CFPB Overdraft Proposal Is About More Than the Fee Cap!

The expenses of offering overdraft protections would increase considerably, causing some banks and credit unions to...

As you are undoubtedly aware, this week, the CFPB proposed its long-awaited expansion of Regulation Z requirements to depository institutions, like banks and credit unions, with $10 billion or more in assets that have the audacity to profit from offering overdraft protection products. Specifically, "Very Large Institutions" imposing more than the “break-even costs” of overdraft products would be required to provide protections, such as periodic statements. The proposed regulations would, however, include a safe harbor amount yet to be determined. Credit unions charging no more than the break-even amounts, which could range anywhere from $3-$14 under the CFPB’s proposal, would not be subject to Regulation Z’s mandates. 

The CFPB estimates that the regulation could take effect as early as October 2025. While institutions with less than $10 billion can breathe a sigh of relief for now, in the preamble, the CFPB notes that it will be analyzing the impact of this regulation and could impose similar requirements on smaller banks and credit unions. 

While the fee cap has gotten most of the attention, complying with this proposal for those credit unions going to provide initial disclosures would require the development of several additional protocols which may make even the largest institutions decide that the benefits aren’t worth the costs. For example, if the credit union provides an overdraft line of credit, this line of credit will now have to be provided in a separate account. Similar requirements are imposed on debit and credit cards. 

As burdensome as this proposal is, it is doubtful that a legal challenge to the authority of the CFPB to promulgate this regulation would be successful. The CFPB notes in the preamble that as early as 1969, when Regulation Z was first promulgated, regulators considered extending Regulation Z’s protections to overdraft products, but decided not to do so as a matter of policy. Furthermore, a strong argument can be made that overdraft products are consumer loans, particularly when they include lines of credit. The CFPB will be accepting comments on this proposal until April 1, 2024. 

CFPB Overdraft Proposal Is About More Than the Fee Cap! -