Rule2024-29699
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
December 30, 2024
Effective
October 1, 2025
Issuing agencies
Consumer Financial Protection Bureau
Abstract
The Consumer Financial Protection Bureau (CFPB) amends Regulations E and Z to update regulatory exceptions for overdraft credit provided by very large financial institutions, thereby ensuring that these extensions of overdraft credit adhere to consumer protections required of similarly situated products, unless the overdraft fee is a small amount that only recovers estimated costs and losses. The rule allows consumers to better comparison shop across credit products and provides substantive protections that apply to other consumer credit.
Full Text
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[Federal Register Volume 89, Number 249 (Monday, December 30, 2024)]
[Rules and Regulations]
[Pages 106768-106845]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-29699]
[[Page 106767]]
Vol. 89
Monday,
No. 249
December 30, 2024
Part II
Consumer Financial Protection Bureau
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12 CFR Parts 1005 and 1026
Overdraft Lending: Very Large Financial Institutions; Final Rule
Federal Register / Vol. 89 , No. 249 / Monday, December 30, 2024 /
Rules and Regulations
[[Page 106768]]
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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: Final rule; official interpretation.
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SUMMARY: The Consumer Financial Protection Bureau (CFPB) amends
Regulations E and Z to update regulatory exceptions for overdraft
credit provided by very large financial institutions, thereby ensuring
that these extensions of overdraft credit adhere to consumer
protections required of similarly situated products, unless the
overdraft fee is a small amount that only recovers estimated costs and
losses. The rule allows consumers to better comparison shop across
credit products and provides substantive protections that apply to
other consumer credit.
DATES: Effective date: October 1, 2025.
FOR FURTHER INFORMATION CONTACT: George Karithanom, Regulatory
Implementation and Guidance Program Analyst, 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#e2a1a4b2a0bda381818791918b808b8e8b969ba281849280cc858d94"><span class="__cf_email__" data-cfemail="8dcecbddcfd2cceeeee8fefee4efe4e1e4f9f4cdeeebfdefa3eae2fb">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Overview
A. Summary
B. Market Background
II. The Proposal and Other Procedural Background
A. Outreach and Engagement
B. Summary of the Proposed Rule
III. Legal Authority
A. Truth in Lending Act
B. Electronic Fund Transfer Act
C. Consumer Financial Protection Act
IV. Discussion of the Final Rule
A. Overview of the CFPB's Approach
B. Entity Coverage
C. Transaction and Account Coverage
D. Changes to Definition of ``Finance Charge''
E. Changes to Covered Overdraft Credit Offered by Very Large
Financial Institutions
V. Effective and Compliance Date
VI. Other Comments
A. Possible Alternative or Additional Requirements
B. Usury Limits
C. Other Comments Regarding Statutory Authority
D. Data Supporting Application of Regulation Z to Overdraft
E. Implications for Other Laws
VII. CFPA Section 1022(b) Analysis
A. Overview
B. Data Limitation and Quantification of Benefits, Costs, and
Impacts
C. Baseline for Analysis
D. Comments Received
E. Potential Benefits and Costs to Consumers and Covered Persons
F. Potential Benefits and Costs to Consumers and Covered Persons
of Further Provisions of the Proposed Rule
G. Potential Impacts on Depository Institutions and Credit
Unions With $10 Billion or Less in Total Assets, as Described in
CFPA Section 1026
H. Potential Impacts on Consumer Access to Credit and on
Consumers in Rural Areas
VIII. Regulatory Flexibility Act Analysis
IX. Paperwork Reduction Act
X. Congressional Review Act
XI. Severability
I. Overview
A. Summary
The CFPB is updating non-statutory exceptions in Regulations Z and
E that have allowed very large financial institutions to avoid
statutory consumer credit protection requirements when extending
certain overdraft credit.\1\
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\1\ When amending commentary, the Office of the Federal Register
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. In
addition, the CFPB is releasing an unofficial, informal redline to
assist industry and other stakeholders in reviewing the changes to
the regulatory text and commentary of Regulation E and Regulation Z.
This redline may be found on the CFPB's website. If any conflicts
exist between the redline and the text of Regulation E or Regulation
Z, its commentary, or this 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; other consumer credit products with similar
features, such as short term repayment, 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 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 the negative consequences of
a bounced check without being charged any additional fees beyond an
amount that did not exceed 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
[[Page 106769]]
institutions make from low-balance accounts). The volume of overdrawing
transactions and related revenue rose drastically over the years,
including on transactions where the consumer may have otherwise
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 per overdraft transaction 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
updating 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 will allow consumers to better
compare certain overdraft credit to other types of credit and will
provide consumers with several substantive protections that already
apply to other consumer credit.
These amendments apply only to very large financial institutions--
i.e., insured depository institutions and credit unions with more than
$10 billion in assets. The rule does 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 final rule, Regulation Z will 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 final rule accomplishes this result by updating two regulatory
exceptions from the statutory definition of finance charge. First, the
final rule updates 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\ The rule narrows this exception to no longer apply to
``above breakeven overdraft credit'' offered by a very large financial
institution, which generally means that profit-generating overdraft
fees charged by very large financial institutions would no longer be
excepted from TILA. The final rule gives 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 a standard set forth in the rule; or (2) relying on a
benchmark fee of $5. Second, the final rule updates a related exception
that provides that a charge imposed on an asset account in connection
with an overdraft credit feature is not a finance charge if the charge
does not exceed the charge for a similar transaction account without a
credit feature.\7\ The updates clarify what is and is not a comparable
charge in light of changes finalized in this rule.
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\6\ 12 CFR 1026.4(c)(3).
\7\ 12 CFR 1026.4(b)(2).
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In the proposal, the CFPB presented four alternatives for the
benchmark fee described above--$3, $6, $7, and $14--to solicit public
comment on what data the CFPB should consider when calculating the fee.
In the final rule, the CFPB will apply the same approach used to derive
the proposed $3 benchmark fee. However, the final rule increases the $3
benchmark fee to $5 to account for additional costs noted by
commenters, such as costs relating to overdraft notices, branch
servicing, collection, core providers/vendors, compliance, and
technology. As a result of this final rule, above breakeven overdraft
credit that is not currently subject to Regulation Z will become
subject to Regulation Z, including provisions in subpart B that govern
open-end credit (e.g., annual percentage rate disclosures, other
account opening disclosures, periodic statements, and advertising
rules), on the effective date of this rule. For ease of reference, this
final rule 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 will become covered overdraft credit when this final rule
becomes effective on October 1, 2025.
The final rule also requires covered overdraft credit offered by
very large financial institutions to be put in a credit account
separate from the asset account, and it updates exceptions relating to
credit cards. Among other changes, it applies the portions of
Regulation Z that implement the Credit Card Accountability
Responsibility and Disclosure Act of 2009 (CARD Act) \8\ 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 will apply to such overdraft credit
include, but are not limited to, ability to pay underwriting
requirements, limitations on penalty fees including certain fees on
transactions that are declined due to nonsufficient funds, and various
requirements related to rate changes.
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\8\ Public Law 111-24; 123 Stat. 1734 (2009).
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The final rule will also prohibit compulsory use of preauthorized
electronic fund transfers (EFTs) for repayment of covered overdraft
credit provided by very large financial institutions. This change will
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
cannot 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 will have the right to repay this overdraft credit manually if
they prefer.
The final rule will take effect on October 1, 2025. This effective
date is more than six months after the date the rule is published in
the Federal Register, consistent with 15 U.S.C. 1604(d).
B. Market Background
1. 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
[[Page 106770]]
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,\9\ 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.'' \10\ The Board subsequently adopted
commentary excluding debit cards with no credit agreement from
Regulation Z's definition of ``credit card.'' \11\ 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.\12\
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\9\ 34 FR 2002 (Feb. 11, 1969).
\10\ 42 FR 22360, 22362 (May 3, 1977).
\11\ 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.
\12\ 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.\13\ 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;
\14\ however, since late 2021, in the wake of substantial CFPB
enforcement and supervising attention on overdraft fees, a number of
financial institutions have voluntarily eliminated such fees.\15\
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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\13\ 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).
\14\ Id.
\15\ 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 final rule 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.\16\
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\16\ 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
cannot 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.\17\ While, as noted above, overdraft credit must
technically be discretionary to be excepted from Regulation Z, in
practice, financial 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).\18\ Financial institutions that use static limits
sometimes 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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\17\ CFPB 2013 White Paper at 48-52.
\18\ 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.\19\ Financial institutions typically
have charged the same amount
[[Page 106771]]
for an NSF fee as for a non-covered overdraft fee.\20\ As noted in part
I.B.3, many financial institutions have eliminated NSF fees over the
past three years.
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\19\ The CFPB is aware that some prepaid card providers charge
NSF fees on one-time purchase transactions, based on fees disclosed
in the CFPB's publicly-available prepaid account agreement database.
\20\ 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 returned item 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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2. Evolution and Growth of Non-Covered Overdraft
Non-covered overdraft credit started as a courtesy that individuals
within financial institutions provided when they would decide on an ad
hoc basis to pay particular check transactions into overdraft rather
than returning those checks unpaid.\21\ 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.\22\
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.\23\ 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.\24\ 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 the New York metro area found that the median fee
was $5, while some banks charged zero.\25\ By 1994, concern had risen
about the increase in the average fee to over $15 ($5.77 in 1976
dollars); \26\ by 2000, the average had surpassed $20 ($6.61 in 1976
dollars) and continued to increase thereafter.\27\
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\21\ 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'').
\22\ 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).
\23\ 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'').
\24\ 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 Nov. 13, 2024); 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), Responding to Reform: Overdraft in 2023 (Oct. 8,
2024), <a href="https://finhealthnetwork.org/research/responding-to-reform-overdraft-in-2023/">https://finhealthnetwork.org/research/responding-to-reform-overdraft-in-2023/</a> (FHN Brief 2024) (finding almost half (45
percent) of overdrafters reported that their most recent overdraft
occurred on a transaction of $50 or less).
\25\ Senate Staff Report at 10-11.
\26\ 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, FRS) (showing average overdraft fee of over $15 in
1993); see also id. at 95-96, 101-102 (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).
\27\ 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).
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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 on overdraft fees.\28\ 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 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.\29\
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\28\ CFPB 2013 White Paper at 16-17.
\29\ 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 estimated 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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3. 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.\30\
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.\31\ With the onset of the
pandemic
[[Page 106772]]
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.\32\ 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.\33\ Notwithstanding the trend downward during the pandemic,
estimated market wide overdraft revenue exceeded $9 billion in 2020 and
2021.\34\
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\30\ Id.
\31\ 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.
\32\ CFPB 2021 Data Point at 22-24.
\33\ 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>.
\34\ See discussion of methodology at FN 31.
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Beginning in late 2021, a number of large banks began announcing
and implementing changes to their overdraft policies.\35\ Some banks
eliminated overdraft fees altogether or reduced them to $10 or $15 per
transaction.\36\ Some banks made changes to their policies by expanding
their fee waiver policies, including establishing a daily limit of one
fee per day even if multiple overdrawing transactions are paid; \37\
establishing de minimis negative balance thresholds of $50 or more,
within which overdrafts do not result in a fee; and implementing grace
periods giving consumers time through the next business day to bring
their accounts positive before a fee is assessed.\38\ Collectively
these changes resulted in a sustained reduction in overdraft revenues
as compared to pre-pandemic levels.\39\ Marketwide overdraft revenue in
2022 was an estimated $9.1 billion ($7.9 billion in 2019 dollars, a 37
percent drop in real terms).\40\ Of that, an estimated $6.16 billion,
or 68 percent, was earned by financial institutions with above $10
billion in assets.\41\ At the same time, most very large financial
institutions eliminated NSF fees.\42\
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\35\ 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>.
\36\ Id.
\37\ Id.
\38\ Id.
\39\ 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); see
also CFPB, Trends in overdraft/non-sufficient fund (NSF) fee revenue
and practices (Apr. 24, 2024), <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> (CFPB April 2024 Data Spotlight)
(reflecting data and analysis published periodically from Dec. 1,
2021 to present).
\40\ See discussion of methodology at FN 31.
\41\ Estimated using data from 2022 Federal Financial
Institutions Examination Council (FFIEC) Call Reports and
methodology discussed at FN 31.
\42\ 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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Although there was some overall decline in the charging of
overdraft fees, a sizeable majority of banks and credit unions with
over $10 billion in assets (i.e., 68 percent) continue to charge
between $30 and $37 per transaction incurring an overdraft fee, and
more than half charge $35.\43\ 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).\44\ 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.\45\ 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.\46\
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 IV.D.3, 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 those banks during the period studied.
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\43\ CFPB Market Monitoring of Publicly Available Overdraft
Practices, Dec. 2022-July 2023.
\44\ CFPB 2013 White Paper at 17.
\45\ Id.
\46\ Id.
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4. Consumer Impact of Overdraft Fees
As cumulative overdraft fee revenue for financial institutions
increased before recent reductions, so did the cumulative burden of
overdraft fees on consumers, particularly more financially vulnerable
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.\47\ 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.\48\
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\47\ 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).
\48\ 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
[[Page 106773]]
lowest share of accounts with frequent overdrafts tended to have the
lowest rates of involuntary closure.\49\ 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 Federal Deposit
Insurance Corporation (FDIC) estimates that there were approximately
5.6 million unbanked households in the U.S. in 2023,\50\ nearly half of
which had a bank account in the past.\51\ Of those previously banked
households, nearly two-thirds have little or no interest in having a
bank account again,\52\ with high fees, unpredictable fees, and not
enough funds to meet minimum balance requirements among the most cited
reasons.\53\
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\49\ CFPB 2013 White Paper at 25.
\50\ FDIC, 2023 FDIC National Survey of Unbanked and Underbanked
Households, at 1 (Nov. 2024), <a href="https://www.fdic.gov/household-survey/2023-fdic-national-survey-unbanked-and-underbanked-households-report">https://www.fdic.gov/household-survey/2023-fdic-national-survey-unbanked-and-underbanked-households-report</a>
(FDIC 2023 Unbanked Report).
\51\ Id. at 27 tbl.1.3 (47.4 percent of unbanked households
previously had a bank account).
\52\ Id. at 28 fig.1.7 (47.5 percent of previously banked
households are not at all interested in having a bank account, and
17.8 percent are not very interested).
\53\ FDIC, 2023 FDIC National Survey of Unbanked and Underbanked
Households--Appendix Tables (November 2024), at 13 tbl.A.8, <a href="https://www.fdic.gov/household-survey/2023-fdic-national-survey-unbanked-and-underbanked-households-appendix-tables">https://www.fdic.gov/household-survey/2023-fdic-national-survey-unbanked-and-underbanked-households-appendix-tables</a> (among previously banked
households, 32.8 percent cited bank account fees are too high, 30.6
percent cited bank account fees are too unpredictable, and 43.3
percent cited that they do not have enough money to meet minimum
balance requirements).
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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.\54\ 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, or whether a particular paid transaction will be
deemed an overdraft and assessed an overdraft fee.\55\
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\54\ 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>;
see also Press Release, CFPB, CFPB Orders Atlantic Union Bank to Pay
$6.2 Million for Illegal Overdraft Fee Harvesting (Dec. 7, 2023),
<a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-atlantic-union-bank-to-pay-6-2-million-for-illegal-overdraft-fee-harvesting/">https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-atlantic-union-bank-to-pay-6-2-million-for-illegal-overdraft-fee-harvesting/</a>.
\55\ Id.; see also 87 FR 66935, 66935-40 (Nov. 7, 2022).
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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,\56\ 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
since its inception in 2011.
---------------------------------------------------------------------------
\56\ 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.\57\ 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.\58\ 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.\59\ In addition,
involuntary account closure was about 2.5 times as likely for consumers
who were opted-in than for consumers who were not.\60\
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\57\ CFPB 2014 Data Point at 21.
\58\ Id. at 13.
\59\ 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 I.B.5.
\60\ 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).
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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.\61\ Compared to non- or infrequent overdrafters, frequent
overdrafters tend to have lower incomes and lower end-of-day
balances.\62\ 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.\63\ Black households and Latino
households are more likely to incur overdraft fees than white
households.\64\
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\61\ 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.
\62\ Id. 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, 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 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).
\63\ CFPB 2017 Data Point at 15-16.
\64\ See 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 FHN Brief 2024 (finding that 31 percent of
Black, 24 percent of Latinx, and 14 percent of White households
reported having overdrafted in 2023); 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); see also CFPB, Overdraft and Nonsufficient Fund Fees,
at 25 (Dec. 2023), <a href="https://files.consumerfinance.gov/f/documents/cfpb_overdraft-nsf-report_2023-12.pdf">https://files.consumerfinance.gov/f/documents/cfpb_overdraft-nsf-report_2023-12.pdf</a> (finding that Black and
Hispanic consumers are 69 and 60 percent more likely to reside in a
household charged at least one overdraft or NSF fee in the past
year).
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Further, evidence suggests that millions of accounts with
outstanding overdrafts are closed every year, and those former
accountholders may have less subsequent access to the formal banking
system as a result.\65\
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\65\ For example, a 2012 study found that 30 million checking
accounts were involuntarily closed from 2001-2005 due to excessive
overdrafts, with the former accountholders having limited or no
subsequent access to the formal banking system. See Dennis Campbell
et al., Bouncing out of the banking system: An empirical analysis of
involuntary bank account closures, 36 J. Banking & Fin. 1224 (2012).
The CFPB's supervisory experience suggests that overdraft-related
involuntary closures remain prevalent in today's market.
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[[Page 106774]]
5. Growing Regulatory Concerns About Non-Covered Overdraft Credit
As financial institutions began to evolve the provision of non-
covered overdraft away from the historical 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 Office of the Comptroller of the
Currency (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.'' \66\ In 2002, the Board noted that some non-covered overdraft
credit may not be all that different from overdraft lines of
credit,\67\ 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.\68\ 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'' and ``[w]ere the
Board to address these issues more specifically, it would do so
separately under its clear [TILA] authority.'' \69\ 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'').\70\ Following the adoption of the Board's
rule, the FDIC issued additional supervisory guidance,\71\ 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.\72\
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\66\ 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>.
\67\ 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).
\68\ 69 FR 31760, 31761 (June 7, 2004).
\69\ See 70 FR 9127, 9128-29 (Feb. 24, 2005).
\70\ 74 FR 5212 (Jan. 28, 2009).
\71\ 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>.
\72\ 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.\73\ 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.\74\ 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.\75\
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\73\ 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
Dec. 3, 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).
\74\ 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>.
\75\ 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.\76\ 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.\77\
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\76\ 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.
\77\ 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'' \78\ 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.'' \79\ 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.'' \80\ 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.'' \81\ 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.\82\
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\78\ 15 U.S.C. 1602(f).
\79\ 81 FR 83934, 84168 (Nov. 22, 2016).
\80\ Id. at 84160.
\81\ Id.
\82\ Id. at 84162.
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II. The Proposal and Other Procedural Background
A. Outreach and Engagement
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.\83\ This inquiry included a request for information on
[[Page 106775]]
the impacts of overdraft fees on consumers,\84\ 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.\85\ 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.\86\ 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.\87\
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\83\ 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>.
\84\ 77 FR 12031 (Feb. 28, 2012).
\85\ See CFPB 2013 White Paper at 8; see also CFPB 2014 Data
Point at 6-7.
\86\ See CFPB 2013 White Paper; CFPB 2014 Data Point; CFPB 2017
Data Point.
\87\ 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.\88\ Since then, the CFPB has continued tracking trends in
the marketplace \89\ and evaluating some banks' key overdraft-related
metrics through the CFPB's supervision work.\90\ From December 2022 to
July 2023, the CFPB reviewed the publicly available overdraft practices
of financial institutions with assets over $10 billion.\91\ 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 IV.D as well as in
a separate report issued in January 2024 titled ``Overdraft and NSF
Practices at Very Large Financial Institutions.'' \92\
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\88\ CFPB 2021 Data Point.
\89\ CFPB April 2024 Data Spotlight.
\90\ 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).
\91\ CFPB Market Monitoring of Publicly Available Overdraft
Practices, Dec. 2022-July 2023.
\92\ See CFPB, 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 Overdraft and
NSF Practices Report).
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Consistent with section 1022(b)(2)(B) of the CFPA, the CFPB has
consulted with the appropriate prudential regulators and other Federal
agencies, including regarding consistency with any prudential, market,
or systemic objectives administered by these agencies. 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 II.A.
B. Summary of the Proposed Rule
On January 17, 2024, the CFPB issued a notice of proposed
rulemaking containing several proposed amendments to Regulations Z and
E to extend consumer credit protections that generally apply to other
forms of consumer credit to certain overdraft credit provided by very
large financial institutions. This notice of proposed rulemaking was
published in the Federal Register on February 23, 2024.\93\ The CFPB
proposed 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
expected that would likely fall on October 1, 2025.
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\93\ 89 FR 13852 (Feb. 23, 2024).
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As described more fully below, the CFPB proposed to amend
Regulations Z and E, and accompanying commentary as they relate to
overdraft credit. The amendments would have applied 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 proposed to update two regulatory exceptions from the
definition of finance charge so that Regulation Z would 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,
as follows. First, the proposal would have updated 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 \94\ so that the exception would not
apply to ``above breakeven overdraft credit'' offered by a very large
financial institution. The proposal would have given 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 a standard set forth in the proposal; or
(2) relying on a benchmark fee set by the CFPB in the proposal. The
CFPB asked for comment on four potential benchmark fees: $3, $6, $7, or
$14. Second, the proposal would have updated a related exception that
provides that a charge imposed on an asset account in connection with
an overdraft credit feature is not a finance charge if the charge does
not exceed the charge for a similar transaction account without a
credit feature.\95\
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\94\ 12 CFR 1026.4(c)(3).
\95\ 12 CFR 1026.4(b)(2).
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As a result of these proposed changes, above breakeven overdraft
credit that is not currently subject to Regulation Z would have 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).
The proposal would also have required covered overdraft credit
offered by very large financial institutions to be put in a credit
account separate from the asset account, and it would have updated
exceptions relating to credit cards. Among other changes, it would have
applied the portions of Regulation Z that implement the Credit Card
Accountability Responsibility and Disclosure Act of 2009 (CARD Act)
\96\ 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
[[Page 106776]]
credit from a very large financial institution. Provisions of the CARD
Act that would have applied to such overdraft credit include, but are
not limited to, ability to pay underwriting requirements, limitations
on penalty fees including certain fees on transactions that are
declined due to nonsufficient funds, and various requirements related
to rate changes.
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\96\ Public Law 111-24; 123 Stat. 1734 (2009).
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The proposal would also have prohibited compulsory use of
preauthorized electronic fund transfers (EFTs) for repayment of covered
overdraft credit provided by very large financial institutions, which
would have ensured 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.
Comments
The CFPB received over 48,000 comments on the proposal.\97\ Over
47,000 of those comments were from individual consumers and over 1,000
were from or about institutions with fewer than $10 billion in assets.
The CFPB also received many comments from consumer advocate commenters,
academic commenters, industry commenters, State regulators, State
Attorneys General, and members of Congress. This also includes comments
received after the comment period closed via ex parte submissions and
meetings.\98\ All comments, including ex parte submissions and
summaries of ex parte meetings, will be available on the public docket
for this rulemaking.\99\
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\97\ See <a href="https://www.regulations.gov/docket/CFPB-2024-0002/comments">https://www.regulations.gov/docket/CFPB-2024-0002/comments</a>.
\98\ See CFPB, Policy on Ex Parte Presentations in Rulemaking
Proceedings, 82 FR 18687 (Apr. 21, 2017).
\99\ See <a href="https://www.regulations.gov/docket/CFPB-2024-0002/">https://www.regulations.gov/docket/CFPB-2024-0002/</a>.
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Relevant information received via comment letters, as well as ex
parte submissions, is discussed below in subsequent parts of this
document, as applicable. The CFPB considered all the comments it
received regarding the proposal, made certain modifications, and is
adopting the final rule as described in part IV below.
III. Legal Authority
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.\100\ 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.\101\ 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.\102\ 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.\103\
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\100\ 15 U.S.C. 1604(a).
\101\ 15 U.S.C. 1601(a).
\102\ Id.
\103\ 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.\104\
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\104\ 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 amending
Regulation Z with respect to overdraft credit to carry out TILA's
purposes. The CFPB is retaining additional requirements, adjustments,
and exceptions as, in the CFPB's judgment, are necessary and proper to
carry out the purposes of TILA, prevent circumvention or evasion
thereof, or to facilitate compliance. In developing these amendments
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.\105\ Among other things, EFTA contains provisions regarding
compulsory use of EFTs.\106\
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\105\ 15 U.S.C. 1693.
\106\ 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.\107\ 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.\108\ 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.'' \109\
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\107\ 15 U.S.C. 1693b(a).
\108\ 15 U.S.C. 1693b(c).
\109\ 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 IV 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
[[Page 106777]]
CFPB's authority under, as applicable, EFTA section 904(a) and (c).
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.'' \110\
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\110\ 12 U.S.C. 5512(b)(1).
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Among other statutes, TILA, EFTA, and the CFPA are Federal consumer
financial laws.\111\ Accordingly, in issuing this rule, 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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\111\ 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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IV. Discussion of the Final Rule
A. Overview of the CFPB's Approach
As discussed above, the CFPB proposed 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 estimated costs and losses. These consumer protections allow
consumers to better comparison shop across credit products and provide
substantive protections that apply to other consumer credit.
As a result of the evolution of the overdraft market over the last
few decades, the regulatory exceptions for overdraft credit provided by
very large financial institutions no longer serve their original
purpose. The CFPB proposed preserving a limited exception to encourage
the availability of overdraft coverage, which can benefit consumers,
especially given that much overdraft credit is incidental in nature, as
consumers often do not know with certainty whether a transaction will
be presented against sufficient funds. But the proposal stated that 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 to consumers, nor as consistent with TILA's purposes of
promoting the informed use of credit and comparison shopping across
credit products, and protecting consumers against inaccurate and unfair
credit billing and credit card practices.
The CFPB is adopting the same general approach in the final rule,
with some modifications, as discussed herein.
Comments Received on the CFPB's Proposed Approach Generally
Comments received by the CFPB on the proposal, and responses
thereto, are discussed in more detail throughout this part IV. The
following is a synopsis of comments received on the CFPB's proposed
approach generally.
Many of the commenters supported the CFPB's proposal, stating among
other things that the rule would reduce fee burdens and associated
consequences and support the informed use of credit. These commenters
generally focused on negative consumer experiences with overdraft fees,
stating that what began as a narrow exception to provide for occasional
accommodation now generates billions of dollars in fees from vulnerable
populations. A State agency commenter noted that overdraft fees can
discourage many consumers from wanting a bank account at all and noted
that overdraft fees can deduct funds from a consumer's public benefits,
thereby frustrating the purpose of those benefit programs. A consumer
advocate commenter noted that some financial institutions are already
lowering fees or offering alternative products to meet consumer needs
and posited that the CFPB's proposal would continue this progress by
supporting market shifts that benefit consumers. Another commenter
noted that the proposal continues to offer flexibility to covered
entities such that they may offer overdraft as courtesy non-covered
overdraft or as a covered overdraft line of credit.
Other commenters, including banks, credit unions, and industry
groups, did not support the proposed rule, arguing, for example, that
it is unnecessary because overdraft fees are already effectively
disclosed consistent with Regulations DD and E, and that consumers find
value in overdraft programs and expressly opt into them. Therefore,
some argued that the CFPB should further study why consumers sometimes
use higher-cost credit options and, in the case of overdraft programs,
expressly opt into them, before proposing new regulations to ensure
that any changes will achieve their goals. Commenters also emphasized a
number of changes to overdraft programs that have already reduced fees
in recent years and noted that if the proposal is finalized, financial
institutions might pass along costs to consumers by increasing other
fees or limiting credit or other services, including the possibility
that transactions would not be paid through overdraft credit but would
instead be declined or that consumers might migrate to less regulated
credit alternatives. Some commenters objected to the CFPB's focus on
whether overdraft fees recover more than applicable costs and losses.
B. Entity Coverage
Proposed Rule
The CFPB proposed to expand protections to consumers of overdraft
credit at financial institutions with more than $10 billion in assets.
Under the proposal, the regulatory framework would not change 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 have defined 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. The proposed rule then used the term ``very
large financial institution'' to limit the scope of overdraft credit
that would be subject to the proposed rule.
The CFPB preliminarily determined in the proposal that overdraft
services offered by financial institutions with more than $10 billion
in assets should be subject to this rule. The proposal noted that, 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 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 preliminarily determined in the proposal that consumers
would benefit from a rule that would apply to very large financial
institutions--i.e., those with assets of $10 billion or more. The
proposal noted that such a rule would increase protections for the
overwhelming majority of consumers of overdraft credit. The CFPB noted
that the proposed rule would have covered
[[Page 106778]]
financial institutions holding approximately 80 percent of consumer
deposits as of December 2022 \112\ and responsible for approximately 68
percent of overdraft charges as of December 2022.\113\ The CFPB
preliminarily determined 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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\112\ Computed from 2022 FFIEC and National Credit Union
Administration call report data.
\113\ Estimated using data from 2022 FFIEC Call Reports and
methodology discussed at FN 29.
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The CFPB noted that in light of the different circumstances smaller
financial institutions may face in adapting to the proposed regulatory
framework, the CFPB did not propose to extend the proposed rule to
those institutions with $10 billion or less in assets. The CFPB noted
that while it did not propose 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 requested 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.
For the reasons discussed below, the CFPB is adopting the very
large financial institution definition as proposed.
Comments Received
Several commenters, including several consumer advocates, supported
the proposal's approach to apply the rule to very large financial
institutions. They stated that the rule would benefit a majority of
consumers, that very large financial institutions have greater
resources to adapt to regulatory changes, and that the CFPB may need
additional time to gather relevant cost data for smaller financial
institutions. These commenters recommended that the CFPB take steps to
conduct a rulemaking as soon as possible to consider expanding the
scope of the rule to entities that are not very large financial
institutions (non-VLFIs).
A number of industry commenters maintained that the CFPB did not
provide a sufficient justification for applying the rule only to very
large financial institutions. The industry commenters criticized on
several different grounds the proposed rule's approach to apply the
revised regulatory framework only to very large financial institutions.
Some industry commenters stated that the CFPB lacks authority to
apply the rule only to very large financial institutions. Several
industry commenters maintained that the differential treatment of very
large financial institutions would be inconsistent with TILA, stating
that the proposed rule did not explain why subjecting smaller financial
institutions to the rule would not provide a meaningful benefit to
consumers while subjecting very large financial institutions to the
rule would provide a meaningful benefit. Other industry commenters
stated that the proposal did not consider the five factors for an
exemption under section 105(f)(2) of TILA and that the CFPB did not
explain why it would be appropriate to define overdraft as credit and
an overdraft fee as a finance charge only for very large financial
institutions.
Several industry commenters stated that the proposal failed to
provide a sufficient explanation for covering only very large financial
institutions. The commenters stated that the proposal noted the $10
billion supervisory threshold but did not sufficiently explain why that
threshold was relevant for exempting very large financial institutions
from the proposed overdraft rule. While these commenters acknowledged
that the proposal noted that smaller financial institutions may face
``different circumstances,'' they maintained that the proposal did not
sufficiently explain what those circumstances are and why they are
relevant.
Several industry commenters stated that the proposal provided
insufficient data to support applying the rule only to very large
financial institutions. The commenters stated that data cited in the
proposed rule indicated that smaller financial institutions hold only
20 percent of deposits but receive 32 percent of overdraft fees.
Commenters stated the CFPB's own data indicate that smaller financial
institutions appear to receive similar or greater overdraft fees per
account compared to larger financial institutions.
Several industry commenters also maintained that applying the rule
only to very large financial institutions would cause consumer
confusion and market disruption. The commenters stated that consumers
would receive different disclosures based upon the asset size of their
financial institution and may not understand the differences among the
overdraft programs at different financial institutions.
Several industry commenters expressed concern that the CFPB's
proposal to apply the rule only to very large financial institutions
avoided the CFPB's SBREFA obligations. Moreover, some commenters argued
that the CFPB did not fulfill its obligations with respect to the
SBREFA process.
In addition, many non-VLFI industry commenters stated that, even if
the rule would not apply to non-VLFIs, they would nevertheless face
competitive pressure to alter their overdraft programs and reduce their
overdraft fees. They maintained that, because they lack the resources
of larger financial institutions, they would have difficulty altering
their overdraft programs and reducing their fees to compete with larger
financial institutions and may be forced to decrease availability of or
discontinue overdraft programs.
Several commenters, including consumer advocates, academic
commenters, and State Attorneys General, recommended that the CFPB
apply the rule's framework to all financial institutions. They stated
that non-VLFIs engage in the same problematic overdraft practices that
harm consumers and that all consumers should receive the protections
from the rule's overdraft framework. Some commenters stated that many
large institutions already have eliminated or reduced their overdraft
and NSF fees, whereas most small institutions have not and that the
proposed rule therefore would not apply to many of the institutions
that are causing significant harm to their consumers through their
overdraft programs.
A couple of commenters recommended adjusting the threshold. One
consumer advocate supported reducing the threshold to the SBREFA
threshold of $850 million, noting that the rule provides multiple
pathways for financial institutions to determine breakeven overdraft
fees. A few other commenters recommended raising the threshold to $100
billion or more, arguing that the largest financial institutions have
the resources to adapt to regulatory changes.
Some commenters, including a consumer advocate and a bank, raised
concerns that nonbanks that partner with banks to offer bank accounts
could evade coverage under the rule. They stated that large nonbanks
could evade the rule by partnering with multiple smaller banks with
assets under $10 billion. The consumer advocate stated that some
nonbanks offer accounts that they claim are checking accounts exempt
from the prepaid rule and its protections applicable to overdraft fees
on prepaid cards. The consumer advocate recommended that the CFPB
clarify that any such account, even if tied to a bank account, is a
prepaid
[[Page 106779]]
account. Alternatively, the consumer advocate recommended that the CFPB
expand the rule's definition of ``very large financial institution'' by
using the Regulation E definition of ``financial institution,'' which
is broader than depository institutions, and including within the scope
of the rule nonbanks that offer accounts in partnership with depository
institutions. Otherwise, the consumer advocate stated, nonbanks will
partner with one or more smaller financial institutions with less than
$10 billion in assets to ensure that their accounts would not be
subject to this rule. The consumer advocate stated that nonbanks
already are using these partnerships to avoid having to comply with the
Durbin Amendment's interchange fee limits.
Final Rule
For the reasons stated in the proposal and below, the CFPB is
adopting the very large financial institution definition as proposed to
expand protections for consumers of overdraft credit at financial
institutions with more than $10 billion in assets. The rule does not
change the regulatory framework for overdraft credit offered at
financial institutions with $10 billion or less in assets. The CFPB
plans to monitor market responses to the protections adopted in this
rule, analyze additional information, and consider whether to apply
expanded protections to overdraft credit offered by financial
institutions with $10 billion or less in assets. As in the proposed
rule, the final rule defines the term ``very large financial
institution'' in Sec. 1026.62(b)(6) 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>. The final rule uses the term very large
financial institution to limit the scope of overdraft credit that is
subject to the final rule.
The CFPB has determined that it is appropriate to move forward with
a rule that expands protections for consumers of overdraft credit at
very large financial institutions. The majority of consumers will
benefit from such a rule. As noted above, approximately 80 percent of
consumer deposits are at very large financial institutions, and more
than two-thirds of overdraft fees were imposed by very large financial
institutions. Using its supervision and market monitoring capabilities,
the CFPB has observed recent market changes for overdraft programs,
especially at very large financial institutions. Many very large
financial institutions have altered their overdraft programs and
reduced or eliminated overdraft fees without imposing additional fees,
indicating that very large financial institutions have the capacity to
adapt their overdraft programs without impairing their provisions of
other products and services.
By contrast, smaller financial institutions may have less
flexibility in adapting to changes in the regulatory framework for
overdraft credit. To the extent that changes to the regulatory
framework would result in a reduction in overdraft revenue, smaller
financial institutions may have greater difficulty in absorbing a
reduction in overdraft revenue without it having some impact on their
operations, and this impact could negatively affect consumers at
smaller financial institutions. Although the CFPB has less information
about smaller financial institutions, information from the bank call
reports and comments on the proposal indicate that smaller financial
institutions currently are more reliant on overdraft revenue under the
existing regulatory framework than very large financial institutions.
For example, based on 2023 call report data, combined revenue from
overdraft and NSF charges was 44 percent of deposit service charges and
4.7 percent of noninterest income for banks with assets between $1
billion and $10 billion, as compared to 19 percent and 1.8 percent,
respectively, for banks with assets greater than $10 billion. These
data suggest that smaller financial institutions are more reliant on
overdraft revenue and may be less able to adapt to a regulatory
framework that results in reductions in overdraft revenue. A number of
non-VLFI industry commenters claimed that if they were subject to the
rule, they would face significant challenges that would cause them to
alter or eliminate their overdraft programs and impair their ability to
offer other products and services. Moreover, as a consumer advocate
commenter noted, smaller institutions may have less flexibility to
adjust their product offerings.
As noted above, many very large financial institutions have
recently adjusted their overdraft credit programs by, among other
things, reducing or eliminating fees. This suggests that very large
financial institutions, with their diverse product offerings and
multiple sources of revenue, would have flexibility to respond to
changes in the regulatory framework for overdraft credit and would be
able to adapt to a reduction in fee revenue from non-covered overdraft
credit. This also suggests that, if very large financial institutions
want to continue offering non-covered overdraft credit that is not
subject to Regulation Z after the rule goes into effect, they should be
able to reduce their fees to continue providing non-covered overdraft
credit. The CFPB has not observed a significant number of smaller
financial institutions modifying their overdraft credit offerings to
reduce or eliminate overdraft fees. On the contrary, the CFPB received
feedback from smaller financial institutions stating that they were not
capable of making such changes. Given the CFPB's limited information
about the potential impact that revising the regulatory framework for
overdraft credit could have on smaller financial institutions, and the
consumers that rely on those smaller financial institutions, the CFPB
has determined that it should proceed at this time with a rulemaking
that narrows the exceptions only for very large financial institutions,
i.e., those with assets of $10 billion or more.
As noted above, several industry commenters stated that the CFPB
lacks authority under TILA to revise the regulatory framework only for
very large financial institutions, maintaining that the proposed rule
did not consider the standards for TILA exemptions under section
1604(f). As discussed in more detail elsewhere, including in the
section discussing changes to the definition of finance charge, the
CFPB is partially removing the existing regulatory exceptions created
by the Board, not creating new exemptions from TILA or Regulation Z,
and therefore need not invoke its statutory exception or exemption
authority. Section 1604(f)(2) starts with the phrase ``[i]n determining
which classes of transactions to exempt,'' and then provides a list of
factors that the CFPB would need to consider to justify creating an
exemption under that authority. It is not a list of factors the CFPB
must consider to justify partially removing an existing exception,
which is what this rule does.\114\ And the CFPB
[[Page 106780]]
is not obligated to justify the portion of the Board's exception that
the CFPB is not reversing (the portion applicable to non-VLFIs) using
those factors) just because the CFPB is declining at this time to
remove that portion of the existing exception due to the policy and
prudential reasons described herein. As noted above, the CFPB plans to
monitor market responses to the protections adopted in this rule and
consider whether to remove the exception as to smaller financial
institutions.
---------------------------------------------------------------------------
\114\ Section 1604(a) provides that the CFPB may prescribe
regulations that contain 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. The CFPB
likewise does not have to invoke this statutory adjustment or
exception authority to narrow the scope of an existing exception.
---------------------------------------------------------------------------
Nevertheless, these changes are also consistent with TILA Sec.
105(a), which grants the CFPB authority to establish ``additional
requirements, classifications, differentiations, or other provisions,
and may provide for such adjustments and exceptions for all or any
class of transactions, as in the judgment of the [CFPB] are necessary
or proper to effectuate the purposes of this subchapter, to prevent
circumvention or evasion thereof, or to facilitate compliance
therewith.'' Consistent with the discussion above, the CFPB has
determined that covering overdraft credit only from VLFIs in this rule
at this time will facilitate compliance with TILA and its purposes by
providing the protections of TILA and Regulation Z to the vast majority
of consumers of overdraft credit, while the CFPB monitors the market
impact of the rule, but not disturbing the status quo for smaller
financial institutions that may be less equipped to adapt to such
changes without impacting their operations in a manner that could
negatively affect their consumers. The CFPB notes that consumers of
overdraft credit at smaller institutions will remain covered by the
existing regulatory regime.
For similar reasons, the CFPB has determined that the elimination
of the regulatory exception to EFTA's compulsory use prohibition only
for overdraft credit provided by a VLFI is consistent with EFTA Sec.
904(c), which empowers the CFPB to ``provide for such adjustments and
exceptions for any class of electronic fund transfers or remittance
transfers as in the judgment of the [CFPB] are necessary or proper to
effectuate the purposes of this subchapter, to prevent circumvention or
evasion thereof, or to facilitate compliance therewith,'' and also to
``modify the requirements imposed by [EFTA] on small financial
institutions if the Bureau 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 [EFTA].'' The CFPB has determined that, because smaller
financial institutions may face difficulty in adapting to these
regulatory changes without negatively impacting their consumer base,
applying the amendment to the compulsory use exception only to VLFIs in
this rule at this time will prevent undue compliance burden on those
institutions, facilitate compliance with EFTA, and be consistent with
the purpose and objective of EFTA by continuing, for now, the existing
regulatory framework establishing the rights, liabilities, and
responsibilities of participants in those electronic fund transfer
systems while the CFPB monitors the market impact of the rule.
Several industry commenters maintained that the CFPB lacks data for
its approach of limiting the applicability of the rule to very large
financial institutions, noting that non-VLFIs hold only 20 percent of
deposits but receive 32 percent of overdraft fees. As noted above, the
CFPB has concluded that it is appropriate to adopt a rule now that
covers very large financial institutions because the CFPB has more
information about overdraft programs at very large financial
institutions and about the capacity for them to adapt to a revised
regulatory framework and because such a rule would provide protections
to a significant majority of consumers. The CFPB has limited
information about the costs for overdraft programs at smaller financial
institutions and the cost data that the CFPB relied upon in developing
the benchmark fee in Sec. 1026.62(d)(1)(ii) may not be representative
of the costs for non-VLFIs. The CFPB is concerned that non-VLFIs would
face more significant challenges in adapting to a revised regulatory
framework. The CFPB is not basing its decision to apply this rule to
VLFIs on material differences in the overdraft programs at very large
financial institutions and non-VLFIs.
Several industry commenters also stated that applying the rule only
to very large financial institutions would cause consumer confusion and
market disruption. They noted that the rule would result in a
marketplace in which consumers would receive different disclosures for
otherwise similar services based upon the size of the financial
institution. The CFPB appreciates that the rule would create some
differences in regulatory treatment of overdraft programs in the
marketplace. However, the CFPB concludes that the benefits of providing
additional protections to most consumers while proceeding cautiously
with respect to smaller financial institutions outweighs those
concerns. The CFPB plans to monitor market responses to the protections
adopted in this rule.
As noted above, a number of industry commenters maintained that the
CFPB did not comply with its obligations under the SBREFA process.
Several non-VLFI industry commenters maintained that the rule will have
a negative impact on their financial condition and their ability to
offer overdraft products and other products and services because market
pressures will force non-VLFIs to lower their overdraft fees and adjust
their overdraft programs even if the rule itself does not require them
to do so. Other commenters maintained that the CFPB's decision to
remove the existing exception for larger financial institutions but not
for smaller financial institutions was designed to circumvent SBREFA.
But leaving in place an existing exception for smaller financial
institutions is not inconsistent with SBREFA. The CFPB has complied
with its obligations under SBREFA. The rule does not require non-VLFIs
to comply with the revised regulatory framework, and any competitive
pressures to adjust their overdraft programs are indirect and
uncertain. It is far from clear that market forces will force non-VLFIs
to adjust their overdraft programs. As noted above, many very large
financial institutions already have adjusted their overdraft programs,
including by reducing or eliminating overdraft fees, but these changes
have not forced other non-VLFIs to alter their overdraft programs
similarly.
The CFPB has concluded that $10 billion is an appropriate asset
threshold for this rulemaking. The CFPB reached the decision to use $10
billion as the threshold by borrowing from Congress's policy judgment
to use that threshold to separate very large financial institutions
from smaller entities in other contexts in the CFPA. The CFPB also
considered the lower threshold of $850 million used by the SBA to
define small financial institutions, but decided to take the more
prudent and cautious approach of initially finalizing a higher
threshold that applies only to ``very large'' entities and not just
``large'' entities. Congress used a relatively high $10 billion
threshold to define ``very large banks, credit unions, and savings
associations'' for purposes of limiting the CFPB's primary supervision
and enforcement authority to very large depository institutions. The
CFPB will be able to use its primary supervisory authority to closely
monitor the implementation of the rule with respect to these entities,
which will aid its understanding of the effects of the rule as the CFPB
studies the market to
[[Page 106781]]
determine whether and what regulations are appropriate for the rest of
the market.
The CFPB has concluded that updating the regulatory framework is
appropriate for very large financial institutions for several reasons,
including that the CFPB has more information about overdraft credit
offered by financial institutions with more than $10 billion in assets
and about their ability to adapt to changes in the regulatory framework
for their overdraft programs. As noted above, financial institutions
with more than $10 billion in assets have greater diversity in product
offerings and likely would have greater flexibility in adapting quickly
to a revised regulatory framework for overdraft credit. Indeed, as also
noted above, many financial institutions with more than $10 billion in
assets already have modified their overdraft credit offerings to reduce
or eliminate overdraft fees and available evidence indicates that these
financial institutions are less reliant on overdraft revenue,
indicating that they have the ability to adapt to any reductions in
overdraft revenue that may result from these changes to the regulatory
framework for overdraft credit.
As noted above, a bank and a consumer advocate raised concerns
about nonbanks evading the rule by partnering with smaller banks to
offer accounts with overdraft credit. The consumer advocate recommended
clarifying that such accounts offered by nonbanks are prepaid accounts
subject to the protections of the prepaid rule or, alternatively,
revising the definition of ``very large financial institution'' in this
rule to cover nonbanks with more than $10 billion in assets. The CFPB
declines to address in this rule whether such accounts would be
considered prepaid accounts. The CFPB also declines to revise the
definition of ``very large financial institution'' to include nonbanks.
Nevertheless, the CFPB will continue to monitor the market and will
analyze whether any market participants are taking steps to evade
coverage under the rule.
C. Transaction and Account Coverage
The CFPB proposed to add Sec. 1026.62(a) and (b) to define the
scope of transactions and accounts that would be covered under the
proposed rule. As discussed below, to update non-statutory exceptions
in Regulation Z, the proposed updates included defined terms (e.g.,
``above breakeven overdraft credit,'' ``covered asset account,'' and
``hybrid debit-credit card'') that specifically reference a ``very
large financial institution,'' as defined in proposed Sec.
1026.62(b)(8). The proposal would not change the regulatory framework
for overdraft services offered by financial institutions with assets of
$10 billion or less.
The proposal defined overdraft credit in proposed Sec.
1026.62(a)(2), and also provided an example of overdraft credit in
proposed comment 2(a)(14)-4. The CFPB's proposed rule would have added
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 CFPB proposed definitions
of covered overdraft credit and non-covered overdraft credit by adding
Sec. 1026.62(b) to assist with ease of reference. The proposal
provided that covered overdraft credit 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. The
proposal provided that non-covered overdraft credit 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 proposed to add a
definition for covered overdraft credit account to facilitate ease of
reference to credit accounts through which the financial institutions
extend or can extend covered overdraft credit. Each of these proposed
amendments is discussed below.
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.\115\ 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.
---------------------------------------------------------------------------
\115\ 15 U.S.C. 1602(f).
---------------------------------------------------------------------------
The CFPB's Proposal
To facilitate compliance, proposed comment 2(a)(14)-4 provided an
example of overdraft credit: funds extended by a financial institution
to a consumer to pay transactions that overdraw a checking or other
transaction account held at the financial institution whenever the
consumer has a contractual obligation to repay the funds. The proposal
noted, as stated in the 2016 Prepaid Final Rule, that a ``person, in
extending overdraft funds, has provided the consumer with `the right .
. . to incur debt and defer its payment.' '' \116\
---------------------------------------------------------------------------
\116\ 81 FR 83934, 84168 (Nov. 22, 2016).
---------------------------------------------------------------------------
As part of defining the scope of credit transactions that would be
covered under the proposed rule, proposed Sec. 1026.62(a)(2) provided
a definition of ``overdraft credit'': 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)(2) provided non-exhaustive examples, such as consumer credit
extended through a transfer from a credit card account or overdraft
line of credit. The definition of ``overdraft credit'' in proposed
Sec. 1026.62(a)(2) did not include credit exempt from Regulation Z
pursuant to existing Sec. 1026.3.
For the reasons discussed below, the CFPB is adopting comment
2(a)(14)-4 substantially as proposed and is adopting Sec. 1026.62(a)
as proposed. The CFPB is also adopting a proposed cross reference to
the definition of ``overdraft credit'' at Sec. 1026.62(b)(7) as
proposed but with technical changes to conform to Code of Federal
Regulations style requirements.
Comments Received
Several commenters, including State Attorneys General, consumer
advocates, and nonprofits, agreed that when a financial institution
extends funds to pay transactions that overdraw a checking account held
at the financial institution, the financial institution is providing
credit. A consumer advocate commenter stated that it is common sense
that overdraft is credit and that regulators, including the Board, have
long acknowledged that overdraft is credit. For example, the commenter
noted that in 2005 the Board--along with the OCC, FDIC, and National
Credit Union Administration--issued Joint Guidance on Overdraft
Protection Programs, which stated that ``[w]hen overdrafts are paid,
credit is extended.'' \117\ Among other examples, the commenter also
pointed to a 2001 OCC interpretive letter stating that an ``overdraft
would be `credit,' as defined by the Truth in Lending Act and
Regulation Z.'' \118\
---------------------------------------------------------------------------
\117\ 70 FR 9127, 9129 (Feb. 24, 2005).
\118\ OCC Interpretive Letter No. 914 (Aug. 3, 2001).
---------------------------------------------------------------------------
A nonprofit commenter stated that the TILA statute defines
``credit'' broadly and does not exclude overdraft. The commenter
further stated that when the Board excepted certain overdraft
[[Page 106782]]
charges from Regulation Z's definition of ``finance charge,'' the Board
did not rely on an interpretation of the terms ``finance charge'' or
``credit'' in the statute (rather, the Board used its authority to
create a regulatory exception). A consumer advocate commenter stated
that it is immaterial to the definition of ``credit'' whether the
financial institution has previously committed to pay overdrafts or has
an absolute right to use every means to collect repayment; rather,
``credit'' simply means the right to defer payment of debt or to incur
debt and defer its payment.
Several industry commenters asserted that overdraft is not credit
under TILA and that TILA does not confer authority upon the CFPB to
regulate overdraft. A commenter stated that the term ``overdraft'' does
not appear in TILA's text and that the legislative history is similarly
silent on the issue. Some commenters stated that, if the intent of
Congress was for overdraft to be subject to TILA, then Congress would
have amended TILA to supersede the Board's regulatory exception for
overdraft.
Several commenters asserted that in 1969 when the Board excepted
discretionary overdraft charges from Regulation Z's definition of
``finance charge,'' it did so because the Board determined that
discretionary overdraft is not ``credit.'' A commenter asserted that
the history of Regulation Z and various Board statements show that
discretionary overdraft was never considered to be ``credit.'' For
example, the commenter pointed to a 1977 interpretive letter where
Board staff stated that the regulatory exception for overdraft charges
``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.'' \119\
---------------------------------------------------------------------------
\119\ 42 FR 22360, 22362 (May 3, 1977).
---------------------------------------------------------------------------
Several commenters stated that overdraft is not credit because the
financial institution retains the right to decline transactions that
would overdraw the account. Some commenters stated that overdraft is
not credit because the consumer is obligated to pay the debt within a
very short timeframe; for example, commenters pointed to a State court
opinion interpreting the Iowa Consumer Credit Code definition of
``credit'' as not covering overdraft because the consumer ``must pay
the bank back immediately upon their next deposit.'' \120\ Some
commenters also asserted that overdraft does not involve a written
obligation, an interest rate, an application, or an underwriting
process and otherwise lacks the hallmarks of credit.
---------------------------------------------------------------------------
\120\ Legg v. W. Bank, 873 NW 2d 763, 770 (Iowa 2016).
---------------------------------------------------------------------------
The CFPB received few comments regarding the specific language of
proposed comment 2(a)(14)-4 and proposed Sec. 1026.62(a). A consumer
advocate commenter generally supported the language of these proposed
provisions and made some suggestions. First, in addition to the
proposed language referencing a contractual ``obligation,'' the
commenter suggested referencing a contractual agreement regardless of
whether the financial institution has agreed to limit its means of
recourse if the consumer does not repay. Second, the commenter
suggested revisions to reflect the possibility that overdraft credit
could be extended by a different entity than the financial institution
that holds the account. Third, the commenter suggested referencing an
``asset account'' rather than a ``checking or other transaction
account.'' Fourth, among other non-exhaustive examples of overdraft
credit, the commenter suggested adding a reference to ``overdraft
services'' as defined in Regulation E Sec. 1005.17(a).
Final Rule
For the reasons discussed below, the CFPB is adopting comment
2(a)(14)-4 substantially as proposed and is adopting Sec. 1026.62(a)
as proposed. As proposed, Sec. 1026.62(a)(2) provided the definition
of ``overdraft credit'' and the CFPB is finalizing it without change.
The definition of ``overdraft credit'' does not include credit exempt
from Regulation Z pursuant to existing Sec. 1026.3 (e.g., 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). Nor does the definition of
``overdraft credit'' cover prepaid accounts, as the CFPB's Prepaid
Accounts Rule already provides comprehensive consumer protections
tailored to prepaid accounts.
Arguments that overdraft is not credit under TILA or that TILA does
not confer authority upon the CFPB to regulate overdraft are not
supported by the statute itself. The final rule is consistent with
TILA's definition of ``credit'' \121\ and with the CFPB's statutory
authority under TILA section 105(a).\122\
---------------------------------------------------------------------------
\121\ 15 U.S.C. 1602(f).
\122\ 15 U.S.C. 1604(a).
---------------------------------------------------------------------------
TILA defines ``credit'' broadly and does not exclude overdraft. As
stated in the 2016 Prepaid Final Rule, ``[b]y authorizing or paying a
transaction where the consumer does not have sufficient or available
funds . . . to cover the amount of the transaction when the transaction
is authorized or paid, the [institution] is allowing the consumer to
incur a debt with the [institution] where payment of that debt is not
immediate.'' \123\ Thus, when a transaction exceeds the funds in the
consumer's account and a financial institution elects to cover the
transaction by extending overdraft funds, then the financial
institution has provided the consumer with the right to defer payment
of debt or to incur debt and defer its payment, and therefore has
extended ``credit'' under the plain language of TILA's definition.\124\
---------------------------------------------------------------------------
\123\ 81 FR 83934, 84167-68 (Nov. 22, 2016).
\124\ 15 U.S.C. 1602(f).
---------------------------------------------------------------------------
The fact that Congress did not legislatively supersede the Board's
regulatory exception for overdraft does not demonstrate that overdraft
is outside the scope of TILA. Rather, Congress provided a broad
definition of ``credit'' under the statute and then delegated to the
Board (and, later, the CFPB) the authority to prescribe regulations
``to carry out the purposes of'' TILA and which ``may provide for such
adjustments and exceptions . . . as in the judgment of the [agency] are
necessary or proper to effectuate the purposes of [TILA], to prevent
circumvention or evasion thereof, or to facilitate compliance
therewith.'' \125\ The Board used its delegated authority to create a
regulatory exception from the definition of finance charge for certain
overdraft fees and the CFPB is using its authority to narrow that
exception.\126\
---------------------------------------------------------------------------
\125\ 15 U.S.C. 1604(a).
\126\ Commenters disagreed about whether the Board, in issuing
the original regulatory exception for certain overdraft fees from
TILA's definition of finance charge, was relying on its delegated
authority to create adjustments and exceptions or was using its
delegated rule-writing authority to implement an interpretation of a
statutory provision of TILA. The Board's original 1969 issuance over
50 years ago was not explicit about what authority it used for the
overdraft charge exception. 34 FR 2002, 2004 (Feb. 11, 1969). And it
neither discussed policy rationales nor interpretation of statutory
text. The proposal did, however, invoke the Board's exception
authority generally. 33 FR 15506 (Oct. 18, 1968). The inclusion of a
specific ``exception'' for overdraft charges that would have met the
general definition of finance charge but for the exception, in a
rule that did not state it was an interpretation or engage in
textual interpretation, suggests the exception was not created as an
interpretive exercise. Regardless, the CFPB has put forward its
interpretation of the relevant provisions of TILA in this rule and
explained why the statute covers overdraft fees.
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[[Page 106783]]
Commenters' assertion that the Board determined that discretionary
overdraft is not ``credit'' conflates the definition of ``credit'' with
the definition of ``finance charge.'' The history of Regulation Z and
the Board's statements show that the Board excepted certain overdraft
charges from Regulation Z's definition of ``finance charge,'' which
would have been unnecessary if overdraft was not credit. The Board did
not except overdraft from the definition of ``credit.'' Existing
Regulation Z's definition of ``finance charge'' excepts overdraft
charges ``unless the payment of such items and the imposition of the
charge were previously agreed upon in writing.'' \127\ But the fact
that these charges were not considered ``finance charges'' under the
regulation does not mean that the underlying overdrafts were not
considered credit. For example, existing Regulation Z commentary
acknowledges the existence of ``incidental credit that is not extended
under an agreement between the consumer and the financial
institution.'' \128\ One example of such incidental ``credit'' in the
overdraft context is ``credit inadvertently extended incident to an
electronic fund transfer using a debit card, . . . if the bank and the
consumer do not have an agreement to extend credit when the consumer's
account is overdrawn.'' \129\ Incidental overdraft credit remains
``credit,'' notwithstanding that the Board excepted the overdraft
charges from Regulation Z's definition of ``finance charge.''
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\127\ 12 CFR 1026.4(c)(3).
\128\ Regulation Z comment 13(i)-2 (emphasis added).
\129\ Id. (emphasis added).
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Regarding the 1977 interpretive letter cited by a commenter, the
CFPB notes that the letter addresses whether certain overdraft charges
are finance charges, not whether overdraft is credit.\130\ Board staff
did not exclude overdraft from the definition of ``credit.'' Rather,
the letter states that the Board's regulatory exception for overdraft
charges (i.e., excepting them from Regulation Z's definition of
``finance charge'') ``relates only to regular demand deposit accounts
which carry no credit features and in which a bank may occasionally . .
. honor a check which inadvertently overdraws that account.'' \131\
Existing Regulation Z commentary similarly distinguishes between an
account with incidental overdraft credit and an account with an
overdraft ``credit feature.'' \132\ On a deposit account with no
``credit feature,'' as explained above, charges for incidental
overdraft credit are excepted from existing Regulation Z's definition
of ``finance charge''--but nonetheless the incidental overdraft credit
remains ``credit.''
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\130\ 42 FR 22360, 22362 (May 3, 1977).
\131\ Id. (emphasis added).
\132\ Compare Regulation Z comment 13(i)-2 (providing that
credit inadvertently extended incident to an electronic fund
transfer using a debit card is governed solely by Regulation E error
resolution procedures), with Regulation Z comment 13(i)-3 (providing
that certain Regulation Z error resolution provisions apply if a
consumer uses a debit card to withdraw money at an automated teller
machine and activates an overdraft credit feature).
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Commenters' argument that overdraft is not credit because the
financial institution retains the right to decline overdraft
transactions is not consistent with the text of TILA and likewise
appears to conflate the definition of ``credit'' with the definition of
``finance charge.'' The Board excepted overdraft charges from
Regulation Z's definition of ``finance charge'' depending on whether
the payment and charge were ``previously agreed upon'' in writing.\133\
The TILA definition of ``credit'' requires a ``right'' (i.e., the right
to defer payment of debt or to incur debt and defer its payment)--but
does not require that such right be previously agreed upon.\134\
Notwithstanding that a financial institution had retained discretion
and could have declined an overdraft transaction, when the financial
institution nonetheless elects to cover the transaction by extending
overdraft funds, then the financial institution has provided the
consumer with the ``right'' to defer payment of debt or to incur debt
and defer its payment, and has therefore extended ``credit'' under the
plain language of TILA's definition.\135\ Moreover, it is well
established that a financial institution's right to decline
transactions does not prevent those transactions from constituting
credit under TILA: as the CFPB noted in its proposal and previously in
the 2016 Prepaid Final Rule, credit card issuers reserve the right to
reject individual transactions in their contractual agreements, yet
credit card programs are regulated as credit under TILA and Regulation
Z.\136\
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\133\ 12 CFR 1026.4(c)(3).
\134\ 15 U.S.C. 1602(f); see also 12 CFR 1026.2(a)(14).
\135\ 15 U.S.C. 1602(f).
\136\ 81 FR 83934, 84176 (Nov. 22, 2016).
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Regarding commenters' statements that overdraft is not credit
because the consumer is obligated to pay the debt within a very short
timeframe, such assertion is not supported by TILA. When a financial
institution extends overdraft funds that the consumer must pay back
upon their next deposit, the institution ``is allowing the consumer to
incur a debt with the [institution] where payment of that debt is not
immediate.'' \137\ And even though the consumer's next deposit to repay
the institution is typically soon (e.g., on the consumer's next
payday), TILA's definition of ``credit'' does not have an exclusion for
short-term repayment periods. TILA similarly does not support
commenters' assertions that overdraft is not credit because it lacks
certain so-called hallmarks of credit (e.g., a written obligation, an
interest rate, an application), or an underwriting process. TILA
broadly defines ``credit'' to simply mean the right granted by a
creditor to a debtor to defer payment of debt or to incur debt and
defer its payment.\138\ TILA does not require a transaction to have any
of the so-called hallmarks to be considered credit. Moreover, to the
extent that commenters' factual assertions accurately describe current
market practices, some such practices might not align with Regulation Z
because they pertain to currently non-covered overdraft credit (e.g.,
overdraft credit with charges excepted from existing Regulation Z's
definition of ``finance charge''). Creditors may need to change their
practices as a result of the final rule to come into compliance, but
that does not mean that such overdraft practices today are not credit
under TILA.
---------------------------------------------------------------------------
\137\ Id. at 84167-68.
\138\ 15 U.S.C. 1602(f).
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In response to a commenter's suggestion that proposed comment
2(a)(14)-4 reference not only a contractual ``obligation'' but also a
contractual agreement regardless of the recourse, the CFPB is not
adopting this specific suggestion but comment 2(a)(14)-4, as finalized,
highlights that it provides but one ``example'' of overdraft credit.
Comment 2(a)(14)-4 is not an exhaustive list of examples. As proposed,
Sec. 1026.62(a)(2) provided the definition of overdraft credit and the
CFPB is finalizing it without change.
Regarding the commenter's suggested revisions to reflect the
possibility that overdraft credit could be extended by a different
entity than the financial institution that holds the account, the CFPB
notes that such revisions are unnecessary because such credit does not
fall within the Board's regulatory exception for overdraft and thus
such credit is generally covered under existing Regulation Z.
Similarly, it is also unnecessary to adopt the commenter's suggestion
to reference an ``asset account,'' rather than a ``checking
[[Page 106784]]
or other transaction account,'' given that the Board referenced a
``checking or other transaction account'' when it excepted certain
overdraft charges from Regulation Z's definition of ``finance charge.''
\139\
---------------------------------------------------------------------------
\139\ 12 CFR 1026.4(b)(2).
---------------------------------------------------------------------------
In response to the commenter's suggestion to revise proposed Sec.
1026.62(a)(2) by adding a reference to ``overdraft service'' as defined
in Regulation E Sec. 1005.17(a), the CFPB is not doing so because,
consistent with TILA's broad definition of ``credit,'' Sec.
1026.62(a)(2) ``includes, but is not limited to, any . . . overdraft
line of credit.'' The commenter's suggested revision is unnecessary and
could introduce confusion because the term ``overdraft service'' as
defined in Regulation E Sec. 1005.17(a) ``does not include any payment
of overdrafts pursuant to . . . [a] line of credit subject to
Regulation Z (12 CFR part 1026), including transfers from . . . [an]
overdraft line of credit.'' \140\
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\140\ 12 CFR 1005.17(a)(1).
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2. Clarifications to Definition of 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. This
definition is consistent with TILA's definitions of ``open end credit
plan'' and ``open end consumer credit plan,'' which mean a plan under
which the creditor reasonably contemplates repeated transactions, which
prescribes the terms of such transactions, and which provides for a
finance charge which may be computed from time to time on the
outstanding unpaid balance.\141\
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\141\ 15 U.S.C. 1602(j).
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The CFPB's Proposal
The CFPB proposed to clarify 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. For clarity and to facilitate
compliance, the CFPB proposed to add commentary regarding two terms
used in the definition of open-end credit: ``plan'' and ``finance
charge.''
The CFPB proposed 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.
The CFPB also proposed to add 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. Proposed
comment 2(a)(20)-4.iii also states that these are finance 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.
As discussed below, the CFPB is finalizing these changes
substantially as proposed with only minor technical revisions for
clarity, including to ensure that the changes to the commentary apply
only to very large financial institutions.
Comments Received
Interpretation That Covered Overdraft Credit is Generally Open-End
Credit
Consumer advocate commenters supported the proposed rule's analysis
concluding that overdraft credit is open-end credit. Specifically, the
commenters agreed with the CFPB's analysis of some of the specific
elements of ``open-end credit.'' First, one commenter stated that
overdraft fees are payable by the consumer and are imposed directly by
banks as an incident to and as a condition of the extension of credit,
and therefore, meet the definition of a ``finance charge.'' Second,
that commenter agreed that a financial institution that imposes an
overdraft fee on an unpaid overdraft is imposing a finance charge from
time to time on an unpaid balance, regardless of whether the charge is
on the deposit account or a separate credit account. Third, the
commenter agreed that a very large financial institution that extends
covered overdraft credit would be a ``creditor'' under TILA because
that financial institution would regularly extend consumer credit
subject to a finance charge, and the obligation is payable to that
institution by agreement. Finally, the commenter agreed that financial
institutions that extend overdraft credit reasonably contemplate that
consumers may engage in repeat overdrafts.
Some commenters disagreed with the proposal's determination that
overdraft credit is open-end credit. One commenter questioned the
CFPB's authority to categorize overdraft fees as ``open-end credit,''
explaining that they believe the Board appropriately excepted from the
definition of ``finance charge'' overdraft fees that are not expressly
agreed upon in writing because this exception aligned with the
statutory intent of TILA to regulate finance charges on ``open end
consumer credit'' plans. The commenter did not provide further
explanation as to why the exception aligned with TILA's statutory
authority. This commenter appears to take issue with the revised
exceptions to the definition of ``finance charge'' and not with the
definition of ``open-end credit.'' The CFPB addresses the revisions to
these exceptions in part IV.D below.
``Plan'' (Comment 2(a)(20)-2.iv)
A consumer advocate commenter generally supported proposed comment
2(a)(20)-2.iv. Specifically, the commenter agreed that a creditor
extends credit even if (1) it does not agree in writing to extend the
overdraft credit or (2) it retains the discretion to refuse to extend
that credit in the future.
However, the commenter recommended that the language regarding what
constitutes a ``plan'' under the definition of ``open-end credit'' be
changed from ``obligated contractually to pay'' to ``obligated or
contractually agrees to pay'' because, the commenter stated, that
financial institutions may be able to manipulate whether a consumer is
considered ``obligated contractually to pay'' by giving the consumer
the right to cancel authorization for repayment or limiting the
financial institution's recourse for repayment.
The commenter also suggested that the comment clarify that a
program will be considered a ``plan'' when the creditor does not extend
credit for transactions once the consumer has exceeded a certain
amount, whether or not the limit is disclosed.
Finance Charge Imposed From Time to Time on an Outstanding Balance
(Comment 1026.2(a)(20)-4.iii)
A consumer advocate commenter supported comment 1026.2(a)(20)-
4.iii, which clarifies that overdraft fees are finance charges imposed
from time to time on an outstanding balance if there
[[Page 106785]]
is no specific amount financed for the plan and regardless of whether
the fees are imposed on the deposit account or the credit account. The
commenter specifically supported two aspects of the statement: (1) that
there is a finance charge from time to time on the outstanding balance
of a plan regardless of whether the charge is on the deposit account or
separate credit account; and (2) there is a finance charge from time to
time on the outstanding balance of a plan if there is no specific
amount financed for the plan because the amount of any overdraft is
never precalculated from inception of the plan.
The commenter suggested that the term ``deposit account'' in the
comment be replaced with ``asset account'' because deposit account is
undefined and could present problems because there is no established
regulatory or caselaw definition for deposit account.
Industry commenters stated that the proposed comment 2(a)(20)-4.iii
would introduce ambiguity around finance charges. The commenters stated
that the proposed comment would make it difficult for financial
institutions to determine their obligations when establishing overdraft
credit products. The commenters stated that the uncertain financed
amount for a plan would challenge a financial institution's compliance
efforts and their ability to transparently disclose terms to consumers.
An individual commenter questioned the CFPB's conclusion that an
overdraft fee is ``imposed from time to time on an outstanding unpaid
balance. . . .'' The commenter stated that an overdraft fee is imposed
because a transaction exceeded the dollar amount in the account, and it
is imposed regardless of whether the transaction is paid by the
financial institution or the amount of the overdraft credit extended.
Final Rule
For the reasons stated below, the CFPB is finalizing comments
2(a)(20)-2.iv and 2(a)(20)-4.iii substantially as proposed with
technical revisions for clarity, including to ensure that the comments
address only the subject of the rule, i.e., when a very large financial
institution covers a transaction that would otherwise overdraft a
consumer's account.
Like the proposal, the final rule does not revise the definition of
``open-end credit.'' Rather, the final rule adds commentary to clarify
how overdraft products meet the elements of the definition of ``open-
end credit.'' Specifically, and as discussed herein, the final rule
adds two comments to clarify (1) the definition of a ``plan'' and (2)
that overdraft fees 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 commentary does not change the term ``open-end credit'' in
Regulation Z, which implements the statutory term ``open end credit
plan'' under TILA. Rather, the commentary provides clarification in
light of the revisions made to the regulatory exceptions to the
definition of ``finance charge.'' Moreover, the commentary facilitates
compliance with TILA by helping participants understand how overdraft
products may be subject to TILA's requirements as open-end credit.
In addition, consistent with the proposal and as discussed below,
the CFPB concludes 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. Thus, when above breakeven overdraft
credit becomes covered overdraft credit on the effective date of this
rule, such credit will also likely be considered open-end credit.
(1) Credit. As discussed above, a person extending overdraft funds
has provided credit under TILA and Regulation Z.\142\
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\142\ 15 U.S.C. 1602(f); 12 CFR 1026.2(a)(14).
---------------------------------------------------------------------------
(2) Plan. An 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.\143\
Specifically, but for the Regulation Z exceptions, the 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.''
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\143\ 15 U.S.C. 1602(j).
---------------------------------------------------------------------------
The CFPB is finalizing proposed comment 2(a)(20)-2.iv generally as
proposed (but with technical revisions for clarity) to clarify that the
reservation of discretion in connection with covered overdraft does not
mean the absence of an open-end credit plan. The CFPB understands that
financial institutions offering automated overdraft services include in
their agreements' provisions governing 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 as
long as the overdraft transaction is within the overdraft coverage
limit that the institution has 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 open-end credit plans under TILA and Regulation Z.
Treating the provision of automated overdraft credit in a comparable
way promotes consistency and follows from the text of TILA and
Regulation Z. Therefore, the CFPB has determined that an 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.
Regarding the commenter's suggestion that comment 2(a)(20)-2.iv be
revised to state that a ``plan'' under the definition of open-end
credit means a program where the consumer is ``obligated to or
contractually agrees to repay any credit extended by the creditor''
instead of stating that the consumer is ``obligated contractually to
repay . . . '', the CFPB is not adopting this specific suggestion.
However, the CFPB has determined that certain minor changes would help
make clear that the comment is an illustrative example. In particular,
comment 2(a)(20)-2.iv, as finalized, replaces ``means'' with
``includes'' to state ``a plan includes a program where the consumer is
obligated contractually to repay any credit extended by the creditor.''
The comment also highlights that it is providing one ``example'' of
overdraft credit and not an exhaustive list of all overdraft credit.
In response to the same commenter's suggestion that comment
2(a)(20)-2.iv be revised to note that a plan under the definition of
open-end credit will be a plan regardless of whether the consumer
receives disclosure of the overdraft credit limit, the CFPB finds this
clarification unnecessary since existing comment 2(a)(20)-5.ii already
clarifies
[[Page 106786]]
that a creditor does not need to establish a specific credit limit for
a line of credit.
The final rule also replaces ``covered overdraft credit'' with
``covered asset account'' to ensure that changes to the commentary
apply only to very large financial institutions.
(3) Imposing a ``finance charge'' from time to time. Overdraft
credit is generally subject to fees that would meet the definition of
``finance charges'' but for the exceptions created by Regulation Z to
that statutory definition. As discussed elsewhere, this final rule
modifies those Regulation Z exceptions so that above breakeven
overdraft credit fees will be finance charges when this rule becomes
effective. Thus, as explained below, the CFPB has determined that an
institution offering covered overdraft credit, including above-
breakeven overdraft credit, is generally imposing a finance charge from
time to time because 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 is finalizing comment 2(a)(20)-4.iii generally as proposed
(but with technical revisions for clarity) to clarify that (1) charges
imposed by a very large financial institution for paying a transaction
that overdraws a consumer's account generally are finance charges
unless they are excluded from the definition of finance charge; and (2)
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 any such
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 cannot
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. Therefore, to the extent that any finance charge may be imposed
in connection with such a credit plan, the credit plan will meet this
criterion.
Regarding the comment that an overdraft fee is not ``imposed from
time to time on an outstanding unpaid balance'' because the fee is
charged on the occurrence of there being nonsufficient funds in the
consumer's account and not based on the extension of credit, the CFPB
disagrees for the reasons explained in more detail in part IV.D
addressing the definitions of ``credit'' and ``finance charge.''
With respect to the commenter stating that comment 2(a)(20)-4.iii
would introduce ambiguity around finance charges, the commenter
explained that this is because a plan with no specific finance amount
makes it harder for financial institutions to determine their financial
risks and challenges an institution's ability to disclose terms to
consumers. The CFPB notes that this characteristic in overdraft credit
is no different from any other open-end credit product that similarly
does not have a specific amount financed, and which generally must also
comply with Regulation Z disclosure and other regulatory requirements.
Regarding the commenter's suggestion that comment 2(a)(20)-4.iii
reference an ``asset account,'' rather than a ``deposit account,'' the
CFPB is not adopting this specific suggestion. For the same reasons
provided in relation to ``overdraft credit'' in part IV.C.1, the CFPB
finds it unnecessary to change the term to ``asset account.'' However,
the final rule replaces ``deposit account'' with ``covered asset
account'' to ensure that regulatory changes are limited to the subject
of this rule, i.e., overdraft credit provided by very large financial
institutions. The final rule also includes other clarifying edits,
including to ensure that comment 2(a)(20)-4.iii properly cross-
references Sec. 1026.4.
(4) Person extending credit is a creditor. Assuming that overdraft
fees are finance charges, 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.\144\ Thus, 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.
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\144\ See Sec. 1026.2(a)(17)(i).
---------------------------------------------------------------------------
The CFPB anticipates that most persons offering covered overdraft
credit regularly extend overdraft credit and therefore would meet the
definition of ``creditor.'' Further, if an institution providing open-
end covered overdraft credit is considered a ``card issuer,'' then it
is also considered a creditor under existing Sec. 1026.2(a)(17)(iii)
for purposes of Regulation Z, subpart B.
(5) Reasonably contemplates repeated transactions. Institutions
providing overdraft credit typically contemplate repeated overdraft
transactions. As noted above, the CFPB understands that financial
institutions offering automated overdraft services include in their
agreements' provisions governing how the overdraft service will operate
and including information about overdraft fees. These agreements
contemplate that consumers may overdraw repeatedly. Further, the CFPB
found that 93.2 percent of overdraft and NSF fees were assessed on
consumers with four or more overdraft or NSF transactions per
year.\145\
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\145\ CFPB 2017 Data Point at 13.
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(6) Amount of credit replenishes when outstanding balance is
repaid. Institutions providing 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 absolute
right 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 concludes 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's Proposal
The CFPB proposed 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
[[Page 106787]]
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 IV.D, some
charges imposed in connection with overdraft credit are not considered
finance charges.
The proposed definition of ``overdraft credit'' was limited to
consumer credit, but, even with that qualification, not all overdraft
credit would be subject to Regulation Z under the proposed rule. 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, under the
proposed rule, 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) currently 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.
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.\146\
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\146\ 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.
---------------------------------------------------------------------------
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 not to be card issuers and
would therefore not be creditors under Sec. 1026.2(a)(17)(iii).
Comments Received and Final Rule
A commenter questioned the CFPB's authority to define covered and
non-covered overdraft credit because the commenter stated that Congress
has not directed the CFPB to differentiate between these two terms. The
commenter questioned the CFPB's justification for departing from its
prior approach to treating overdraft under Regulation Z because the
delineation between covered and non-covered overdraft credit introduces
unnecessary complexity.
The CFPB is finalizing the definition of ``covered overdraft
credit'' and ``non-covered overdraft credit'' as proposed. With the
addition of these two definitions, the CFPB does not create any
substantive changes to TILA or Regulation Z. Instead, the additional
definitions carry out the purposes of TILA by helping participants
understand which forms of overdraft are subject to TILA's requirements.
The CFPB did not receive any comments on the definition of ``card
issuer'' and is finalizing this definition as proposed because the CFPB
has 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 goals of the final rule.
4. Covered Overdraft Credit Account (Sec. 1026.62(b)(4))
The CFPB's Proposal
The proposed rule defined ``covered overdraft credit account'' as a
credit account through which a financial institution extends or can
extend covered overdraft credit. The term would include 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
linked checking or other transaction accounts.
Comments Received and Final Rule
The comments received on this proposed definition agreed with the
CFPB's position, and the CFPB is finalizing the definition of ``covered
overdraft credit account'' without change. One consumer advocate
commenter supported the definition of ``covered overdraft credit
account'' because it believes that any account that can be used to
access overdraft credit should be covered by the rule, regardless of
the technicalities through which the credit is extended. The commenter
stated that a narrower, more specific definition may encourage evasions
of the rule.
For the reasons stated above, the CFPB is finalizing the definition
of ``covered overdraft credit account'' as proposed.
D. Changes to Definition of ``Finance Charge''
In explaining the meaning of ``finance charge,'' TILA section
106(a) (15 U.S.C. 1605(a)) 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.''
\147\ The finance charge does not include charges of a type payable in
a comparable cash transaction.\148\
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\147\ 15 U.S.C. 1605(a).
\148\ Id. The term finance charge also excludes certain fees and
amounts imposed by third party closing agents.
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Similarly, 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.'' \149\ 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
[[Page 106788]]
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.\150\ Neither of these exclusions appear
within the statutory text of TILA.
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\149\ 12 CFR 1026.4(c)(3).
\150\ 12 CFR 1026.4(b)(2).
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The CFPB proposed to amend the definition of ``finance charge'' in
Sec. 1026.4 in three ways. First, it proposed to 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 proposed to add Sec. 1026.4(b)(12)
to provide examples of charges imposed in connection with overdraft
credit that are finance charges. Third, it proposed to 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 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.
Each of these proposed changes are discussed below.
1. Examples of Finance Charges (Sec. 1026.4(b)(2))
Section 1026.4(b) provides examples of types of charges that are
finance charges, except if those charges are specifically excluded
under existing Sec. 1026.4(c) through (e). In particular, existing
Sec. 1026.4(b)(2) provides that examples of finance charges generally
include service, transaction, activity, and carrying charges imposed on
a checking or other transaction account (except a prepaid account as
defined in Sec. 1026.61). However, the Board added a partial exception
to this example such that if a charge for an account with a credit
feature does not exceed the charge for a similar account without a
credit feature, then the charge is not a finance charge under existing
Sec. 1026.4(b)(2) and its commentary.\151\ As discussed in the
proposal, the Board and the CFPB have amended Sec. 1026.4(b)(2) and
its commentary over time.\152\
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\151\ Regulation Z comment 4(b)(2)-1.
\152\ 89 FR 13852, 13864 (Feb. 23, 2024).
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The CFPB proposed to amend this current example of a finance charge
as described in Sec. 1026.4(b)(2) and comment 4(b)(2)-1 to set forth a
different rule for when charges imposed on a covered asset account, as
that term is defined in Sec. 1026.62(b)(2), would be finance charges.
The CFPB also proposed to add Sec. 1026.4(b)(12) to provide examples
of finance charges with regard to a covered asset account, as defined
in proposed Sec. 1026.62(b)(2). These proposed changes specified which
overdraft transactions include a finance charge and, therefore, may be
subject to the requirements of TILA and Regulation Z.
Proposed Sec. 1026.4(b)(12)(i) described as an example of a
finance charge any service, transaction, activity, or carrying charges
imposed on the separate credit account required by Sec. 1026.62(c),
which is also a covered overdraft credit account. Proposed Sec.
1026.4(b)(12)(ii) described as an example of a finance charge any
service, transaction, activity, or carrying charges imposed on the
covered asset account to the extent the charge exceeds a comparable
charge imposed on a checking or other transaction account that does not
have overdraft credit. Proposed Sec. 1026.4(b)(12)(iii) then described
certain charges imposed on a checking or other transaction account that
does not have overdraft credit that are not comparable to charges
imposed on a covered asset account, which, by definition (see Sec.
1026.62(b)(2)), does have overdraft credit tied to it and is provided
by a very large financial institution. As discussed in the proposal,
the proposed limitations in Sec. 1026.4(b)(12)(iii)(A) through (E)
would prohibit a very large financial institution from comparing
charges that are not comparable cash transactions or from using
comparisons in a way that may lead to evasion of the requirements of
Regulation Z. These proposed changes would broaden the example of a
``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. For the reasons discussed below, the CFPB is
finalizing these proposed revisions with certain clarifying changes.
Finance Charges Generally
Several commenters, including industry trade groups, objected to
the CFPB's proposed changes to Sec. 1026.4(b)(2) and (b)(12), while
other commenters, including consumer advocate and academic commenters,
supported the changes. Most commenters did not address the specific
language of the proposed changes to Sec. 1026.4(b)(2) and (b)(12),
focusing instead on broader concerns. One consumer advocate commenter
supported the language of the proposed changes and suggested certain
changes, including adding additional commentary, an additional example,
and an additional comment related to eliminating the participation fee
exception for covered asset accounts.
Commenters opposing the proposed changes argued that the CFPB's
proposal misclassifies overdraft as ``credit'' and, because overdraft
is not credit, overdraft charges are not a ``finance charge'' under
TILA. As discussed above, arguments that overdraft is not credit under
TILA are not supported by the statute itself; TILA defines ``credit''
broadly and does not exclude overdraft.
Industry commenters opposing the proposed changes also argued that,
even if overdraft is ``credit,'' overdraft charges are not incident to
or a condition of the extension of credit and therefore do not meet the
definition of a ``finance charge.'' These commenters argued that
overdraft charges are service charges applied, for example, for keeping
an overdrawn account open or compensating for the failure to timely
remedy the overdraft. Commenters pointed to case law that they believe
supports this characterization of overdraft charges. At least one
industry commenter further argued that the CFPB lacks the authority
under TILA to redefine covered overdraft fees as finance charges.
Commenters supporting the proposal argued that the term ``finance
charge'' is broadly defined and contains no limitation for overdraft
charges in its definition. Members of Congress commented that the
proposed rule is consistent with and helps fulfill TILA's purpose by
ensuring that consumers have critical protections when offered credit.
A consumer advocate commenter stated that overdraft charges imposed on
a credit account are clearly incident to credit, and that charges for
credit imposed on other asset accounts are part of the cost of the
credit and incidental to that credit, even if there are comparable
charges in another non-credit context. A consumer advocate commenter
provided specific suggestions for amending existing comments 4(b)(2)-1
and 4(b)(2)-1.ii.
With respect to commenters stating that an overdraft charge is not
a ``finance charge'' under TILA and that TILA does not confer authority
upon the CFPB to regulate overdraft, such assertions are inconsistent
with TILA.\153\ The definition of ``finance charge'' under TILA section
106(a) and in Regulation Z under Sec. 1026.4(a) is very broad and,
unless specifically excluded by the regulation, includes amounts
imposed directly or indirectly by the
[[Page 106789]]
creditor as an incident to or condition of the extension of credit.
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\153\ See part III.A for a discussion of the CFPB's authority
under TILA section 105(a).
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Moreover, the CFPB discussed the regulatory history of the
overdraft exception extensively in the prepaid rule proposal.\154\ As
summarized in that proposal, although Congress did not exempt overdraft
services or similar programs offered in connection with deposit
accounts from TILA, the Board in issuing Regulation Z in 1969 carved
financial institutions' ``bounce-protection'' programs out of the new
regulation.\155\ The Board revisited the exception of bounce protection
programs from Regulation Z over the years, including signaling concern
with overdraft services in a number of rulemaking actions.\156\ In
particular, the Board revisited the exception of bounce protection
programs from Regulation Z in 1981, in a rulemaking in which the Board
implemented the Truth in Lending Simplification and Reform Act.\157\ In
the related proposal, the Board considered adjusting its overdraft
exception to apply only to ``inadvertent'' overdrafts because, as the
Board stated, ``a charge imposed for honoring an instrument under any
agreement between the institution and the consumer is a charge imposed
for a credit extension and thus fits the general definition of a
finance charge, whether or not the charge and the honoring of the check
are reflected in a written agreement. The characterization of the
charge will thus depend on whether `credit' has been extended, within
the meaning of the regulation.'' \158\ Further, in a 2002 proposal to
amend Regulation Z with regard to the status of certain credit card-
related fees and other issues, the Board noted that some overdraft
services may not be all that different from overdraft lines of credit,
which typically include a written agreement, and requested comment on
whether and how Regulation Z should be applied to banks' bounce-
protection services.\159\ That proposal cited to Regulation Z's
exclusion of a charge for overdraft unless the payment of such items
and the imposition of the charge are previously agreed upon in writing
and noted that ``[f]ees imposed in connection with `bounce protection'
services may or may not meet the definition of a finance charge.''
\160\ This regulatory history indicates that, but for the exception
established under Regulation Z, a charge for overdraft would fall
within the definition of a ``finance charge.''
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\154\ 79 FR 77102, 77117-20 (Dec. 23, 2014).
\155\ 34 FR 2002 (Feb. 11, 1969). See Sec. 1026.4(b)(2) and
(c)(3).
\156\ 79 FR 77102, 77119 (Dec. 23, 2014).
\157\ Public Law 96-221, sec. 601, 94 Stat. 132; 45 FR 80648
(Dec. 5, 1980).
\158\ 45 FR 80648, 80657 (Dec. 5, 1980). The Board ultimately
made only a few minor editorial changes to the exclusion, thus
preserving the exemption unless there is an agreement in writing to
pay items and impose a charge. 46 FR 20848, 20855 (Apr. 7, 1981).
\159\ 67 FR 72618, 72620 (Dec. 6, 2002).
\160\ Id. The Board did not modify the Regulation Z exemptions
when it issued final rules in 2003, instead stating in preamble 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).
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Some comments stated that an overdraft charge is not a finance
charge because it is a fee for providing a service related to the
account and is imposed regardless of whether credit is extended such
that it is not a fee incident to or a condition of the extension of
credit. The CFPB notes, however, that this argument appears
inconsistent with current market practices, which do often distinguish
between overdraft fees and other fees. Financial institutions subject
to this rule generally make clear in their account agreements that
overdraft coverage is a separate feature with fees that often differ
from those charged when an overdrawing transaction is declined. Such
financial institutions also often do not assess NSF fees on declined
card transactions, and many such financial institutions are no longer
charging NSF fees on any types of transactions. These considerations
highlight the fact that the overdraft fee is incident to or a condition
of the extension of credit, even if the financial institution charges
an NSF fee, characterizes the fee as a bank account service fee, or
charges the fee for keeping an overdraft account open or because an
overdraft is not repaid within a certain period of time.
For these reasons, CFPB is finalizing the proposed change to Sec.
1026.4(b)(2) and corresponding changes to comment 4(b)(2)-1 to set
forth a different rule for when charges imposed on a covered asset
account, as that term is defined in Sec. 1026.62, are finance charges.
As discussed below, the CFPB is also finalizing Sec. 1026.4(b)(12) to
provide an example of a finance charge with regard to a covered asset
account.
The CFPB declines to incorporate the commenter's suggestions on
commentary 4(b)(2)-1 because it believes that finalizing commentary
4(b)(2)-1 as proposed makes clear that charges applied to covered asset
accounts are evaluated under Sec. 1026.4(b)(12). The CFPB declines to
incorporate the commenter's suggested revisions on commentary 4(b)(2)-
1.ii. While the CFPB recognizes that retaining the existing language
regarding ``paying or returning'' an item on a similar account without
a credit feature could be read to imply that a comparable account with
overdraft is nevertheless an account without a credit feature, the
discussion of ``overdraft credit'' above in part IV.C.1 notes the
distinction between incidental credit and a credit feature.
Example of a Finance Charge for the Separate Credit Account
With regard to a covered asset account, proposed Sec.
1026.4(b)(12)(i) described as an example of a finance charge any
service, transaction, activity, or carrying charge imposed on the
separate credit account required by Sec. 1026.62(c). Proposed section
1026.62(c) stated that a very large financial institution shall
structure covered overdraft credit as a separate credit account and
stated that the separate credit account is a covered overdraft credit
account.
An industry commenter objected to the lack of language in proposed
Sec. 1026.4(b)(12)(i) to account for a comparable cash transaction or
to provide for a comparison to a charge imposed on a checking or other
transaction account that does not have overdraft credit. This commenter
argued that the lack of such language contravenes the specific
exclusion in TILA section 1605(a) for charges of a type payable in a
comparable cash transaction, and stated that these exclusions from the
finance charge definition are mandated by TILA's provisions and tied to
TILA's purpose.
A consumer advocate commenter supported Sec. 1026.4(b)(12)(i)
because the service, transaction, activity or carrying charges
identified in that section are imposed on a credit account and thus are
clearly incident to credit. This commenter noted that this is true
under the law today and would remain true if banks restructure their
overdraft services as lines of credit to comply with the CFPB's rule.
This commenter also agreed with the proposal's rationale that it would
not make sense to compare fees on a credit account to those on a
noncredit account.
Regarding the commenter's argument that the CFPB erred by not
providing for a comparison to a charge imposed on a checking or other
transaction account that does not have overdraft credit, final Sec.
1026.4(b)(12)(i) does not change existing law. Existing Sec.
1026.4(b)(2) provides that examples of finance charges include service,
transaction, activity, and carrying charges imposed on a credit
account. Onto this example, the Board added a partial exception in
Sec. 1026.4(b)(2) stating that any charge
[[Page 106790]]
imposed on a checking or other transaction account (emphasis added),
such as a service or transaction account charge, is only a finance
charge to the extent that the charge exceeds the charge for a similar
asset account without a credit feature.\161\ Under existing Sec.
1026.4(b)(2), service, transaction, activity, and carrying charges
imposed on an overdraft line of credit account (as opposed to the
checking or other transaction account to which the credit line is tied)
are generally finance charges. This is true whether or not the charge
exceeds the charge for a similar asset account without a credit
feature. The CFPB's rule does not change this treatment of fees
assessed on overdraft lines of credit or credit card accounts, which
many financial institutions currently provide, and which are, in
general, currently covered by Regulation Z. Similarly, the separate
credit account required by Sec. 1026.62(c) is not a checking or other
transaction account that would qualify for the partial exception. The
CFPB is also, as described in the proposal, concerned that adding such
a comparison might lead to potential evasion of the rule. For these
reasons, proposed Sec. 1026.4(b)(12)(i) is consistent with existing
Sec. 1026.4(b)(2) and the CFPB is finalizing Sec. 1026.4(b)(12)(i) as
proposed.
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\161\ Existing comment 4(b)(2)-1 similarly provides that a
checking or transaction account charge imposed in connection with a
credit feature is a finance charge under existing Sec. 1026.4(b)(2)
to the extent the charge exceeds the charge for a similar account
without a credit feature.
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Example of a Finance Charge for the Covered Asset Account
Proposed Sec. 1026.4(b)(12)(ii) largely echoed existing Sec.
1026.4(b)(2) by providing that any service, transaction, activity, or
carrying charge imposed on a 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 overdraft
credit. Commenters, in general, did not focus specifically on proposed
Sec. 1026.4(b)(12)(ii), instead focusing their criticism or support on
Sec. 1026.4(b)(12)(iii) (discussed below). The CFPB is finalizing
Sec. 1026.4(b)(12)(ii) largely as proposed with minor stylistic
changes to match existing Sec. 1026.4(b)(2).
Proposed Sec. 1026.4(b)(12)(iii) described five specific types of
charges imposed on a checking or other transaction account without
overdraft credit that are not comparable to charges imposed on a
covered asset account. Industry commenters objected to Sec.
1026.4(b)(12)(iii), focusing most heavily on the inability to use a
nonsufficient funds (NSF) fee as a comparable charge to reduce the
extent to which an overdraft fee is a finance charge. These commenters
argued that eliminating this exception would reduce the availability of
covered overdraft credit, and such reduction would disadvantage
consumers, who would face the same or higher fees without the benefit
of a paid transaction. At least one industry commenter also argued that
precluding this comparison contradicts TILA's goal of requiring
disclosure of fees that are payable by credit customers but not by cash
customers. This same commenter argued that both an overdraft charge and
an NSF fee are imposed upon an overdrawn account and serve many of the
same functions, citing to court cases and agency publications grouping
overdraft and NSF fees in the same category. This commenter argued that
nothing in TILA section 1605(a) precludes the ``cash transaction''
description from applying to a payment for services and that the
concept of a ``cash transaction'' relates to the method of payment,
rather than what is provided in return.
A consumer advocate commenter supported this proposed provision,
arguing that the comparable cash transaction exception has been used to
hide or exclude amounts even where no comparable transaction actually
exists; therefore, the proposed restrictions in Sec.
1026.4(b)(12)(iii) would help to prevent evasions. This commenter also
argued that returning an item unpaid is not a comparable cash
transaction to paying it as an overdraft as one transaction is credit,
with the fee being the cost of that credit, and the other transaction
is not credit, with the fee serving a different purpose. This commenter
supported the limitations proposed in Sec. 1026.4(b)(12)(iii), arguing
that the charges listed in (A) through (D) are not associated with cash
transactions. This commenter also supported the limitation on using a
charge for transferring funds into the checking or other transaction
account from any other asset account (such as a savings account),
arguing that a charge for overdraft credit reflects the cost of that
credit and that the full amount of that fee should be viewed as a
finance charge, noting that this policy is already reflected in
existing comment 4(a)-4 and would reflect the reality that the
consumers who incur the most overdraft fees are unlikely to have
significant linked savings or other asset accounts that can be used to
cover overdrafts.
This commenter also recommended adding commentary interpreting
Sec. 1026.4(b)(12) for clarity, including a comment stating that
transfer fees imposed on any credit account, whether an overdraft line
of credit or traditional credit card, are a finance charge and a
comment comparing the monthly account fees of two asset accounts that
differ in whether they have a tied credit feature or not, such that the
difference in the asset accounts' monthly fees is a finance charge.
As to the commenter's request for additional commentary, the
purpose of Sec. 1026.4(b)(12)(iii) is to clarify which types of
transactions are not comparable to an overdraft charge for purposes of
the comparison calculation described in Sec. 1026.4(b)(12)(ii). As
discussed further below, specific charges are identified in Sec.
1026.4(b)(12)(iii) for the purpose of prohibiting comparison for
purposes of Sec. 1026.4(b)(12)(ii); Sec. 1026.4(b)(12)(iii) does not
address whether or not such fees are themselves ``finance charges.''
Thus, the CFPB declines to add additional commentary.
After considering the comments, the CFPB is finalizing Sec.
1026.4(b)(12)(iii) largely as proposed in order to prohibit very large
financial institutions from comparing overdraft charges to charges that
are not comparable cash transactions, to prevent using such comparisons
in a way that may lead to evasion of the requirements of Regulation Z,
and to ensure that the full cost of credit is more accurately
disclosed. Accordingly, Sec. 1026.4(b)(12)(iii) includes the
limitation in proposed Sec. 1026.4(b)(12)(iii)(B) and (C) because fees
for declining to authorize or pay a transaction or for returning a
transaction unpaid--often referred to as NSF fees--are not comparable
to overdraft charges. As discussed in the proposal, an NSF fee is
assessed when a transaction is declined while an overdraft charge is
assessed when a transaction is paid and the institution lends the
consumer money to pay that transaction. As to commenters' concerns that
proposed Sec. 1026.4(b)(12)(iii) would have designated NSF fees
themselves as examples of ``finance charges,'' final Sec.
1026.4(b)(12)(iii) does not do so. The proposed regulatory text was
intended to prohibit the use of an NSF fee to offset an overdraft
charge. Final Sec. 1026.4(b)(12)(iii) prohibits that same comparison
but adds stylistic changes to clarify that the types of transactions
identified in Sec. 1026.4(b)(12)(iii)(A) through (E) are itemized
solely for the purpose of clarifying that they cannot be compared to
charges imposed when overdraft credit is extended. Nothing in
[[Page 106791]]
final Sec. 1026.4(b)(12)(iii)(A) through (E) changes or modifies
whether or not these five types of transactions are examples of finance
charges. Specifically, final Sec. 1026.4(b)(12)(iii) does not comment
on whether or not an NSF fee would be a finance charge.
For the reasons discussed above, the CFPB is finalizing Sec.
1026.4(b)(12)(ii) and (iii) largely as proposed. The CFPB makes two
additional clarifying changes to the regulatory text of Sec.
1026.4(b)(12)(iii). First, the final rule strikes ``covered'' from
``covered overdraft credit'' in Sec. 1026.4 (b)(12)(iii). Proposed
Sec. 1026.4(b)(12)(ii) referred to a checking or other transaction
account that does not have overdraft credit; proposed Sec.
1026.4(b)(12)(iii) referred to a checking or other transaction account
that does not have covered overdraft credit. Thus, changing ``covered
overdraft credit'' to ``overdraft credit'' in final Sec.
1026.4(b)(12)(iii) resolves what could have
[…truncated; see source link]Indexed from Federal Register on December 30, 2024.
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