The Consumer Financial Protection Bureau released a final overdraft rule that caps overdraft fees at $5 for the largest banks. The sweeping rule immediately drew a legal challenge from bank trade groups.
The CFPB said in a final rule issued Thursday, that it will reclassify overdraft fees as loans subject to interest rate disclosures under the Truth in Lending Act. The rule would apply only to the largest banks and credit unions with more than $10 billion in assets, impacting roughly 175 financial institutions.
The Consumer Bankers Association said late Thursday that it is jointly pursuing legal action against the CFPB with the American Bankers Association, America's Credit Unions, Mississippi Bankers Association and three banks directly affected by the rule.
"CBA had no choice but to pursue legal action to counter the CFPB's blatant statutory overreach with its misguided rule to ensure consumers continue to have access to liquidity through overdraft services," said Lindsey Johnson, president and CEO of the trade group.
CFPB Director Rohit Chopra has lambasted banks for charging excessive overdraft fees as high as $35. He said that overdraft fees were never meant to be a major profit driver for banks. The CFPB claims the rule will save consumers $225 per household or $5 billion a year.
"The CFPB is cracking down on these excessive junk fees and requiring big banks to come clean about the interest rate they're charging on overdraft loans," Chopra said in a press release.
Banks have argued that cutting off access to overdraft services would force consumers to rely on payday lenders and have no access to credit. Bank trade groups said the CFPB far exceeded its authority by imposing price caps and substantive restrictions in the terms under which overdraft can be offered.
The CFPB's final rule gives banks three options on how to comply, based on whether a bank chooses to profit from overdraft fees.
Under the final rule, large banks can cap their overdraft fees at $5, a level commensurate with what the CFPB estimates would be necessary to cover the service's cost to banks.
Alternatively, banks can cap their fees at an amount that covers costs and losses, rendering overdraft a "convenience service rather than a profit center."
Finally, banks could charge higher fees as long as they disclose the terms of their overdraft fees just like other loans. Overdraft pricing, Chopra has said, would require banks to disclose annual percentage rates
Looking ahead, bank experts said there's a wide menu of choices for other ways the overdraft rule could be scuttled.
Once the Trump administration takes over next year, "this final rule will almost certainly be subject to the Congressional Review Act," which allows Congress to nullify a rule within 60 legislative days of its finalization, said Joe Lynyak, a partner at Dorsey & Whitney.
The trade groups argue in the lawsuit that overdraft services are not "credit," and that customers do not have a right to incur overdrafts or defer repayment of the overdraft and therefore, cannot be regulated under Truth in Lending Act, passed by Congress in 1968. The trade groups said the CFPB exceeded its statutory Authority and misinterprets TILA in suggesting that overdraft fees are a form of credit.
"The fact that the financial institution may voluntarily elect to provide a service does not indicate that the consumer has a corresponding right to receive it," the bank trades said in the 63-page lawsuit filed in U.S. District Court for the Southern District of Mississippi. The three banks that joined the trades groups in suing the CFPB include Arvest Bank in Fayetteville, Arkansas; Bank of Franklin in Meadville, Mississippi; and The Commercial Bank in DeKalb Mississippi.
Chopra has long claimed that banks received an exception from the Truth in Lending Act more than 50 years ago when overdraft was considered a "courtesy," service for customers that had overdrawn their account and bounced a check.
"For far too long, the largest banks have exploited a legal loophole that has drained billions of dollars from Americans' deposit accounts," Chopra said in a press release.
The CFPB said in the 296-page rule that the "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," the rule states.
Rob Nichols, president and CEO of the American Bankers Association, said the CFPB is ignoring that a millions of consumers use overdraft as a service and do not want it to go away.
"By taking this action, the Bureau has once again chosen to prioritize demonizing highly regulated and transparent bank fees over its mission to help consumers," Nichols said. "This rule, and the government price controls that accompany it, will make it significantly harder for banks to offer this valuable service to their customers, including those who have few other options to cover essential payments."
Banks have said they may be forced to eliminate overdraft fees, restrict credit, impose higher minimum balance requirements and limit the availability of free or low-cost deposit accounts. The CFPB's final rule differs from
The final rule will take effect on Oct. 1, 2025.
