. 1, at 21 (2008).
\154\ CFPB 2014 Data Point at 17.
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This shift away from check transactions is significant because, as
financial institutions have automated their non-covered overdraft
programs and expanded them to cover non-check transactions, the sheer
volume of overdraft transactions and associated fees has
increased.\155\ This trend especially is pronounced with respect to
debit cards, where CFPB research shows that incidence of overdraft
increases for consumers who use debit cards. For example, CFPB research
shows that 92.3 percent of accounts that do not use debit cards have no
overdrafts in a year of account use and only 0.6 percent of such
accounts incur more than 10 overdrafts per year.\156\ In contrast,
accounts that use their debit cards more than 30 times per month have
the lowest percentage of accounts with no overdraft (51.2 percent) and
the highest percentage of accounts that overdraft more than 10 times
per year (18.0 percent).\157\ In other words, for many consumers who
use debit cards frequently, non-covered overdraft credit services are
no longer provided as an occasional accommodation.\158\
[[Page 13868]]
Moreover, financial institutions today routinely extend overdraft
credit in circumstances where they stand to generate more direct
revenue from extending overdraft credit to cover a transaction than
they would from declining it (because, for example, consumers are
rarely charged NSF fees for declined debit card transactions,\159\ and
nearly two-thirds of banks with over $10 billion in assets have
eliminated NSF fees \160\).\161\ As a result of these changes, non-
covered overdraft programs now generate a substantial portion of the
direct fee revenue that many financial institutions make from checking
accounts (and much of the total revenue that financial institutions
make from low-balance accounts), which has encouraged some financial
institutions to promote consumers' use of non-covered overdraft credit
and/or to calibrate their systems to increase overdraft fee
revenue.\162\ This shift represents a significant departure from the
historical courtesy model, which provided an accommodation to consumers
for the occasional inadvertent overdraft.
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\155\ 81 FR 83934, 83950-51 (Nov. 22, 2016).
\156\ CFPB 2014 Data Point at 15 tbl.4c.
\157\ Id.
\158\ 42 FR 22360, 22362 (May 3, 1977) (``[Section 226.4(d) (now
section 1026.4(c)(3)] relates only to regular demand deposit
accounts which carry no credit features and in which a bank may
occasionally, as an accommodation to its customer, honor a check
which inadvertently overdraws that account.'').
\159\ 74 FR 5212, 5217 (Jan. 29, 2009).
\160\ See CFPB October 2023 Data Spotlight.
\161\ This was not always the case. Historically, financial
institutions charged no more for honoring an overdrawing check
through non-covered overdraft credit than they did for returning the
check unpaid. For example, a 1976 report on bank fees presented the
results of a survey of banks in New York and Washington, DC. Of the
41 banks surveyed, 39 charged overdraft fees that were equal to or
less than the amount of their NSF fees. See Senate Staff Report at
10-11.
\162\ See 81 FR 83934, 83950-51 (Nov. 22, 2016); 70 FR 29582,
29583 (May 24, 2005); CFPB 2013 White Paper at 16-17; CFPB Winter
2015 Highlight at 8-9; FDIC 2018 Highlight at 12; FDIC 2019
Highlight at 2-3.
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The proposed changes described in this section would return the
exception to its original conception--excepting overdraft services from
Regulation Z when offered as a courtesy or accommodation to customers--
while adapting it to fit within the modern payments system. The concept
of a courtesy or an accommodation is the provision of a service
primarily for the convenience of a customer. A credit product that
produces large amounts of revenue and profit, and is provided to many
people who may not want the service, is not consistent with the concept
of providing an additional service as a courtesy. The CFPB
preliminarily finds that, where a financial institution sets its
overdraft fees at or below its breakeven point, it provides a courtesy
service to consumers who overdraw their accounts. Conversely, where a
financial institution sets its overdraft fees above its breakeven
point, and profits from those fees, it cannot be said to be providing a
courtesy. The CFPB has preliminarily determined that the Sec.
1026.4(c)(3) exception should continue to apply to overdraft fees set
at or below the breakeven point, so that very large financial
institutions have the option to recover their costs and losses
associated with providing non-covered overdraft credit to consumers
(without having to comply with Regulation Z), and thus, are not
disincentivized from providing non-covered overdraft to consumers as a
convenience.
In addition to returning the Sec. 1026.4(c)(3) exception to its
original courtesy conception, an independent justification for the
proposed amendments to Sec. 1026.4(c)(3) is that they would further
TILA's purposes of promoting the informed use of credit and comparison
shopping across credit products. Currently, most non-covered overdraft
credit is subject to Regulations DD and E. Although Regulation DD and
Regulation E require certain disclosures for overdraft services,
neither regulation requires that such non-covered overdraft credit be
disclosed as a credit product. Instead, both regulations use terms like
overdraft fees, overdraft practices, or overdraft services that tend to
obscure the fact that financial institutions are providing consumers a
credit product. Applying the Regulation Z regulatory framework would
benefit consumers by ensuring that above breakeven overdraft credit is
disclosed as a credit product and treated like other credit products.
Treating above breakeven overdraft credit like other credit would
benefit consumers by helping them understand that they are entering
into a contract for a credit product provided by a creditor. Unlike the
disclosures required under Regulation DD and Regulation E, the
disclosures required by Regulation Z are designed to set forth
contractual terms for credit products clearly. Providing such
disclosures will help promote the informed use of credit. In addition,
treating above breakeven overdraft credit like other credit would
benefit consumers by aligning the disclosures for such credit with
other credit types and by applying Regulation Z's substantive credit
protections consistently across similar credit products.
Further, disclosing above breakeven overdraft credit under the
Regulation Z regulatory framework would make it easier for consumers to
compare the cost of such credit with the cost of other credit products,
such as linked credit cards, because financial institutions would
present the credit terms for above breakeven overdraft credit in the
same form that creditors present the credit terms of other credit
products. In its November 2009 rulemaking finalizing the current
Regulation E opt-in rule, the Board acknowledged that, based on its own
consumer testing, consumers are interested in receiving more
information about alternatives to non-covered overdraft credit services
on ATM and one-time debit card transactions prior to deciding whether
or not to opt in to such services.\163\ Even though consumers generally
are interested in alternatives to non-covered overdraft credit
services, some consumers, including consumers who may even have
alternative credit available to them,\164\ continue to be frequent
users of non-covered overdraft credit services despite its higher cost
relative to other forms of credit. For example, CFPB research found
that in 2012 the median overdraft fee was $34, the median size of a
debit card transaction incurring an overdraft fee was $24, and that the
majority of non-covered overdraft credit transactions were repaid
within three days.\165\ Putting these figures in lending terms, the
annual percentage rate (APR) for such a non-covered overdraft credit
transaction would be 17,000 percent (if transaction fees were included
in the APR calculation).\166\ By comparison, CFPB research found that
the APR for a typical payday loan was 391 percent and APRs on credit
cards can range between 12 and 30 percent.\167\ The fact that frequent
overdrafters continue to use non-covered overdraft credit services
despite its higher cost relative to other credit suggests that some
frequent overdrafters have difficulty comparing non-covered overdraft
credit services with available alternatives. Disclosing above breakeven
overdraft credit services under the Regulation Z regulatory framework
would promote
[[Page 13869]]
the informed use of credit by ensuring that credit terms were disclosed
consistently across competing credit products, thereby helping
consumers compare such credit with alternative credit options.
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\163\ 74 FR 59033, 59048 (Nov. 17, 2009).
\164\ CFPB 2017 Data Point at 16 tbl. 2.
\165\ CFPB 2013 White Paper at 52; CFPB 2014 Data Point at 5.
\166\ Press Release, CFPB, CFPB Finds Small Debit Purchases Lead
to Expensive Overdraft Charges (July 31, 2014), <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-finds-small-debit-purchases-lead-to-expensive-overdraft-charges/">https://www.consumerfinance.gov/about-us/newsroom/cfpb-finds-small-debit-purchases-lead-to-expensive-overdraft-charges/</a>. Recent supervisory
data the CFPB has collected, reflecting transactions from 2022 and
2023, found that the median debit card overdraft resulted in an
overdraft credit extension of approximately $25.50. Assuming a
credit extension of $25.50, the $35 overdraft fee typical of very
large financial institutions, and a three-day repayment period
results in a similar APR of over 16,000 percent.
\167\ CFPB, Payday Loans and Deposit Advance Products, at 9
(Apr. 24, 2013), <a href="https://files.consumerfinance.gov/f/201304_cfpb_payday-dap-whitepaper.pdf">https://files.consumerfinance.gov/f/201304_cfpb_payday-dap-whitepaper.pdf</a>; CFPB, Ask CFPB: What is a
payday loan?, <a href="https://www.consumerfinance.gov/ask-cfpb/what-is-a-payday-loan-en-1567/">https://www.consumerfinance.gov/ask-cfpb/what-is-a-payday-loan-en-1567/</a> (last reviewed Jan. 17, 2022).
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Moreover, the CFPB expects that applying the Regulation Z
regulatory framework to above breakeven overdraft credit services would
benefit consumers by applying the regulation's existing substantive
protections to such credit services. For example, the CFPB's proposal,
as discussed in additional detail in this notice, would apply the due
date requirement in 1026.7(b)(11)(i)(A), the offset prohibitions in
Sec. 1026.12(d)(1), and the ability to pay provisions in Sec. 1026.51
to covered overdraft credit accounts (including credit that currently
is non-covered above breakeven overdraft credit) that can be accessed
by a hybrid debit-credit card. Therefore, applying Regulation Z to
above breakeven overdraft credit would prohibit very large financial
institutions from immediately taking funds from any incoming deposit in
repayment of the consumer's overdraft balance, would require very large
financial institutions to establish due dates on the same day of each
billing cycle, and would require very large financial institutions to
assess the consumer's ability to pay for such credit--all protections
that the current Regulation DD and Regulation E regulatory frameworks
do not provide.
The CFPB acknowledges that the current Sec. 1026.4(c)(3) exclusion
has existed in its present form for decades and that very large
financial institutions have undertaken efforts to ensure that their
non-covered overdraft credit services comply with Regulations DD and E.
The CFPB also recognizes that some consumers have come to rely on the
availability of non-covered overdraft credit. The CFPB's proposal
reflects, in part, an effort to balance these reliance interests
against the other considerations discussed above in this section. The
proposed changes to Sec. 1026.4(c)(3) would require very large
financial institutions to comply with Regulation Z when providing above
breakeven overdraft credit services, but would allow them to continue
to comply with Regulations DD and E when providing non-covered
overdraft credit services at or below breakeven pricing. Thus, a very
large financial institution that has invested in compliance with
Regulations DD and E could maintain its current processes for providing
consumers with non-covered overdraft credit so long as it priced such
credit at or below breakeven pricing.
i. Alternatives to the Proposed Sec. 1026.4(c)(3) Amendment Considered
During the development of its proposal, the CFPB considered
alternatives to its proposed amendment to Sec. 1026.4(c)(3) including
(1) striking Sec. 1026.4(c)(3) from Regulation Z in its entirety and
(2) updating the opt-in disclosure requirements at Sec. 1005.17 of
Regulation E in a manner that would better disclose the costs
associated with authorizing non-covered overdraft protection for ATM
and debit card transactions.\168\
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\168\ Press Release, CFPB, CFPB Unveils Prototypes of ``Know
Before You Owe'' Overdraft Disclosure Designed to Make Costs and
Risks Easier to Understand (Aug. 4, 2017), <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-unveils-prototypes-know-you-owe-overdraft-disclosure-designed-make-costs-and-risks-easier-understand/">https://www.consumerfinance.gov/about-us/newsroom/cfpb-unveils-prototypes-know-you-owe-overdraft-disclosure-designed-make-costs-and-risks-easier-understand/</a>.
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With respect to the first alternative, the CFPB has preliminarily
determined that it should not eliminate all non-covered overdraft
credit. The CFPB believes that the proposed amendment to Sec.
1026.4(c)(3) is preferable because it would address the CFPB's concerns
relating to consumers' informed use of above breakeven overdraft
credit, including a consumer's ability to compare competing credit
offers, and apply other substantive protections, including ability to
pay requirements and offset restrictions, while allowing very large
financial institutions to still offer non-covered overdraft credit as a
courtesy if they chose to do so.
With respect to the second alternative, the CFPB preliminarily
determined that Regulation E opt-in disclosures would not communicate
the cost of above breakeven overdraft credit as effectively as
Regulation Z disclosures. As discussed above, applying Regulation Z
will ensure that above breakeven overdraft credit is disclosed as a
credit product and treated like other credit products. In addition,
Regulation E disclosures distinguish between overdraft transactions
completed via electronic fund transfers and overdraft transactions
completed via other funds transfer methods (such as checks), whereas
Regulation Z disclosures would apply identically to above breakeven
overdraft transactions regardless of fund transfer method. Modifying
the opt-in disclosure requirements at Sec. 1005.17 of Regulation E
also would not provide other substantive protections available through
Regulation Z, such as the ability to pay requirements and the offset
prohibition discussed above. These substantive protections are
important. For example, by requiring financial institutions to assess
consumers' ability to pay, the proposed rule would ensure that
financial institutions confirm that consumers could make the required
minimum periodic payments under the terms of their account based on
their income or assets and their current obligations. As another
example, by prohibiting offset and requiring the due date to be on the
same day each month for covered overdraft credit accessible by a hybrid
debit-credit card, the proposed rule would give consumers more time to
repay overdraft credit and greater control over how to structure those
repayments. Therefore, the CFPB preliminarily believes that its
proposal better protects consumers than an approach that merely updates
the opt-in disclosure requirements at Sec. 1005.17 of Regulation E.
ii. How To Calculate Whether Overdraft Credit Is Above Breakeven
Overdraft Credit
To clarify the circumstances under which overdraft credit offered
by a very large financial institution is ``above breakeven overdraft
credit'' for purposes of proposed Sec. 1026.62(b)(1), the CFPB also
proposes to add a paragraph at Sec. 1026.62(d).
Proposed Sec. 1026.62(d)(1) would clarify that overdraft credit
offered by a very large financial institution is ``above breakeven
overdraft credit'' for purposes of proposed Sec. 1026.62(b)(1) if the
charge or combination of charges for such credit exceeds the greater of
(1) the pro rata share of the very large financial institution's annual
total direct costs and charge-off losses for providing non-covered
overdraft credit calculated in accordance with Sec. 1026.62(d)(2); or
(2) an estimate published by the CFPB.
For purposes of proposed Sec. 1026.62(d)(1), a ``combination of
charges'' would include all revenue received in connection with an
overdraft transaction when determining whether the charges for that
transaction exceed its average costs and charge-off losses for
providing non-covered overdraft credit, including any extended or
sustained overdraft fees, any interest charges on outstanding overdraft
balances, and any other payments the very large financial institution
receives in connection with an overdraft transaction or transactions.
The approach outlined in proposed Sec. 1026.62(d)(1) would provide
a very large financial institution with two methods for determining
whether its current charge for an overdraft transaction exceeds the
average of its costs and charge-off losses for providing non-covered
overdraft credit--the breakeven standard described at proposed Sec.
1026.62(d)(1)(i) and the benchmark fee described at proposed
[[Page 13870]]
Sec. 1026.62(d)(1)(ii). To the extent that a very large financial
institution does not determine or prefers not to calculate its average
costs and charge-off losses for providing non-covered overdraft credit
using the breakeven standard described at proposed Sec.
1026.62(d)(1)(i), the proposal would permit the very large financial
institution to determine whether it is offering above breakeven
overdraft credit based solely on the benchmark fee at proposed Sec.
1026.62(d)(1)(ii). The CFPB has preliminarily determined that this
approach would decrease compliance costs for some very large financial
institutions by providing them with a simple bright-line method for
determining whether the overdraft credit they extend is above breakeven
overdraft credit. Other very large financial institutions would be
permitted the flexibility to calculate on their own whether the
overdraft credit they extend is above breakeven pricing.
To employ the breakeven standard described at proposed Sec.
1026.62(d)(1)(i), a very large financial institution would determine
its total direct costs and charge-off losses for providing non-covered
overdraft credit to all accounts open at any point during the previous
12 months and then divide that figure by the total number of non-
covered overdraft transactions attributable to those accounts occurring
the previous 12 months. The CFPB proposes to use figures from the prior
12 months because (1) reviewing annualized data would even out any
seasonal variations that could occur with a shorter review period; (2)
very large financial institutions likely already collect annualized
cost and loss data; and (3) reviewing annualized data would require
very large financial institutions to make average cost and loss
calculations only once per year. When determining the total number of
non-covered overdraft transactions occurring the previous 12 months,
the financial institution may account for non-covered overdraft
transactions that do not incur fees, including those that do not incur
fees consistent with fee waiver policies, by excluding from its
transaction total any non-covered overdraft transaction for which the
financial institution either refunded or did not assess any fee or
charge. The CFPB believes that allowing very large financial
institutions to adjust their transaction totals to account for
overdraft transactions that do not incur fees would give financial
institutions flexibility to maintain or to implement fee waiver
policies.
Under the proposal, when a very large financial institution applies
the breakeven standard either for the first time or after transitioning
from the benchmark fee described at proposed Sec. 1026.62(d)(1)(ii),
it may include direct costs and charge-off losses from any transaction
that was a non-covered overdraft transaction during the prior 12-months
even if, applying the breakeven standard, it would have been considered
above breakeven overdraft credit during that period. When determining
the total number of non-covered overdraft transactions occurring the
previous 12 months, a very large financial institution applying the
breakeven standard either for the first time or after transitioning
from the benchmark fee described at proposed Sec. 1026.62(d)(1)(ii)
also may exclude from its transaction total any non-covered overdraft
transaction for which the financial institution either refunded or did
not assess any fee or charge.
To provide additional guidance regarding the types of costs and
charge-off losses a very large financial institution could consider
when calculating the breakeven standard, the CFPB also proposes to add
a paragraph at Sec. 1026.62(d)(2). Proposed Sec. 1026.62(d)(2) would
provide that, when calculating the breakeven standard, a very large
financial institution could consider costs and charge-off losses that
are specifically traceable to its provision of non-covered overdraft
credit in the previous year. The CFPB proposes to allow very large
financial institutions to consider only costs and charge-off losses
that are specifically traceable to their provision of non-covered
overdraft credit to prevent very large financial institutions from
employing the breakeven standard in a manner that would circumvent
Sec. 1026.62(b)(1). For example, without the specifically traceable
restriction, very large financial institutions might include in their
average cost and loss calculations costs and charge-off losses that are
more appropriately attributable either to other segments of their
deposit business or to their deposit business overhead.
Based on its previous experience collecting overdraft cost data
from financial institutions, the CFPB has preliminarily determined that
specifically traceable costs and charge-off losses would include a very
large financial institution's cost of funds for providing non-covered
overdraft credit, its charge-off losses for non-covered overdraft
credit, and any operational costs that are directly attributable to its
non-covered overdraft program. For example, if a very large financial
institution uses issue tagging in its call center to reasonably and
accurately gauge the number of customer service calls it receives
relating to non-covered overdraft credit, direct costs relating to
those customer service calls would be specifically traceable and the
very large financial institution could include the direct costs
relating to those calls in its calculation of costs under the breakeven
standard. Conversely, the CFPB preliminarily believes that both general
overhead costs and charge-off losses resulting from unauthorized use,
EFT errors, billing errors, returned deposit items, or rescinded
provisional credit are not specifically traceable to a very large
financial institution's provision of non-covered overdraft credit and
must not be included in its calculation of costs under the breakeven
standard. For example, if a very large financial institution purchases
office equipment to support its depository business generally, such
costs would not be specifically traceable to its provision of overdraft
services and the very large financial institution could not include the
cost of such office equipment in its calculation of costs under the
breakeven standard.
Under the benchmark fee approach outlined at proposed Sec.
1026.62(d)(1)(ii), a very large financial institution may presume that
any charge or combination of charges it imposes for paying a
transaction that overdraws an account does not exceed its costs and
charge-off losses for providing non-covered overdraft credit if the
charge or combination of charges is less than or equal to any benchmark
fee established by the CFPB. The CFPB is considering four alternatives
for this benchmark fee--$3, $6, $7, and $14. The CFPB views each of
these options as potentially viable because, as discussed in additional
detail in the following paragraphs, they each apply the calculation
method proposed by the breakeven standard to alternative data sets and/
or alternative approaches for calculating the total number of non-
covered overdraft transactions. (As highlighted at the end of this
section, the CFPB seeks comment on each of these alternatives.)
The CFPB requested data, information, and documents from eight
financial institutions relating to, among other things, their costs and
charge-off losses for providing non-covered overdraft credit in the
2022 calendar year.\169\ Each of these eight financial institutions
would qualify as very large financial institutions for purposes of
[[Page 13871]]
proposed Sec. 1026.62(b)(8) and, collectively, these eight
institutions account for over 30 percent of the total assets of very
large financial institutions and represent a diverse set of geographic
footprints, asset sizes, and business models.\170\ The CFPB received
data from all eight institutions, but some institutions were unable to
provide all the requested data at the level of detail requested.\171\
As a result, the CFPB referenced data from five financial institutions
to calculate the four alternatives for the proposed benchmark fee.
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\169\ CFPB, Discretionary Overdraft and NSF Practices at Very
Large Financial Institutions (Jan. 2024), <a href="https://files.consumerfinance.gov/f/documents/cfpb_overdraft-nsf-practices-very-large-financial-institutions_2024-01.pdf">https://files.consumerfinance.gov/f/documents/cfpb_overdraft-nsf-practices-very-large-financial-institutions_2024-01.pdf</a> (CFPB 2024 Overdraft
NSF Report).
\170\ Id. at 4.
\171\ Id.
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The CFPB used the same general formula to calculate all four of the
proposed alternative benchmark fees but relied on different datapoints
to derive each fee amount. To calculate each benchmark fee, the CFPB
first determined the total charge-off losses (excluding losses
attributable to unauthorized use, billing errors, rescinded provisional
credit, returned deposit items, and other sources not attributable to
overdraft transactions) for the financial institutions included in its
estimate calculation and then divided that figure by the total number
of non-covered overdraft transactions (i.e., overdraft transactions
currently excepted from Regulation Z) in the relevant dataset for each
estimate. Next, the CFPB adjusted this charge-off loss per transaction
figure by adding to it $1 per transaction to account for the CFPB's
estimate of a financial institution's cost of funds and operational
costs, which the CFPB estimates does not exceed $0.50 per transaction
each.\172\ To calculate the $0.50 cost of funds figure, the CFPB
estimated that financial institutions would pay interest of 5 percent
per year to obtain funds and would lend an average of $120 to consumers
per transaction for a period of one month. The CFPB preliminarily
believes that this cost of funds estimate would cover most
institutions' costs given that the median overdraft amount per
transaction is $50 and that consumers typically repay overdraft
transactions within three days.\173\ Based on its supervisory and
enforcement experience, the CFPB preliminarily believes that call
center expenses represent the bulk of the operational costs associated
with providing non-covered overdraft programs at very large financial
institutions. To calculate the figure for operational costs, the CFPB
estimated that 10 percent of non-covered overdraft transactions would
require 10 minutes of a customer service representative's time and that
20 percent of these customer service contacts also would require 10
minutes of a supervisor's time.\174\ Based on this estimate, the CFPB
determined that at an average hourly wage of $21.07 and $30.81 for
customer service representatives and supervisors in the financial
sector, respectively, financial institutions would incur roughly $0.45
per non-covered overdraft transaction on call center expenses.\175\ The
CFPB then rounded this figure up to $0.50 to account for other
potential operational costs.
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\172\ Id. at 8-9.
\173\ Id. at 8.
\174\ Id. at 9.
\175\ U.S. Bureau of Labor Stat., Occupational Employment and
Wage Statistics: May 2022 National Industry-Specific Occupational
Employment and Wage Estimates NAICS 5220A1--Credit Intermediation
and Related Activities (5221 and 5223 only), <a href="https://www.bls.gov/oes/current/naics4_5220A1.htm">https://www.bls.gov/oes/current/naics4_5220A1.htm</a> (last modified Apr. 25, 2023).
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To calculate the $3 benchmark fee figure, the CFPB first added
together the charge-off losses for the five financial institutions in
its sample that produced sufficient data to analyze. Next, the CFPB
calculated a charge-off loss per transaction figure by dividing the
total charge-off loss figure by the total number of non-covered
overdraft transactions paid by those five financial institutions. When
tallying the total number of non-covered overdraft transactions for the
charge-off loss per transaction figure, the CFPB counted both non-
covered overdraft transactions that resulted in an overdraft fee and
non-covered overdraft transactions that did not result in an overdraft
fee. This approach yielded a charge-off loss per transaction figure of
$2 per transaction after rounding to the nearest dollar. The CFPB then
added $1 per transaction to this figure to account for the CFPB's
estimate of a financial institution's cost of funds and operational
costs.
To calculate the $6 benchmark fee figure, the CFPB used the same
approach it used to calculate the $3 benchmark fee figure, but changed
how it tallied the total number of non-covered overdraft transactions
for the charge-off loss per transaction figure. Instead of counting
both non-covered overdraft transactions that resulted in an overdraft
fee and non-covered overdraft transactions that did not result in an
overdraft fee, the CFPB counted only non-covered overdraft transactions
that resulted in an overdraft fee. This change increased the charge-off
loss per transaction figure to $5 per transaction after rounding to the
nearest dollar. The CFPB then added $1 dollar per transaction to this
figure to account for the CFPB's estimate of a financial institution's
cost of funds and operational costs.
To calculate the $7 benchmark fee figure, the CFPB first identified
the financial institution in its sample with the highest charge-off
losses. Next, the CFPB calculated a charge-off loss per transaction
figure by dividing total charge-off losses by the total number of non-
covered overdraft transactions paid by the financial institution. When
tallying the total number of non-covered overdraft transactions for the
charge-off loss per transaction figure, the CFPB counted both non-
covered overdraft transactions that resulted in an overdraft fee and
non-covered overdraft transactions that did not result in an overdraft
fee. This approach yielded a charge-off loss per transaction figure of
$6 per transaction after rounding to the nearest dollar. The CFPB then
added $1 dollar per transaction to this figure to account for the
CFPB's estimate of a financial institution's cost of funds and
operational costs.
To calculate the $14 benchmark fee figure, the CFPB used the same
approach it used to calculate the $7 benchmark fee figure (i.e.,
identifying the financial institution in its sample with the highest
charge-off losses) but changed how it tallied the total number of non-
covered overdraft transactions for the charge-off loss per transaction
figure. Instead of counting both non-covered overdraft transactions
that resulted in an overdraft fee and non-covered overdraft
transactions that did not result in an overdraft fee, the CFPB only
counted non-covered overdraft transactions that resulted in an
overdraft fee. This change increased the charge-off loss per
transaction figure to approximately $13 per transaction after rounding
to the nearest dollar. The CFPB then added $1 dollar per transaction to
this figure to account for the CFPB's estimate of a financial
institution's cost of funds and operational costs.
In addition to amending Sec. 1026.4(c)(3), the proposed rule also
would revise the commentary to Sec. 1026.4(c)(3) by adding proposed
comment 4(c)(3)-3. Proposed comment 4(c)(3)-3 would direct readers to
see proposed Sec. 1026.4(b)(12) for guidance on when fees imposed on a
covered asset account as defined in Sec. 1026.62 are finance charges.
The CFPB seeks comment on all aspects of the proposed amendments to
Sec. 1026.4(c)(3) and its commentary and on its proposal to add Sec.
1026.62(b)(1) and (d). In particular, the CFPB seeks comment on the
following issues:
[[Page 13872]]
1. Should the CFPB eliminate the Sec. 1026.4(c)(3) exception for
very large financial institutions rather than amend its application to
above breakeven overdraft credit?
2. What alternative formulae, if any, should the CFPB consider for
calculating costs and charge-off losses for the breakeven standard and
the proposed alternative benchmark fee? For example, instead of
requiring a very large financial institution to calculate its average
costs and charge-off losses for non-covered overdraft across its entire
depository account portfolio, should the breakeven standard allow a
very large financial institution to make separate calculations of its
average costs and charge-off losses for non-covered overdraft within
subsets of its depository account portfolio, such as account
relationship tiers or average account balance ranges?
3. What are the pros and cons of permitting very large financial
institutions to adjust their non-covered overdraft transaction totals
to account for their fee waiver policies under the breakeven standard
described at proposed Sec. 1026.62(d)(1)(i)?
4. What alternative approaches, if any, should the CFPB consider
for calculating the breakeven standard described at proposed Sec.
1026.62(d)(1)(i)? For example, should the CFPB consider an approach
that allows very large financial institutions to estimate their costs
as a flat dollar amount per transaction, as a percentage of their total
asset account costs, or as a percentage of losses?
5. What alternative figures should the CFPB consider, if any, for
its cost of funds and operational cost estimates?
6. Which of its proposed benchmark fee figures--$3, $6, $7, and
$14--should the CFPB adopt? What alternative figures should the CFPB
consider, if any?
7. Should the breakeven standard require the same calculation used
to calculate the benchmark fee? For example, if the CFPB finalizes a
benchmark fee based on all non-covered overdraft transactions, whether
or not the very large financial institution collected a fee in
connection with the transaction, should the breakeven standard also
require the very large financial institution to calculate their costs
based on all non-covered overdraft transactions, whether or not the
very large financial institution collected a fee in connection with the
transaction?
D. Changes to Covered Overdraft Credit Offered by Very Large Financial
Institutions
As discussed below, the CFPB is proposing to change requirements
that apply to covered overdraft credit offered by a very large
financial institution by: (1) requiring covered overdraft credit to be
structured as a separate account; (2) applying additional credit card
provisions to covered overdraft credit that can be accessed by a hybrid
debit-credit card; and (3) applying Regulation E's compulsory-use
prohibition to covered overdraft credit. For existing open-end covered
overdraft credit products, the proposed new designation as covered
overdraft credit accounts would not impose duplicative or additional
account opening requirements.
1. Structure of Covered Overdraft Credit (Sec. 1026.62(c))
The CFPB proposes in Sec. 1026.62(c) to prohibit a very large
financial institution from structuring covered overdraft credit as a
negative balance on a checking or other transaction account.
Conversely, the CFPB proposes to require such institution to structure
covered overdraft credit as a separate credit account.
The CFPB has preliminarily determined that this structural
prohibition and requirement will make it easier for creditors and
consumers to implement and understand, respectively, covered overdraft
credit. Regulation Z's open-end credit rules generally address
independent credit products that do not have substantial positive
(asset) funds associated with them. For example, existing Sec.
1026.11(a) generally provides that creditors must refund any asset
balances on a credit account to the consumer within six months.
In contrast, overdraft credit, whether or not subject to Regulation
Z's requirements, by its nature involves both consumer assets and
consumer credit, the purpose of the latter being to cover shortfalls in
the former. In the context of overdraft credit, the CFPB has
preliminarily determined that requiring the separation of a consumer's
asset balance, such as a checking or other transaction account that is
a ``covered asset account'' as defined in proposed Sec. 1026.62(b)(2),
from the consumer's credit balance, such as a credit account that is a
``covered overdraft credit account'' as defined in proposed Sec.
1026.62(b)(4), is an appropriate addition to Regulation Z under its
TILA section 105(a) authority, as it is necessary or proper to
facilitate creditor compliance and to effectuate the purposes of TILA
by helping to avoid the uninformed use of credit and protecting
consumers against inaccurate and unfair credit billing and credit card
practices. Existing Sec. 1026.61(b), which was established by the
Bureau's 2016 Prepaid Final Rule, similarly prohibits credit accounts
tied to prepaid accounts from being structured as negative balances on
the prepaid accounts and requires that the prepaid account and the tied
credit account be separate.\176\ Further, commenters that addressed
this aspect of the Bureau's 2014 prepaid accounts proposed rule
universally supported the separate asset account and credit account
structure that the 2016 rule adopted.\177\
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\176\ See 12 CFR 1026.61(b).
\177\ See 81 FR 83934, 84264 (Nov. 22, 2016).
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In the context of overdraft credit that is not subject to
Regulation Z's requirements, financial institutions today typically
provide overdraft credit to consumers through negative balances on
consumers' asset accounts. That is, institutions typically provide one
account to a consumer, which is regulated as an asset account such as a
checking or other transaction account, with an asset balance being a
positive balance in the account and an overdraft credit balance being a
negative balance in the account. Further, institutions typically obtain
repayment of a consumer's negative overdraft credit balance by
immediately taking any incoming deposit to the asset account, such as
an electronic direct deposit, as repayment (or ``offset'') of the
account's negative balance. For example, if a consumer's asset account
balance is a negative $100 overdraft credit balance and an institution
receives a $150 electronic direct deposit which is to be credited to
the consumer's account, the institution immediately takes the first
$100 of the electronic deposit to repay the consumer's overdraft credit
balance, such that the consumer's account balance subsequent to the
institution's receipt of the electronic direct deposit is a positive
asset balance of $50.
This practice by institutions of immediately taking incoming
deposits as repayment of overdrafts is known as ``offset.'' Regulation
Z generally prohibits offset in connection with covered overdraft
credit, as defined in proposed 1026.62(b)(3), which can typically be
accessed by a ``credit card'' as defined in 1026.2(a)(15).\178\ That
is, the institution providing the covered overdraft credit is generally
prohibited from immediately taking funds from
[[Page 13873]]
incoming deposits in repayment of consumers' outstanding overdraft
credit balances. Thus, continuing the above example of an outstanding
overdraft credit balance of $100, when Regulation Z applies and the
institution receives a $150 deposit to be credited to the consumer's
account, the institution is prohibited from immediately taking the
funds of the incoming deposit, but must instead credit the funds to the
consumer's asset account and give the consumer the use of the funds. In
other words, when Regulation Z applies, the regulation's offset
prohibition requires that the institution make it such that the
consumer has both an overdraft credit balance of $100 (the money the
consumer continues to owe the institution) and an asset balance of $150
(the money from the incoming deposit) at the same time.\179\
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\178\ See TILA section 169(a) (15 U.S.C. 1666h(a)) and 12 CFR
1026.12(d)(1).
\179\ While TILA and Regulation Z prohibit offset, the statute
and regulation do permit periodic deductions pursuant to the
consumer's written agreement. See 12 CFR 1026.12(d)(3). These
periodic deductions must occur at regular intervals and therefore
cannot occur immediately whenever deposit funds are received to be
credited to the consumer's account. Thus, the permissibility of
periodic deductions does not change the requirement that the
institution make it such that the consumer has both an overdraft
credit balance of $100 and an asset balance of $150 at the same
time.
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Accordingly, the CFPB has preliminarily determined that the
proposed requirement in Sec. 1026.62(c) to structure covered overdraft
credit as a separate credit account that is separate from the checking
or other transaction account will enable institutions to comply with
the TILA and Regulation Z offset prohibition. Specifically, the CFPB
has preliminarily determined that that proposed requirement would
facilitate compliance with the TILA and Regulation Z offset prohibition
by requiring an institution to retain at the same time both an
outstanding overdraft credit balance and an outstanding asset balance
for a consumer. Conversely, the CFPB has preliminarily determined that
it is difficult or impossible for an institution to maintain both an
asset (positive) balance and a credit (negative) balance at the same
time for a consumer within a single asset account and that it is
therefore difficult or impossible for the institution to provide
overdraft credit to the consumer in a manner that complies with
Regulation Z without providing the consumer with an asset account and a
credit account that are separate from each other.
In addition, the CFPB has preliminarily determined that the
proposed requirement to structure covered overdraft credit as a
separate credit account would (1) protect consumers against inaccurate
and unfair credit billing and credit card practices by enabling them to
exercise control over their funds and (2) avoid the uninformed use of
credit by enabling consumers to better understand their asset and
credit balances. With respect to protecting consumers by enabling them
to control their funds, the requirement will facilitate consumers'
ability to control incoming deposits to their accounts and use them for
purposes other than immediately repaying an overdraft balance, as the
offset prohibition requires institutions to permit consumers to do. For
example, continuing the example above, rather than the institution
immediately using the incoming $150 electronic direct deposit to
eliminate the $100 negative overdraft balance in the single account,
under the proposed separate-account structure the consumer might use
the electronically deposited funds to pay a phone or electric bill and
to retain the unpaid $100 balance in the separate credit account (i.e.,
to repay the credit balance to the institution at a later time).
With respect to avoiding the uninformed use of credit by enabling
consumers to understand their asset and credit balances, the
requirement for separate accounts will enable consumers to better
monitor their account balances and trace how their funds are being used
through the better disclosures (e.g., entries on periodic statements)
that institutions will provide to consumers in compliance with
Regulations E and DD for asset accounts and in compliance with
Regulation Z, which effectuates the informed use of credit, for the
credit accounts. Continuing the above example of a $150 incoming
deposit and $100 overdraft balance, with a separate asset account and
credit account (as would be required by proposed Sec. 1026.62(c)), the
consumer whose asset account receives an electronic direct deposit
would see disclosed on the periodic statements a $150 credit entry to
the asset account and, at that time, a $150 balance in the asset
account and a $100 balance in the credit account.
Further, if the consumer were to subsequently choose to use the
$150 asset funds to repay the overdraft, the consumer would at that
later point in time see on the statements the following data points on
the asset account and credit account: (1) a debit entry of $100 to the
asset account for repayment of the overdraft credit balance, (2) a
resulting balance in the asset account of $50, (3) a credit entry of
$100 to the credit account, and (4) a resulting balance in the credit
account of $0. In contrast, without the separate credit account, where
overdrafts are represented as negative balances on the asset account,
the same consumer would see disclosed only the following: a $150 credit
to the asset account for the incoming electronic deposit and a
resulting balance of $50 in the asset account. The CFPB has
preliminarily determined that this latter approach may result in the
uninformed use of credit by the consumer, because the consumer may not
readily appreciate how the credit and asset aspects of their asset
account have interacted. The CFPB has therefore also preliminarily
determined that the former approach of requiring that the asset account
and the credit account be separate from each other--and the better
periodic-statement disclosures that necessarily accompany that
approach--will help avoid the uninformed use of credit by the consumer.
Credit account opening. Opening an open-end consumer credit plan,
such as a covered overdraft credit account, that is subject to
Regulation Z may trigger certain requirements and protections,
including account opening disclosures pursuant to Sec. Sec. 1026.5 and
1026.6 and, if a credit card is involved, ability to pay requirements
in Sec. 1026.51 and fee limitations in Sec. 1026.52(a). Consistent
with existing requirements, for purposes of determining compliance with
provisions of Regulation Z that are tied to credit account opening, an
account opening with respect to covered overdraft credit occurs on the
date a consumer may first engage in a transaction for which covered
overdraft credit can be extended under the account.
If the CFPB finalizes the rule as proposed, very large financial
institutions that offer overdraft services on existing accounts may
need to take steps to come into compliance with Regulation Z. For
example, assume that prior to the effective date of this proposed rule,
a very large financial institution through negative balances on a
deposit account provides above breakeven overdraft credit that is not
subject to Regulation Z to a consumer, and assume further that the
institution seeks to continue to provide above breakeven overdraft
credit to the consumer subsequent to the effective date of the proposed
rule. After the proposed rule's effective date, such above breakeven
overdraft credit would be covered overdraft credit, and proposed Sec.
1026.62(c) of the proposed rule (discussed in the preceding paragraphs)
would require the institution to provide the covered overdraft credit
to the consumer through a separate covered overdraft credit account.
Therefore, to provide above
[[Page 13874]]
breakeven, covered overdraft credit to the consumer subsequent to the
effective date of this proposed rule, the institution would need to
open a covered overdraft credit account for the consumer. Further, the
institution would be required by Sec. 1026.5(b)(1)(i) to provide to
credit account opening disclosures to the consumer for the covered
overdraft credit account before the consumer makes the first
transaction under the covered overdraft credit plan. This is so
regardless of whether there was any change in the terms or conditions
of the previously existing deposit account under which the above
breakeven non-covered overdraft credit was previously extended.\180\
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\180\ The only change in the terms of the previously existing
deposit account that would be required by the CFPB's proposed rule
would be a reduction in the dollar amount of the overdraft fee the
institution charges for negative-balance (non-covered) overdraft.
Because that changed term would be a change in the consumer's favor,
a change-in-terms notice would not be required in advance of the
change. See Regulation E Sec. 1005.8(a)(1) and Regulation DD Sec.
1030.5(a)(1).
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Disclosure requirements. Subsequent to the effective date of the
CFPB's proposed rule, when a very large financial institution seeks to
provide above breakeven overdraft credit to a consumer through a
covered overdraft credit account, the institution will need to comply
with the existing disclosure requirements in Regulation Z. The CFPB
seeks comment on whether any specific disclosure requirements should be
clarified and on whether any adjustments should be made to existing
disclosure requirements to help better promote the informed use of
covered overdraft credit.
Credit subaccounts. Like the CFPB's current proposal, section
1026.61(b), established by the CFPB's 2016 Prepaid Final Rule,
prohibits a covered separate credit feature from being structured as a
negative balance on a prepaid account. Section 1026.61(b) requires that
the covered credit feature be provided ``as a separate credit feature,
either as a separate credit account, or as a credit subaccount of a
prepaid account that is separate from the asset feature of the prepaid
account.'' Further, comment 61(b)-1 requires that ``the credit feature
[] be set up as a separate balance on the prepaid account such that
there are at least two balances on the prepaid account--the asset
account balance and the credit account balance.''
In light of these requirements that the prepaid accounts rule
attaches to covered credit subaccounts tied to prepaid asset accounts
(i.e., the same requirements that it attaches to covered credit
accounts tied to prepaid asset accounts) the CFPB has preliminarily
determined that there would be no meaningful distinction between a
covered overdraft credit account tied to a covered asset account and a
covered overdraft credit subaccount tied to a covered asset account.
For clarity in this regard, proposed Sec. 1026.62(b)(4) would
establish that a credit subaccount is a type of covered overdraft
credit account. Nonetheless, the CFPB seeks comment on whether any
distinctions should be made between covered overdraft credit
subaccounts and other types of covered overdraft credit accounts. The
CFPB also seeks comment on whether any additional requirements should
be adopted to specify how covered overdraft credit accounts should be
disclosed to consumers.
Existing overdraft lines of credit. Many very large financial
institutions currently provide overdraft lines of credit subject to
Regulation Z. Subsequent to the effective date of the CFPB's proposed
rule, these lines of credit would be covered overdraft credit accounts,
regardless of whether they are above or below breakeven pricing.
However, under the proposed rule the institution would not be opening a
new credit account (i.e., would not be newly opening an account that is
subject to Regulation Z) because a credit account--the overdraft line
of credit--already existed prior to the effective date of the proposed
rule. Thus, Regulation Z requirements triggered by credit-account
opening (such as Sec. Sec. 1026.5, 1026.6, 1026.51, and Sec.
1026.52(a) mentioned above) would not apply to these previously
existing overdraft lines of credit. However, other Regulation Z
requirements such as change-in-terms requirements would continue to
apply to them. Further, as discussed under proposed Sec. 1026.4(b)(2)
and (12), fees for transferring funds from the overdraft line of credit
to the tied deposit account, which are currently excepted from being
finance charges under Regulation Z, would be finance charges under the
CFPB's proposed changes to Sec. 1026.4(b)(2) and (12). Accordingly,
very large financial institutions may need to provide change-in-terms
notices in connection with many of the overdraft lines of credit that
they currently provide. The CFPB seeks comment on whether additional
guidance would be helpful for understanding the disclosure and other
requirements that under the proposed rule would be applicable to very
large financial institutions in these circumstances. If so, what
examples should be addressed and added?
2. Credit Card Changes
Credit cards and card issuers ar
[…truncated; see source link]Indexed from Federal Register on February 23, 2024.
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