Overdraft Lending: Very Large Financial Institutions

<RULE> CONSUMER FINANCIAL PROTECTION BUREAU <CFR>12 CFR Parts 1005 and 1026</CFR> <DEPDOC>[Docket No. CFPB-2024-0002]</DEPDOC> <RIN>RIN 3170-AA42</RIN> <SUBJECT>Overdraft Lending: Very Large Financial Institutions</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Consumer Financial Protection Bureau. <HD SOURCE="HED">ACTION:</HD> Final rule; official interpretation. <SUM> <HD SOURCE="HED">SUMMARY:</HD> 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. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> <E T="03">Effective date:</E> October 1, 2025. </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> George Karithanom, Regulatory Implementation and Guidance Program Analyst, Office of Regulations, at 202-435-7700 or <E T="03">https://reginquiries.consumerfinance.gov/.</E> If you require this document in an alternative electronic format, please contact <E T="03">CFPB_Accessibility@cfpb.gov.</E> </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Table of Contents</HD> <EXTRACT> <FP SOURCE="FP-2">I. Overview</FP> <FP SOURCE="FP1-2">A. Summary</FP> <FP SOURCE="FP1-2">B. Market Background</FP> <FP SOURCE="FP-2">II. The Proposal and Other Procedural Background</FP> <FP SOURCE="FP1-2">A. Outreach and Engagement</FP> <FP SOURCE="FP1-2">B. Summary of the Proposed Rule</FP> <FP SOURCE="FP-2">III. Legal Authority</FP> <FP SOURCE="FP1-2">A. Truth in Lending Act</FP> <FP SOURCE="FP1-2">B. Electronic Fund Transfer Act</FP> <FP SOURCE="FP1-2">C. Consumer Financial Protection Act</FP> <FP SOURCE="FP-2">IV. Discussion of the Final Rule</FP> <FP SOURCE="FP1-2">A. Overview of the CFPB's Approach</FP> <FP SOURCE="FP1-2">B. Entity Coverage</FP> <FP SOURCE="FP1-2">C. Transaction and Account Coverage</FP> <FP SOURCE="FP1-2">D. Changes to Definition of “Finance Charge”</FP> <FP SOURCE="FP1-2">E. Changes to Covered Overdraft Credit Offered by Very Large Financial Institutions</FP> <FP SOURCE="FP-2">V. Effective and Compliance Date</FP> <FP SOURCE="FP-2">VI. Other Comments</FP> <FP SOURCE="FP1-2">A. Possible Alternative or Additional Requirements</FP> <FP SOURCE="FP1-2">B. Usury Limits</FP> <FP SOURCE="FP1-2">C. Other Comments Regarding Statutory Authority</FP> <FP SOURCE="FP1-2">D. Data Supporting Application of Regulation Z to Overdraft</FP> <FP SOURCE="FP1-2">E. Implications for Other Laws</FP> <FP SOURCE="FP-2">VII. CFPA Section 1022(b) Analysis</FP> <FP SOURCE="FP1-2">A. Overview</FP> <FP SOURCE="FP1-2">B. Data Limitation and Quantification of Benefits, Costs, and Impacts</FP> <FP SOURCE="FP1-2">C. Baseline for Analysis</FP> <FP SOURCE="FP1-2">D. Comments Received</FP> <FP SOURCE="FP1-2">E. Potential Benefits and Costs to Consumers and Covered Persons</FP> <FP SOURCE="FP1-2">F. Potential Benefits and Costs to Consumers and Covered Persons of Further Provisions of the Proposed Rule</FP> <FP SOURCE="FP1-2">G. Potential Impacts on Depository Institutions and Credit Unions With $10 Billion or Less in Total Assets, as Described in CFPA Section 1026</FP> <FP SOURCE="FP1-2">H. Potential Impacts on Consumer Access to Credit and on Consumers in Rural Areas</FP> <FP SOURCE="FP-2">VIII. Regulatory Flexibility Act Analysis</FP> <FP SOURCE="FP-2">IX. Paperwork Reduction Act</FP> <FP SOURCE="FP-2">X. Congressional Review Act</FP> <FP SOURCE="FP-2">XI. Severability</FP> </EXTRACT> <HD SOURCE="HD1">I. Overview</HD> <HD SOURCE="HD2">A. Summary</HD> 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. <SU>1</SU> <FTREF/> <FTNT> <SU>1</SU>  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 <E T="04">Federal Register</E> are the controlling documents. </FTNT> 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. <SU>2</SU> <FTREF/> However, when the Board of Governors of the Federal Reserve System (Board) first adopted Regulation Z in 1969, <SU>3</SU> <FTREF/> 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 T="03">e.g.,</E> to reflect “items that are similar to checks, such as negotiable orders of withdrawal.”  <SU>4</SU> <FTREF/> 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. <FTNT> <SU>2</SU>  Consumer credit is also subject to Regulation Z in other circumstances. <E T="03">See, e.g.,</E> 12 CFR 1026.1(c). </FTNT> <FTNT> <SU>3</SU>  34 FR 2002 (Feb. 11, 1969). </FTNT> <FTNT> <SU>4</SU>  46 FR 20848, 20855 (Apr. 7, 1981). </FTNT> 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  <SU>5</SU> <FTREF/> 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. <FTNT> <SU>5</SU>  In 1987, Congress enacted the Expedited Funds Availability Act (12 U.S.C. 4001 <E T="03">et seq.</E> ) to provide depositors of checks with prompt funds availability and to foster improvements in the check collection and return processes. <E T="03">See</E> 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.” </FTNT> Over the last 30 years, in conjunction with widespread financial institution adoption of information technology systems as well as the expansion of debit card transactions that can overdraw an account, overdraft credit products provided under the exception have morphed from an occasional courtesy provided to consumers into frequently used and promoted products that increase costs to consumers (in certain instances) and generate a substantial portion of the direct fee revenue that financial institutions make from checking accounts (and much of the total revenue that financial institutions make from low-balance accounts). The volume of overdrawing transactions 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. <HD SOURCE="HD2">Key Changes</HD> Given these changes over the past 30 years and consist ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 639k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━