Back in January, the Consumer Financial Protection Bureau (“CFPB”) proposed a rule that would make existing consumer protection laws—namely the Truth in Lending Act and its implementing Regulation Z—applicable to large financial institutions’ overdraft lending services. The proposed rule is portrayed as part of the Biden administration’s broader effort to crack down on “junk fees” charged by financial institutions. The April 1 deadline for public comment on the proposed rule is fast-approaching, at which point the CFPB will move toward finalizing the proposed rule.
Overdraft lending services refers to a financial institution’s extension of credit to a customer whose account does not have sufficient funds to cover a transaction. The bank loans money to the customer so that the transaction is not denied. Banks charge interest on the overdraft loan, and also typically charge a fee. According to the CFPB, “[t]hese institutions typically charge $35 for an overdraft loan, even though the majority of consumers’ debit card overdrafts are for less than $26, and are repaid within three days.” The proposed rule would apply only to institutions with $10 billion in assets and would offer two alternatives for continuing to offer overdraft protection. First, banks could make overdraft lending services a formal line of credit subject to the rules applicable to credit cards (including disclosing the interest rate). Alternately, banks could continue to offer overdraft protection as a convenience to customers but would be required to charge a much lower fee—either an amount that approximates their costs or a benchmark fee set by the CFPB (the proposed rule is considering $3, $6, $7 or $14).
So far, the CFPB has received at least 120 formal comments on the proposed overdraft rule, many from consumers expressing their emphatic support for the proposal. Banks, credit unions and other financial institutions, on the other hand, have been equally emphatic in their opposition to the proposed regulation. The American Bankers Association (“ABA”) and the Consumer Bankers Association (“CBA”) issued statements in opposition to the rule shortly after it was proposed on January 17. The ABA expressed concern that the proposal “would make it significantly harder for banks to offer overdraft protection to customers, including those who have few, if any, other means to access needed liquidity” and cited data showing that the majority of Americans value access to overdraft protection. The CBA noted that financial institutions had voluntarily reduced overdraft fees by $5 billion between 2019 and 2022, and faulted the CFPB for its “one-size-fits-all approach” that threatens to “feez[e] innovation and competition.” Comments submitted by various credit unions and other financial institutions echo those of the ABA and CBA, highlighting that the proposed rule would jeopardize the ability of banks to continue offering overdraft protection, a service that customers uniformly value and are required to affirmatively opt in to. Commenters also pointed out that overdraft protection allows customers who live paycheck to paycheck to address timing mismatches and access valuable free checking accounts.