Overdraft Lending: Very Large Financial Institutions

Federal RegisterFeb 23, 2024

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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:

Proposed rule; request for public comment.

SUMMARY:

The Consumer Financial Protection Bureau (CFPB) proposes 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 applicable costs and losses. The proposal would allow consumers to better comparison shop across credit products and provide substantive protections that apply to other consumer credit.

DATES:

Comments must be received on or before April 1, 2024.

ADDRESSES:

You may submit comments, identified by Docket No. CFPB-2024-0002 or RIN 3170-AA42, by any of the following methods:

•

Federal eRulemaking Portal: https://www.regulations.gov.

Follow the instructions for submitting comments. A brief summary of this document will be available at

https://www.regulations.gov/docket/CFPB-2024-0002.

•

Email: 2024-NPRM-OVERDRAFT@cfpb.gov.

Include Docket No. CFPB-2024-0002 or RIN 3170-AA42 in the subject line of the message.

•

Mail/Hand Delivery/Courier:

Comment Intake—2024 NPRM Overdraft, c/o Legal Division Docket Manager, Consumer Financial Protection Bureau, 1700 G Street NW, Washington, DC 20552.

Instructions:

The CFPB encourages the early submission of comments. All submissions should include the agency name and docket number or Regulatory Information Number (RIN) for this rulemaking. Commenters are encouraged to submit comments electronically. In general, all comments received will be posted without change to

https://www.regulations.gov.

All submissions, including attachments and other supporting materials, will become part of the public record and subject to public disclosure. Proprietary information or sensitive personal information, such as account numbers or Social Security numbers, or names of other individuals, should not be included. Submissions will not be edited to remove any identifying or contact information.

FOR FURTHER INFORMATION CONTACT:

Anna Boadwee, Attorney-Advisor; Joseph Baressi, Pedro De Oliveira, Thomas Dowell, Brandy Hood, Kristin McPartland, or Mark Morelli, Senior Counsels, Office of Regulations, at 202-435-7700 or

https://reginquiries.consumerfinance.gov/.

If you require this document in an alternative electronic format, please contact

CFPB_Accessibility@cfpb.gov.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Summary of Proposed Rule

II. Background

A. Overview of Overdraft Credit

B. Evolution and Growth of Non-Covered Overdraft

C. Non-Covered Overdraft Credit Today

D. Consumer Impact of Overdraft Fees

E. Growing Regulatory Concerns About Non-Covered Overdraft Credit

F. Need for CFPB Action

III. Outreach and Related Research

IV. Legal Authority

A. Truth in Lending Act

B. Electronic Fund Transfer Act

C. Consumer Financial Protection Act

V. Discussion of the Proposed Rule

A. Who is covered? (§ 1026.62(b)(8))

B. What transactions and accounts are covered?

C. Changes to the Definition of “Finance Charge” (§ 1026.4(b)(2), (b)(12), and (c)(3); § 1026.62(d))

D. Changes to Covered Overdraft Credit Offered by Very Large Financial Institutions

VI. Proposed Effective Date

VII. Severability

VIII. CFPA Section 1022(b) Analysis

A. Overview

B. Data Limitations and Quantification of Benefits, Costs, and Impacts

C. Baseline for Analysis

D. Potential Benefits and Costs to Consumers and Covered Persons of the Proposed Changes That Affect Charges for Non-Covered and Covered Overdraft Credit

E. Potential Benefits and Costs to Consumers and Covered Persons of Further Provisions of the Proposed Rule

F. Potential Specific Impacts of the Proposed Rule on Depository Institutions and Credit Unions With $10 Billion or Less in Total Assets, as Described in CFPA Section 1026

G. Potential Specific Impacts of the Proposed Rule on Consumer Access to Credit and on Consumers in Rural Areas

IX. Regulatory Flexibility Act Analysis

X. Paperwork Reduction Act

I. Summary of Proposed Rule

Overview

This proposed rule would update non-statutory exceptions in Regulations Z and E that have allowed very large financial institutions to avoid statutory requirements when extending certain overdraft credit.

When amending commentary, the Office of the Federal Register (OFR) 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 if the Bureau adopts its changes as proposed. In addition, the Bureau is releasing an unofficial, informal redline to assist industry and other stakeholders in reviewing the changes that it proposes to make to the regulatory text and commentary of Regulation E and Regulation Z. This redline may be found on the Bureau's website,

https://files.consumerfinance.gov/f/documents/cfpb_unofficial-redline_overdraft-credit-very-large-financial-institutions-proposed-rule_2024-01.pdf.

If any conflicts exist between the redline and the text of Regulation E or Regulation Z, its commentary, or this proposed rule, the documents published in the

Federal Register

are the controlling documents.

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.

However, when the Board of Governors of the Federal Reserve System (Board) first adopted Regulation Z in 1969,

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.”

This exception is unique to credit extended to pay account overdrafts. In adopting this exception, the Board did not rely on an interpretation of the statute; rather, the Board used its authority to create regulatory exceptions. Similar consumer credit products are subject to Regulation Z.

Consumer credit is also subject to Regulation Z in other circumstances.

See, e.g.,

12 CFR 1026.1(c).

34 FR 2002 (Feb. 11, 1969).

46 FR 20848, 20855 (Apr. 7, 1981).

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

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 all of the negative consequences of a bounced check without being charged any additional fees beyond the amount charged for nonsufficient funds.

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.”

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 rose drastically over the years, including on transactions where the consumer may have 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 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 proposing to update 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 would allow consumers to better compare certain overdraft credit to other types of credit and would provide consumers with several substantive protections that already apply to other consumer credit.

These amendments would apply 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 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 proposal, Regulation Z would 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 proposed rule would accomplish this result by updating two regulatory exceptions from the statutory definition of finance charge. First, the proposal would update 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

so that the exception would not apply to “above breakeven overdraft credit” offered by a very large financial institution. The proposal would give 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 standards set forth in the proposal; or (2) relying on a benchmark fee set by the CFPB in the proposal. The CFPB is considering setting the benchmark fee at $3, $6, $7, or $14. Second, the proposal would update a related exception that provides that a charge imposed in connection with an overdraft credit feature (

e.g.,

a charge for each item that results in an overdraft) is not a finance charge if the charge does not exceed the charge for a similar transaction account without a credit feature (

e.g.,

the charge for returning each item).

As a result of the proposed change, all transfer charges that very large financial institutions impose on asset accounts with linked overdraft lines of credit (

i.e.,

fees imposed for transferring funds to an asset account from an overdraft line of credit to cover an item that would otherwise take the asset account's balance negative) would be finance charges.

12 CFR 1026.4(c)(3).

12 CFR 1026.4(b)(2).

If the proposal is finalized, above breakeven overdraft credit that is not currently subject to Regulation Z would 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). For ease of reference, this proposal 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 would become covered overdraft credit if this proposal is finalized.

The proposal would also require covered overdraft credit offered by very large financial institutions to be put in a credit account separate from the asset account, and it would update exceptions relating to credit cards. Among other changes, it would apply the portions of Regulation Z that implement the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) 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 would 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.

The proposal would also prohibit compulsory use of preauthorized electronic fund transfers (EFTs) for repayment of covered overdraft credit provided by very large financial institutions, which would 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 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.

The CFPB proposes 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 expects that would likely fall on October 1, 2025.

The CFPB invites comment on all aspects of this notice of proposed rulemaking and on the specific issues on which it solicits comment elsewhere herein, including on any appropriate modifications or exceptions to the Proposed Rule.

II. Background

A. 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 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,

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.”

The Board subsequently adopted commentary excluding debit cards with no credit agreement from Regulation Z's definition of “credit card.”

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.

34 FR 2002 (Feb. 11, 1969).

42 FR 22360, 22362 (May 3, 1977).

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.

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.

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.

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;

however, since late 2021, a number of financial institutions have voluntarily eliminated such fees.

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.

Consumer Fin. Prot. Bureau (CFPB),

CFPB Study of Overdraft Programs: A white paper of initial data findings,

at 55 (June 2013),

https://files.consumerfinance.gov/f/201306_cfpb_whitepaper_overdraft-practices.pdf

(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).

Id.

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).

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 proposal 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.

Trevor Bakker et al., CFPB,

Data Point: Checking account overdraft,

at 5, 22 (July 2014),

https://files.consumerfinance.gov/f/201407_cfpb_report_data-point_overdrafts.pdf

(CFPB 2014 Data Point).

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 may not 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.

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).

Financial institutions that use static limits may communicate those limits to account holders, while financial institutions that use dynamic limits generally do not communicate those limits to account holders.

CFPB 2013 White Paper at 48-52.

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.

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. Financial institutions typically have charged the same amount for an NSF fee as for a non-covered overdraft fee.

As noted in part II.C, many financial institutions have eliminated NSF fees over the past two years.

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 fees); Fed. Deposit Ins. Corp. (FDIC),

2008 FDIC Study of Bank Overdraft Programs,

at 16 n.18 (Nov. 2008),

https://www.fdic.gov/bank/analytical/overdraft/FDIC138_Report_Final_v508.pdf

(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.”).

B. Evolution and Growth of Non-Covered Overdraft

Non-covered overdraft credit started as a courtesy that financial institutions provided when they would decide on a manual, ad hoc basis to pay particular check transactions into overdraft rather than returning those checks unpaid.

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.

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.

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.

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 New York found that the median fee was $5, while some banks charged zero.

By 1994, concern had risen about the increase in the average fee to over $15 ($5.77 in 1976 dollars);

by 2000, the average had surpassed $20 ($6.61 in 1976 dollars) and continued to increase thereafter.

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”).

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).

See id.

at 59035;

see also

FRS,

The 2013 Federal Reserve Payments Study,

at 9 ex.2 (Dec. 2013),

https://www.frbservices.org/binaries/content/assets/crsocms/news/research/2013-fed-res-paymt-study-summary-rpt.pdf

(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),

Overdraft Trends Amid Historic Policy Shifts

(June 1, 2023),

https://finhealthnetwork.org/research/overdraft-trends-amid-historic-policy-shifts/

(FHN Brief 2023) (finding almost half (45 percent) of overdrafters reported that their most recent overdraft occurred on a transaction of $50 or less).

Senate Staff Report at 10-11.

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, Bd. of Governors of the Fed. Rsrv. Sys.) (showing average overdraft fee of over $15 in 1993);

see also

Meghan Greene et al., FHN,

FinHealth Spend Report 2022: What U.S. Households Spent on Financial Services During COVID-19,

at 14 (Apr. 2022),

https://finhealthnetwork.org/wp-content/uploads/2022/05/FinHealth_Spend_Report_2022_Final.pdf

(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).

E. Growing Regulatory Concerns About Non-Covered Overdraft Credit

As financial institutions began to evolve 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 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.”

In 2002, the Board noted that some non-covered overdraft credit may not be all that different from overdraft lines of credit,

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.

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. Were the Board to address these issues more specifically, it would do so separately under its clear [TILA] authority.”

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”).

Following the adoption of the Board's rule, the FDIC issued additional supervisory guidance,

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.

OCC, Interpretive Letter No. 914, at 6 (Sept. 2001),

https://www.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2001/int914.pdf.

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)).

69 FR 31760, 31761 (June 7, 2004).

See

70 FR 9127, 9128-29 (Feb. 24, 2005).

74 FR 5212 (Jan. 28, 2009).

FDIC,

Final Overdraft Payment Supervisory Guidance,

FIL-81-2010 (Nov. 24, 2010),

https://www.fdic.gov/news/news/financial/2010/fil10081.html.

Id.

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.

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.

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.

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),

https://files.consumerfinance.gov/f/201503_cfpb_supervisory-highlights-winter-2015.pdf

(last visited Jan. 4, 2024) (CFPB Winter 2015 Highlight); FRS,

Interagency Overdraft Services Consumer Compliance Discussion,

Outlook Live presentation slides, at 20-21 (Nov. 9, 2016),

https://www.consumercomplianceoutlook.org/-/media/cco/Outlook-Live/2016/110916.pdf;

FRS,

Consumer Compliance Supervision Bulletin,

at 12 (July 2018),

https://www.federalreserve.gov/publications/files/201807-consumer-compliance-supervision-bulletin.pdf

(FDIC 2018 Highlight); FDIC,

Consumer Compliance Supervisory Highlights,

at 2-3 (June 2019),

https://www.fdic.gov/regulations/examinations/consumercomplsupervisoryhighlights.pdf?source=govdelivery&utm_medium=email&utm_source=govdelivery

(FDIC 2019 Highlight).

OCC,

OCC Bulletin 2023-12, Overdraft Protection Programs: Risk Management Practices

(Apr. 26, 2023),

https://www.occ.treas.gov/news-issuances/bulletins/2023/bulletin-2023-12.html

(OCC Bulletin 2023-12); FDIC,

Supervisory Guidance on Charging Overdraft Fees for Authorize Positive, Settle Negative Transactions,

FIL-19-2023 (Apr. 26, 2023),

https://www.fdic.gov/news/financial-institution-letters/2023/fil23019a.pdf.

OCC Bulletin 2023-12.

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.

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.

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.

81 FR 83934, 83935-36 (Nov. 22, 2016).

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”

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.”

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.”

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.”

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.

15 U.S.C. 1602(f).

81 FR 83934, 84168 (Nov. 22, 2016).

Id.

at 84160.

Id.

at 84162.

F. Need for CFPB Action

As a result of the evolution of the overdraft market over the last few decades, the overdraft-related exception to the definition of finance charge in Regulation Z no longer serves its original purpose. The CFPB is proposing to update the exception, and several others that allow financial institutions to follow different rules for overdraft credit than for other forms of consumer credit, to ensure that overdraft credit offered by very large financial institutions is generally treated no differently than any other form of consumer credit, except in the narrow cases where it is provided as a courtesy to consumers. Preserving a limited exception from Regulation Z may 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 or not a transaction will be presented against sufficient funds. But 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, nor as consistent with TILA's purposes of promoting the informed use of credit and comparison shopping across credit products. Therefore, the CFPB proposes to limit the exception from TILA, for very large financial institutions, to overdraft credit that is offered at a cost to the consumer that does not exceed the financial institution's costs and losses associated with providing such coverage.

III. Outreach and Related Research

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.

This inquiry included a request for information on the impacts of overdraft fees on consumers,

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.

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.

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.

Press Release, CFPB,

CFPB Launches Inquiry into Overdraft Practices

(Feb. 22, 2012),

https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-launches-inquiry-into-overdraft-practices/.

77 FR 12031 (Feb. 28, 2012).

See

CFPB 2013 White Paper at 8;

see also

CFPB 2014 Data Point at 6-7.

See

CFPB 2013 White Paper; CFPB 2014 Data Point; CFPB 2017 Data Point.

Nicole Kelly & Éva Nagypál, Ph.D., CFPB,

Data Point: Checking Account Overdraft at Financial Institutions Served by Core Processors

(Dec. 2021),

https://files.consumerfinance.gov/f/documents/cfpb_overdraft-core-processors_report_2021-12.pdf.

In 2021, the CFPB examined financial institutions' reliance on overdraft/NSF fees from 2015 to 2019, finding that it was persistent.

Since then, the CFPB has continued tracking trends in the marketplace

and evaluating some banks' key overdraft-related metrics through the CFPB's supervision work.

From December 2022 to June 2023, the CFPB reviewed the publicly available overdraft practices of financial institutions with assets over $10 billion.

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 V.C.2 as well as in a separate report titled Overdraft and NSF Practices at Very Large Financial Institutions.

CFPB 2021 Data Point.

CFPB,

Trends in overdraft/non-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/

(last updated Oct. 11, 2023) (reflecting data and analysis published periodically from Dec. 1, 2021 to present).

See

Patrick Gibson & Lisa Rosenthal,

Measuring the impact of financial institution overdraft programs on consumers,

CFPB (June 16, 2022),

https://www.consumerfinance.gov/about-us/blog/measuring-the-impact-of-financial-institution-overdraft-programs-on-consumers/;

CFPB,

Fall 2023 Supervisory Highlights Junk Fees Update Special Edition,

at 7-9 (Oct. 2023),

https://files.consumerfinance.gov/f/documents/cfpb_supervisory_highlights_junk_fees-update-special-ed_2023-09.pdf

(CFPB Fall 2023 Highlight).

CFPB Market Monitoring of Publicly Available Overdraft Practices, Dec. 2022-July 2023.

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 VIII].

IV. Legal Authority

The CFPB is issuing this proposal pursuant to its authority under TILA, EFTA, and the CFPA. This part includes a general discussion of the provisions on which the CFPB relies in this rulemaking.

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.

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.

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.

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.

15 U.S.C. 1604(a).

15 U.S.C. 1601(a).

Id.

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.

Public Law 111-24; § 2, 123 Stat. 1734, 1735 (2009).

For the reasons discussed in this notice, the CFPB is proposing amendments to Regulation Z with respect to overdraft credit to carry out TILA's purposes. The CFPB at this time is proposing to retain 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 aspects of the proposal 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.

Among other things, EFTA contains provisions regarding compulsory use of EFTs.

15 U.S.C. 1693.

15 U.S.C. 1693k.

EFTA section 904(a) authorizes the CFPB to prescribe regulations to carry out the purposes of EFTA.

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.

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.”

15 U.S.C. 1693b(a).

15 U.S.C. 1693b(c).

See

S. Rept. No. 95-1273, at 26 (1978).

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 V 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 CFPB's authority under, as applicable, EFTA section 904(a) and (c). The CFPB is proposing to retain existing rules for financial institutions with less than $10 billion in assets because the CFPB has determined that such exceptions will alleviate undue compliance burdens as the CFPB continues to examine the market for smaller financial institutions.

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.”

12 U.S.C. 5512(b)(1).

Among other statutes, TILA, EFTA, and the CFPA are Federal consumer financial laws.

100

Accordingly, in setting forth this proposal, 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.

100

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)).

V. Discussion of the Proposed Rule

A. Who is covered? (§ 1026.62(b)(8))

This proposed rule would expand protections to consumers of overdraft credit at financial institutions with more than $10 billion in assets. This proposal would not change the regulatory framework 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 define in proposed § 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. 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

https://www.consumerfinance.gov/compliance/supervision-examinations/institutions/.

As discussed below, the proposed rule then uses the term “very large financial institution” to limit the scope of overdraft credit that would be subject to the proposed rule.

The CFPB has preliminarily determined that overdraft services offered by financial institutions with more than $10 billion in assets should be subject to this rule. As noted above, 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 has 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 has preliminarily determined that consumers would benefit from the CFPB's proceeding with a rule that would apply to very large financial institutions—

i.e.,

those with assets of $10 billion or more. Such a rule would increase protections for the overwhelming majority of consumers of overdraft credit. This proposal would cover financial institutions holding approximately 80 percent of consumer deposits as of December 2022

101

and responsible for approximately 68 percent of overdraft charges as of December 2022.

102

The CFPB believes that consumers at very large financial institutions would benefit from the expanded protections that would be provided by the proposed rule.

101

Computed from 2022 FFIEC and National Credit Union Administration call report data.

102

Estimated using data from 2022 FFIEC Call Reports and methodology discussed at FN 29.

In light of the different circumstances smaller financial institutions may face in adapting to the proposed regulatory framework, the CFPB is proposing not to extend the new rule to those institutions with $10 billion or less in assets. While the CFPB is not proposing 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 seeks 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.

B. What transactions and accounts are covered?

The CFPB proposes to add § 1026.62(a) and (b) to define the scope of transactions and accounts that would be covered under the proposed rule. The proposed rule would introduce new terms and amend several existing Regulation Z definitions and their commentary to state that overdraft credit is credit and assist with ease of reference to various types of overdraft credit. First, the proposal would define overdraft credit in proposed § 1026.62(a)(2), and proposed comment 2(a)(14)-4 would provide a brief example to illustrate that overdraft credit is credit under TILA and Regulation Z.

The CFPB's proposed rule would add commentary to the definition of open-end credit in § 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 proposed definitions of covered overdraft credit and non-covered overdraft credit in new § 1026.62(b) would assist with referencing overdraft credit that would be or not be credit subject to Regulation Z under this proposal. Covered overdraft credit under this proposal 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. Non-covered overdraft credit under this proposal 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 proposes to add a new definition of covered overdraft credit account to facilitate ease of reference to credit accounts through which the financial institutions extend or can extend covered overdraft credit.

1. Overdraft Credit (§§ 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.

103

Regulation Z similarly defines “credit” in existing § 1026.2(a)(14) to mean the right to defer payment of debt or to incur debt and defer its payment. To facilitate compliance with the proposed rule, proposed comment 2(a)(14)-4 would provide a brief, illustrative example of overdraft credit. The 2016 Prepaid Final Rule similarly notes that a “person, in extending overdraft funds, has provided the consumer with `the right . . . to incur debt and defer its payment.' ”

104

103

15 U.S.C. 1602(f).

104

81 FR 83934, 84168 (Nov. 22, 2016).

The CFPB is proposing to update several exceptions in Regulation Z, increasing consumer protections that apply to overdraft credit offered by very large financial institutions. To that end, the CFPB would add a definition of “overdraft credit” in proposed § 1026.62(a) to help clarify the scope of transactions covered by the proposed rule. Proposed § 1026.62(a) would define “overdraft credit” as 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 § 1026.61) held at the financial institution when the consumer has insufficient or unavailable funds in that account. Proposed § 1026.62(a) would provide non-exhaustive examples, such as consumer credit extended through a transfer from a credit card account or overdraft line of credit.

The proposed definition of “overdraft credit” would not cover credit features with respect to a prepaid account as defined in § 1026.61. The CFPB has preliminarily determined that it would be unnecessary and unduly burdensome to include prepaid accounts within the scope of this proposed rule. The CFPB's Prepaid Accounts Rule already provides comprehensive consumer protections tailored to prepaid accounts.

105

The 2016 Prepaid Final Rule and subsequent amendments to that rule are referred to collectively herein as the Prepaid Accounts Rule.

Proposed § 1026.62(a) would also clarify that the term “overdraft credit” does not include credit exempt from Regulation Z pursuant to existing § 1026.3. For example, consistent with TILA section 104(2),

106

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 are not subject to Regulation Z pursuant to existing § 1026.3(d).

106

15 U.S.C. 1603(2).

2. Open-End Credit (§ 1026.2(a)(20))

The term “open-end credit” is defined in § 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.

For the reasons discussed below, the CFPB has preliminarily determined 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. Specifically, but for those exceptions, the typical $35 overdraft fee plainly constitutes a finance charge and a financial institution that regularly assesses such a finance charge is a creditor.

107

See

§ 1026.2(a)(17)(i) (defining “creditor” as “[a] person who regularly extends consumer credit that is subject to a finance charge. . . .”).

The CFPB has preliminarily determined that overdraft credit that is typical in the market today would become covered overdraft credit under the proposed rule and would meet the six elements of open-end credit under Regulation Z. For clarity and to facilitate compliance, the CFPB is proposing additional commentary regarding two terms used in the definition of open-end credit: “plan” and “finance charge.” The following discusses each of the six elements in turn.

(1) Credit.

As discussed above, a person extending overdraft funds has provided credit under TILA and Regulation Z.

108

Because the consumer is obligated to repay the funds, the financial institution is allowing the consumer to incur debt and defer its payment consistent with the TILA and Regulation Z definitions of “credit.”

108

15 U.S.C. 1602(f); 12 CFR 1026.2(a)(14).

(2) Plan.

The CFPB has preliminarily determined that a checking 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.

109

Specifically, but for the Regulation Z exceptions, the checking 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.” As noted, the CFPB's proposed rule would modify those exceptions. The CFPB has preliminarily determined that an

institution offering checking account overdraft credit would be a creditor (discussed under

(4) Person extending credit is a creditor,

below) and the account agreement would be “a contractual arrangement between the creditor and the consumer.” The CFPB proposes 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.

109

15 U.S.C. 1602(j).

The CFPB has preliminarily determined that the reservation of such discretion in connection with covered overdraft credit does not connote the absence of an open-end credit plan. The CFPB understands that financial institutions offering automated overdraft services include in their agreements provisions about 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 so long as the overdraft transaction is within the overdraft coverage limit that the institution 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 treated as open-end credit plans under TILA and Regulation Z. Treating the provision of automated overdraft credit in a comparable way would promote consistency. Therefore, the CFPB has preliminarily determined that a checking 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.

(3) Imposing a “finance charge” from time to time.

The CFPB has preliminarily determined that overdraft credit is generally subject to fees that would be finance charges but for Regulation Z's exceptions to the statutory finance charge definition. As noted, the CFPB's proposed rule would modify those exceptions such that checking account overdraft fees would generally be finance charges. In the absence of the exceptions, the CFPB has preliminarily determined that an institution offering checking account overdraft credit would be imposing a finance charge from time to time.

While the proposed definition of covered overdraft credit includes overdraft credit that is subject to a finance charge as well as overdraft credit payable by a written agreement in more than four installments, the CFPB anticipates that most overdraft credit would meet the definition of covered overdraft credit because it is subject to a finance charge rather than because it is payable in more than four installments.

110

The CFPB proposes 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 by the proposed rule.

110

A card issuer that extends covered overdraft credit that takes the form of closed-end credit and is subject to a finance charge or payable by a written agreement in more than four installments (including closed-end credit accessed by a hybrid debit-credit card) would be a creditor under § 1026.2(a)(17)(iv) and subject to the special rules in that paragraph. A person who is not a card issuer and regularly extends covered overdraft credit that takes the form of closed-end credit and is subject to a finance charge or is payable by written agreement in more installments would be a creditor under § 1026.2(a)(17)(i) and subject to the closed-end credit rules in Regulation Z, subpart C.

Proposed comment 2(a)(20)-4.iii would clarify that 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 the 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 could not 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. Thus, to the extent that any finance charge may be imposed in connection with such a credit plan, the credit plan will meet this criterion.

(4) Person extending credit is a creditor.

Assuming overdraft fees are finance charges, the CFPB has preliminarily determined that 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.

111

Therefore, 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. The CFPB anticipates that most persons offering covered overdraft credit regularly extend overdraft credit and therefore would meet the definition of “creditor.” If an institution providing open-end covered overdraft credit is considered a “card issuer,” then it would also be considered a creditor under current § 1026.2(a)(17)(iii) for purposes of Regulation Z, subpart B.

111

See

§ 1026.2(a)(17)(i).

(5) Reasonably contemplates repeated transactions.

The CFPB has preliminarily determined that institutions providing checking account overdraft credit typically contemplate repeated overdraft transactions as the CFPB found that 93.2 percent of overdraft and NSF fees were assessed on consumers with four or more overdraft and NSF transactions per year.

112

The CFPB has therefore preliminarily determined that this fifth element of the open-end credit definition is satisfied.

112

CFPB 2017 Data Point at 13.

(6) Amount of credit replenishes when outstanding balance is repaid.

The CFPB has preliminarily determined that institutions providing checking account 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 in order 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 has preliminarily determined that covered overdraft credit plans are generally replenishing.

3. Covered Overdraft Credit (§ 1026.62(b)(3)), Non-Covered Overdraft Credit (§ 1026.62(b)(6)), and Card Issuer (§ 1026.2(a)(7))

The CFPB proposes 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 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 V.C, some charges imposed in connection with overdraft credit are not considered finance charges. Thus, use of the proposed definitions will also help a person extending overdraft credit to readily ascertain whether they are subject to the requirements of the regulation.

The proposed definition of “overdraft credit” is limited to consumer credit, but, even with that qualification, not all overdraft credit would be subject to Regulation Z if the definition is finalized as proposed. Many provisions of Regulation Z apply to a “creditor,” which generally is defined at § 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, 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 § 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) 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.

113

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.

114

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 to not be card issuers, and would therefore not be creditors under § 1026.2(a)(17)(iii), because the CFPB has preliminarily 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 purposes of this proposal as discussed in part V.C.

113

See

12 CFR 1026.1(c), and 1026.2(a)(17)(iii). Card issuers are also covered by the general rule that subjects them to Regulation Z if they extend open-end credit.

114

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.

For these reasons, the CFPB has preliminarily determined that a new definition of “covered overdraft credit” that parallels the general definition of creditor will assist with ease of reference to overdraft credit that is subject to Regulation Z. Additionally, the CFPB has preliminarily determined that a new definition of “non-covered overdraft credit” will assist with ease of reference to overdraft credit that is not subject to, or covered by, Regulation Z, particularly in the proposed rule's costs and losses calculation in § 1026.62(d).

4. Covered Overdraft Credit Account (§ 1026.62(b)(4))

The CFPB proposes to define “covered overdraft credit account” as a credit account through which a financial institution extends or can extend covered overdraft credit. The term includes 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 § 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 tied checking or other transaction accounts.

C. Changes to the Definition of “finance charge” (§ 1026.4(b)(2), (b)(12), and (c)(3); § 1026.62(d))

Under Regulation Z, the term “finance charge” generally is defined in § 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.”

115

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 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.

116

Neither of these exclusions appear within the statutory text of TILA.

115

12 CFR 1026.4(c)(3).

116

12 CFR 1026.4(b)(2).

The proposal would amend the definition of “finance charge” in § 1026.4 in three ways. First, it would modify the partial exception provided in § 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 § 1026.62. Second, it would add proposed § 1026.4(b)(12) that would provide examples of charges imposed in connection with covered overdraft credit that are finance charges. Third, it would amend the exception provided in § 1026.4(c)(3) so that the exception would no longer apply to “above breakeven overdraft credit” as defined

in proposed § 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.

1. Comparable Cash Transactions (§ 1026.4(b)(2))

Under TILA section 106(a) (15 U.S.C. 1605(a)), the term “finance charge” generally 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.”

117

The finance charge does not include any charge of a type payable in a comparable cash transaction.

118

117

12 CFR 1026.4(a). Current § 1026.4 implements TILA section 106 by largely mirroring the statutory definition of finance charge and the specific exclusions from that definition. In addition, § 1026.4 specifies certain inclusions and exclusions from the finance charge that are not specifically listed in the statute. For example, § 1026.4(c) specifically excludes application fees and forfeited interest from the definition of finance charge, whereas TILA does not.

118

See

15 U.S.C. 1605(a).

The current official interpretations address comparable cash transactions by stating that charges imposed uniformly in cash and credit transactions are not finance charges and by instructing that, to determine whether a transaction is a finance charge, the creditor should compare the credit transaction to a similar cash transaction.

119

The Board updated the commentary addressing finance charges numerous times.

120

119

Regulation Z comment 4(a)-1.

120

For example, the Board initially adopted comment 226.4(a)-4 to indicate that a fee charged by a card issuer when a consumer takes a cash advance on a credit card account using an ATM was not a finance charge to the extent that it did not exceed the charge imposed by the card issuer on its cardholders for using an ATM to withdraw cash from a consumer asset account, such as a checking or savings account. 48 FR 54642 (Dec. 6, 1983) and 49 FR 40560 (Oct. 17, 1984). After subsequent rulemaking activity, current comment 4(a)-4.1 provides that, for example, any charge imposed on a credit cardholder by a card issuer for the use of an ATM to obtain a cash advance is a finance charge regardless of whether the card issuer imposes a charge on its debit cardholders for using the ATM to withdraw cash from a consumer asset account, such as a checking or savings account. 74 FR 5263 (Jan. 29, 2009).

Section 1026.4(b) lists examples of the types of charges that generally are finance charges. In particular, § 1026.4(b)(2) provides that the finance charge includes “[s]ervice, transaction, activity, and carrying charges, including any charge imposed on a checking or other transaction account (except a prepaid account as defined in § 1026.61) to the extent that the charge exceeds the charge for a similar account without a credit feature.”

The historical roots of § 1026.4(b)(2) trace back to the first version of Regulation Z, published by the Board in 1969. In that version, § 226.4(a)(2) indicated that the finance charge included service, transaction, activity, or carrying charges. The 1969 version of § 226.4(a)(2) also included a footnote stating that the charges listed in § 226.4(a)(2) included “any charges imposed by the creditor in connection with a checking account to the extent that such charges exceed any charges the customer is required to pay in connection with such account when it is not being used to extend credit.”

121

34 FR 2002, 2004 n.2 (Feb. 11, 1969).

As part of its 1981 amendments to Regulation Z, the Board moved the text of § 226.4(a)(2) to its current location in § 1026.4(b)(2) and incorporated the language from the accompanying footnote into the main regulation text.

122

Later that year, the Board also published comment 4(b)(2)-1, which provided two examples of service charges assessed on asset accounts with tied overdraft lines of credit that are not finance charges.

123

In 1998, the Board revised comment 4(b)(2)-1 to clarify that a service charge on a checking or other transaction account with a credit feature is a finance charge only if the charge exceeds the charge for a similar account without a credit feature.

124

122

46 FR 20848, 20894 (Apr. 7, 1981).

123

46 FR 50288, 50299 (Oct. 9, 1981).

124

63 FR 16669, 16675 (Apr. 6, 1998).

The CFPA generally granted rulemaking authority under the TILA and transferred primary oversight of Regulation Z to the CFPB. Subsequently, the CFPB renumbered § 226.4 to § 1026.4.

125

In 2016, the CFPB amended both § 1026.4(b)(2) and comment 4(b)(2)-1 to exclude prepaid accounts as defined in § 1026.61.

126

As part of that rulemaking, the CFPB provided detailed guidance in comment 4(b)(11)(ii) regarding how fees on prepaid accounts with a covered separate credit feature accessible by a hybrid prepaid-credit card should be compared to fees imposed on prepaid accounts without a covered separate credit feature. This guidance was more detailed and more restrictive than the guidance provided under § 1026.4(b)(2) with regard to checking and transaction accounts other than prepaid accounts.

127

As part of this guidance, the CFPB noted that the per transaction fee for a credit extension in the course of a transaction from a covered separate credit feature cannot be compared to a fee for declining to pay a transaction that is imposed on a prepaid account without such a credit feature in the same prepaid account program.

128

The CFPB was concerned about possible evasion of the rule, noting that many prepaid cardholders who wish to use covered separate credit features may not have other asset accounts or savings accounts from which they can transfer funds to prevent an overdraft on the prepaid account in the course of authorizing, settling, or otherwise completing a transaction to obtain goods or services, obtain cash, or conduct person-to-person (P2P) transfers.

129

As a result, if such a comparison were permitted, card issuers could charge a substantial fee to transfer funds from the checking account or savings account during the course of a transaction using the prepaid account (which many prepaid cardholders who wish to use covered separate credit features may not be able to use as a practical matter) and then charge that same substantial per transactions fee for credit drawn or transferred from the covered separate credit feature during the course of a transaction without such fee being considered a finance charge.

130

The CFPB thus concluded that it was appropriate to limit the comparable fee in this case to per transaction fees imposed on prepaid accounts for transactions that access funds in the prepaid account in the same prepaid account program that does not have a covered separate credit feature because all prepaid accountholders can use prepaid accounts to make transactions that access available funds in the prepaid account and thus these types of transactions are available to all prepaid accountholders.

131

125

76 FR 79767 (Dec. 22, 2011).

126

81 FR 83934, 84369, 84374 (Nov. 22, 2016).

127

Id.

at 84185.

128

Id.

at 84186.

129

Id.

130

Id.

at 84186-87.

131

Id.

at 84187.

i. What is changing?

The proposal would revise § 1026.4(b)(2) and comment 4(b)(2)-1 to provide that § 1026.4(b)(2) does not apply to “covered asset accounts” as defined in § 1026.62. This proposed exception would mirror the exception created by the CFPB's Prepaid Rule.

The proposal also would add a paragraph at § 1026.4(b)(12). Proposed § 1026.4(b)(12) would add examples of finance charges with regard to covered asset accounts, as defined in proposed § 1026.62(b)(2). These proposed changes would broaden the definition of

“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. The effect of the proposed changes would be to limit the existing exclusion in § 1026.4(b)(2) such that nearly all service, transaction, activity, and carrying charges imposed on covered asset accounts, including, in particular, fees commonly known as “transfer fees” for moving funds from overdraft lines of credit to covered asset accounts, would be “finance charges” under Regulation Z unless subject to another exclusion or limitation.

132

Under the proposal, fees would continue to be excluded from the definition of finance charge if they are described in existing § 1026.4(c) through (e).

ii. Charges Imposed on Credit Accounts Required by § 1026.62(c) (§ 1026.4(b)(12)(i))

Proposed § 1026.4(b)(12)(i) would specify that any service, transaction, activity, or carrying charge imposed on the separate credit account required by § 1026.62(c) is a finance charge. That is, the fees described in proposed § 1026.4(b)(12)(i) would be finance charges without regard to a comparison to fees for a comparable cash transaction.

Under § 1026.62(c), the required credit account exists for the purpose of providing credit. Therefore, service, transaction, activity, or carrying charges on this separate credit account are, per the finance charge definition in § 1026.4(a), generally imposed as an incident to or a condition of the extension of credit, separate and distinct from any such fees applied to a separate checking or other transaction account. Because of the nature of the credit account, it would be difficult or impossible to determine which, if any, charge applied to a checking or other asset account is a charge for a similar or comparable cash transaction for the purpose of § 1026.4(a). As with the Board's analysis in the 2009 amendment regarding credit card fee transactions, there is not necessarily a single or standard checking account to use for fee comparison. For example, there may be different fees applied to a checking account with a low balance minimum versus another type of checking account. Thus, it would be difficult in many cases to say which checking account provides the appropriate fee for comparison. Even assuming a comparable transaction could be identified, the disclosure a consumer might receive would depend on whether the creditor provides other asset accounts and imposes service, transaction, activity, or carrying charges on those accounts and whether the fees applied to those accounts exceed the fees for those on the separate credit account. As with the distinctions analyzed by the Board in the 2009 amendment, it is not clear that these distinctions are meaningful to consumers.

133

The CFPB has thus preliminarily determined that any service, transaction, activity, or carrying charge imposed on the separate credit account required by § 1026.62(c) would be a finance charge, except for charges specifically excluded by paragraphs (c) through (e) of section 1026.4.

133

74 FR 5263 (Jan. 29, 2009). As discussed above, the purposes of TILA are to provide a meaningful disclosure of credit terms to enable consumers to compare credit terms available in the marketplace more readily and avoid the uninformed use of credit and to protect consumers against inaccurate and unfair credit billing and credit card practices. 15 U.S.C. 1601(a).

iii. Charges Imposed on Covered Asset Accounts (§ 1026.4(b)(12)(ii))

Proposed § 1026.4(b)(12)(ii) would specify that any service, transaction, activity, or carrying charge imposed on the 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 covered overdraft credit tied to it. That is, any such charge is a finance charge to the extent that it exceeds a comparable charge imposed on a checking or other transaction account that is not a covered asset account. This provision would largely mirror existing § 1026.4(b)(2) but with adjustments for covered asset accounts.

iv. Examples of Charges Imposed on Covered Asset Accounts (§ 1026.4(b)(12)(iii)(A) Through (C))

Proposed § 1026.4(b)(12)(iii) would describe certain charges on a checking or other transaction account that does not have covered overdraft credit tied to it that are not comparable to charges imposed on a covered asset account, which, by definition, does have covered overdraft credit tied to it. These charges would therefore not be permitted to be subtracted from charges applied to the covered asset account for the purpose of determining whether or not a charge on the covered asset account is a finance charge.

Proposed § 1026.4(b)(12)(iii)(A) would exclude from the determination of a finance charge comparison of a charge for authorizing or paying a transaction that overdraws the checking or other transaction account that does not have covered overdraft credit. Proposed § 1026.4(b)(12)(iii)(B) would exclude from the determination of a finance charge comparison of a charge for declining to authorize or pay a transaction, and proposed § 1026.4(b)(12)(iii)(C) would exclude from the determination of a finance charge comparison of a charge for returning a transaction unpaid.

134

Thus, under proposed § 1026.4(b)(12)(iii)(A) through (C), a very large financial institution may impose a service fee on a covered asset account when the institution transfers funds into the account from a covered overdraft credit account to cover a transaction that would otherwise overdraw the covered asset account. The institution may also impose a fee on a checking or other transaction account that does not have covered overdraft credit (

i.e.,

is not a covered asset account) when the institution authorizes or pays a transaction that would otherwise overdraw the checking or other transaction account, declines to authorize or pay a transaction that would otherwise overdraw the checking or other transaction account, or returns unpaid a transaction that would otherwise overdraw the checking or other transaction account. However, the fee applied to a checking or other transaction account that does not have covered overdraft credit may not be compared to the fee on a covered asset account for the transfer of funds to cover a transaction. Accordingly, under proposed § 1026.4(b)(12)(iii)(A) through (C), the full amount of the service fee on a covered asset account when a very large financial institution transfers funds into the account from a covered overdraft credit account to cover a transaction that would otherwise overdraw the covered asset account would be a finance charge. Taken together, these three provisions would clarify that the service, transaction, activity, or carrying charges imposed on covered asset accounts may not, for the purposes of determining whether such fees are “finance charges,” be reduced by fees that relate to granting or denying a transaction that would overdraw an account without covered overdraft credit.

134

Some or all of the fees described in proposed § 1026.4(b)(12)(iii)(A) through (C) are sometimes referred to as “overdraft fees,” “declination fees,” or “NSF fees.” Proposed § 1026.4(b)(12)(iii)(A) through (C) are broadly inclusive of the types of fees described therein, regardless of how such fees are labeled.

The CFPB has made the preliminary determination to exclude from the determination of a finance charge these categories of charges for two reasons.

First, these types of charges are charges associated with decisions regarding whether or not to extend credit. The charges described in proposed § 1026.4(b)(12)(iii)(A) are applied if credit is extended; the charges described in proposed § 1026.4(b)(12)(iii)(B) and (C) are applied if credit is denied. As such, they are not charges associated with cash transactions, comparable or otherwise, and should not be compared to or subtracted from fees associated with covered overdraft credit. Additionally, the charges described in proposed § 1026.4(b)(12)(iii)(B) may be described as a penalty, while the charges described in proposed § 1026.4(b)(12)(iii)(C) may be described as a service charge. In neither case are the charges of a type payable in comparable cash transactions.

v. Additional Examples of Charges Imposed on Covered Asset Accounts (§ 1026.4(b)(12)(iii)(D) and (E))

Proposed § 1026.4(b)(12)(iii)(D) would exclude, for purposes of determining whether the fee is a finance charge, comparison of a charge for transferring funds from any credit account into a checking or other transaction account that does not have covered overdraft credit. Proposed § 1026.4(b)(12)(iii)(E) would exclude, for purposes of determining whether the fee is a finance charge, comparison of a charge for transferring funds from any other asset account, such as a savings account, into a checking or other transaction account that does not have covered overdraft credit. Thus, under proposed § 1026.4(b)(12)(iii)(D) and (E), a very large financial institution may impose a service fee on a covered asset account when the institution transfers funds into the account from a covered overdraft credit account to cover a transaction that would otherwise overdraw the covered asset account. The institution may also impose a fee to transfer funds into the checking or other transaction account (

i.e.,

an account that is not a covered asset account) from any credit account or from any other asset account, such as a savings account, to cover a transaction that would otherwise overdraw the checking or other transaction account. But the fee applied to a checking or other transaction account that does not have covered overdraft credit may not be compared to the fee on a covered asset account for the transfer of funds to cover a transaction. Accordingly, under proposed § 1026.4(b)(12)(iii)(D) and (E), the full amount of the service fee on a covered asset account when a very large financial institution transfers funds into the account from a covered overdraft credit account to cover a transaction that would otherwise overdraw the covered asset account would be a finance charge.

The exclusion in proposed § 1026.4(b)(12)(iii)(D) addresses charges in connection with an extension of credit that is regulated as credit, albeit not overdraft credit. Because these are charges payable in a credit transaction, the CFPB has preliminarily determined that these are not charges payable in a comparable cash transaction and should not be used for comparison in the determination of a finance charge.

The exclusion in proposed § 1026.4(b)(12)(iii)(E) addresses charges to transfer funds into a checking or other transaction account that is not a covered asset account from any other asset account to cover a transaction that would otherwise overdraw the checking or other transaction account. This is because the CFPB is concerned about the possibility for evasion from the requirements of Regulation Z if comparison of the charges described in § 1026.4(b)(12)(iii)(E) were to be permitted.

The majority of combined overdraft and NSF fees are paid by a small subset of 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.

135

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.

136

135

CFPB 2017 Data Point at 5; CFPB 2014 Data Point at 12.

136

CFPB 2017 Data Point at 5.

Consumers whose accounts are frequently overdrawn are typically more financially insecure than those who do not overdraw or who do so infrequently.

137

Accordingly, many consumers who overdraft may not have other asset accounts or may not have sufficient funds in those accounts from which they can transfer funds to prevent such overdraft.

137

See id.

at 5-6.

If such a comparison were permitted, a bank could potentially avoid the definition of “finance charge” by charging a substantial fee for transferring funds into a checking or other transaction account that is not a covered asset account from any other asset account and then charge that same substantial amount for any service, transaction, activity, or carrying charge imposed on the covered asset account. By comparing the two substantial fees to each other, the amount of the charge on the covered asset account would not be considered a finance charge. For the subset of consumers who pay the majority of overdraft and NSF fees, however, this comparison of fees would be a comparison between a product that such consumers can readily access (

i.e.,

covered asset accounts) to a product that a majority of such consumers may not be able to access (

i.e.,

other asset accounts) because they do not have such accounts or do not have sufficient funds in those accounts to easily execute transfers. As a result, the CFPB preliminarily concludes that a per transaction fee for transferring asset funds from other asset accounts such as a savings account should not be compared with (should not be allowed to be subtracted from) a service, transaction, activity, or carrying charge assessed on a covered asset account. The CFPB seeks comment on the proposed revisions to § 1026.4(b)(2), the proposal to add § 1026.4(b)(12), and the CFPB's preliminary conclusions regarding comparable cash transactions.

2. History of the Current § 1026.4(c)(3) Exception

Historically, whenever a consumer bounced a check written against a deposit account that lacked a credit feature, the consumer's financial institution typically returned the check unpaid and assessed the consumer an NSF fee. In addition, the payee on the check might have taken various actions against the consumer, such as assessing the consumer a late fee or returned item fee, reporting the consumer's payment as late to a credit bureau, or bringing legal action against the consumer for writing a bad check.

138

However, instead of returning the check unpaid, a financial institution, in its discretion, might have paid the check into overdraft as a courtesy.

139

138

74 FR 5212, 5214 (Jan. 29, 2009); 74 FR 59033, 59035 (Nov. 17, 2009); Steve Cocheo,

Follow the Bouncing Check,

95 ABA Banking J. 32, at 34 (Apr. 2003) (Cocheo 2003).

139

See

Peter G. Weinstock & Stephanie E. Dreyer,

Overdraft Protection Programs: The Emerging Battleground for Bankers and Consumer Advocates,

121 Banking L. J. 791, at 795 (2004) (“Banks have been paying NSF items as a service to customers on a case-by-case basis for decades.”);

see also

Cocheo 2003 at 34 (“Our overdraft program formalizes the traditional courtesy of paying insufficient checks. . . .”) (quoting Gaynell Lawson, Executive Vice-President and Chief Financial Officer of Citizens Bank of Blount County).

Although Congress did not exempt any category of overdraft credit from TILA,

140

the Board used its exception (not its interpretive) authority to create a limited exception for this longstanding practice when it issued Regulation Z in

1969.

141

Specifically, the Board added § 226.4(d), which provided that “[a] charge imposed by a bank for paying checks which overdraw or increase an overdraft in a checking account is not a finance charge unless the payment of such checks and the imposition of such finance charge were previously agreed upon in writing.”

142

A bank providing discretionary, check-centric overdraft (

a.k.a.

“bounce-check protection” or “courtesy overdraft protection” services, as noted in later

Federal Register

publications

143

) was not a creditor subject to Regulation Z because, pursuant to this exception, it did not impose a finance charge (and otherwise did not structure the repayment of credit by written agreement in more than four installments).

144

As Board commentary on Regulation Z noted, this exception enabled a bank to “occasionally, as an accommodation to its customer, honor a check which inadvertently overdraws that account” without having to comply with the requirements of Regulation Z.

145

140

See

Public Law 90-321, 82 Stat. 146 (May 29, 1968), codified as amended at 15 U.S.C. 1601

et seq.

141

34 FR 2002, 2004 (Feb. 11, 1969); 73 FR 28904, 28927 (May 19, 2008) (“Historically, if a consumer engaged in a transaction that overdrew his or her account, depository institutions used their discretion on an ad hoc basis to pay the overdraft, usually imposing a fee. The Board recognized this longstanding practice when it initially adopted Regulation Z in 1969 to implement TILA.”).

142

34 FR 2002, 2004 (Feb. 11, 1969).

143

70 FR 29582, 29582 n.1 (May 24, 2005).

144

See

12 CFR 1026.2(a)(17)(i).

145

42 FR 22360, 22362 (May 3, 1977).

In 1981, the Board amended Regulation Z to, among other things, make “a few minor editorial changes” to the § 226.4(d) exception.

146

Specifically, the Board changed the term “bank” to “financial institution” and the term “checks” to “items.”

147

The Board made these changes “to reflect the ability of financial institutions other than banks, such as savings and loan associations, to pay items that are similar to checks, such as negotiable orders of withdrawal, into overdraft.”

148

Additionally, the Board renumbered § 226.4(d) to § 226.4(c)(3).

149

By making these “minor editorial changes,” the Board stated that “[n]o substantive change is intended . . . .”

150

In other words, the Board did not change the purpose of the § 226.4(d) exception, which was to allow financial institutions to provide consumers with courtesy check-centric overdraft services without having to comply with the requirements of TILA and Regulation Z.

146

46 FR 20848, 20855 (Apr. 7, 1981).

147

Id.

148

Id.

149

Id.

150

Id.

The language from the Board's 1981 version of § 226.4(c)(3) remains in effect unchanged at § 1026.4(c)(3) in the CFPB's current version of Regulation Z.

151

In 2016, the CFPB added an additional sentence to the end of § 1026.4(c)(3) to clarify that the paragraph does not apply to credit offered in connection with a prepaid account as defined in § 1026.61.

See

81 FR 83934, 84179 (Nov. 22, 2016). However, this amendment did not impact the text of the portion of § 1026.4(c)(3) adopted in 1981.

3. Proposed Changes to the § 1026.4(c)(3) Exception

It is the CFPB's preliminary view that the § 1026.4(c)(3) exception is overbroad for purposes of the current non-covered overdraft market. To address the issue, the CFPB proposes to add a new sentence to the end of § 1026.4(c)(3) that would provide that the paragraph no longer applies to “above breakeven overdraft credit” as that term is defined in proposed § 1026.62. As discussed in part V.A, the CFPB proposes to apply its proposed § 1026.4(c)(3) amendment only to very large financial institutions.

The CFPB proposes to define the term “above breakeven overdraft credit” at § 1026.62(b)(1) to mean overdraft credit extended by a very large financial institution to pay a transaction on which, as an incident to or a condition of the overdraft credit, the very large financial institution imposes a charge or combination of charges exceeding the average of its costs and charge-off losses for providing non-covered overdraft credit as described in § 1026.62(d). The CFPB proposes to establish above breakeven overdraft credit by reference to the average of a very large financial institution's cost and charge off losses for providing non-covered overdraft credit rather than the cost and estimated charge-off losses for providing non-covered overdraft credit for each separate transaction because the CFPB has preliminarily determined, based on its supervisory experience, that many financial institutions currently do not track their costs and charge-off losses at the transaction level, but generally can calculate their average costs and charge-off losses at the product level. Further, the CFPB expects that an institution-wide calculation would be easier for very large financial institutions to administer.

The CFPB is proposing these changes for several independent reasons.

First, the market for non-covered overdraft credit has changed in important ways—many financial institutions have automated their non-covered overdraft programs and expanded them to cover non-check transactions, while also adjusting their account pricing structure to more heavily emphasize overdraft fees.

152

These changes have caused the market for non-covered overdraft credit to move away from the historical courtesy model to the point that, for a significant number of consumers, non-covered overdraft credit is no longer an occasional accommodation for inadvertent overdrafts.

152

74 FR 5212 (Jan. 29, 2009); 81 FR 83934, 83950-51 (Nov. 22, 2016).

Unlike in 1969, when checks made up the lion's share of overdraft transactions,

153

recent CFPB analysis of account data from a number of large banks showed that on average overall only 10.36 percent of monthly debit transactions occurred by check, while 62.14 percent occurred by debit card (both one-time and recurring), 12.14 percent occurred by ACH, 6.43 percent occurred by ATM, 0.71 percent occurred by bank teller, and the remainder occurred by other means.

154

153

Stephen Quinn & William Roberds,

The Evolution of the Check as a Means of Payment: A Historical Survey,

93 Fed. Rsrv. Bank of Atlanta Econ. Rev. 1, at 21 (2008)

154

CFPB 2014 Data Point at 17.

This shift away from check transactions is significant because, as financial institutions have automated their non-covered overdraft programs and expanded them to cover non-check transactions, the sheer volume of overdraft transactions and associated fees has increased.

155

This trend especially is pronounced with respect to debit cards, where CFPB research shows that incidence of overdraft increases for consumers who use debit cards. For example, CFPB research shows that 92.3 percent of accounts that do not use debit cards have no overdrafts in a year of account use and only 0.6 percent of such accounts incur more than 10 overdrafts per year.

156

In contrast, accounts that use their debit cards more than 30 times per month have the lowest percentage of accounts with no overdraft (51.2 percent) and the highest percentage of accounts that overdraft more than 10 times per year (18.0 percent).

157

In other words, for many consumers who use debit cards frequently, non-covered overdraft credit services are no longer provided as an occasional accommodation.

158

Moreover, financial institutions today routinely extend overdraft credit in circumstances where they stand to generate more direct revenue from extending overdraft credit to cover a transaction than they would from declining it (because, for example, consumers are rarely charged NSF fees for declined debit card transactions,

159

and nearly two-thirds of banks with over $10 billion in assets have eliminated NSF fees

160

161

As a result of these changes, non-covered overdraft programs now generate a substantial portion of the direct fee revenue that many financial institutions make from checking accounts (and much of the total revenue that financial institutions make from low-balance accounts), which has encouraged some financial institutions to promote consumers' use of non-covered overdraft credit and/or to calibrate their systems to increase overdraft fee revenue.

162

This shift represents a significant departure from the historical courtesy model, which provided an accommodation to consumers for the occasional inadvertent overdraft.

155

81 FR 83934, 83950-51 (Nov. 22, 2016).

156

CFPB 2014 Data Point at 15 tbl.4c.

157

Id.

158

42 FR 22360, 22362 (May 3, 1977) (“[Section 226.4(d) (now section 1026.4(c)(3)] 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.”).

159

74 FR 5212, 5217 (Jan. 29, 2009).

160

See

CFPB October 2023 Data Spotlight.

161

This was not always the case. Historically, financial institutions charged no more for honoring an overdrawing check through non-covered overdraft credit than they did for returning the check unpaid. For example, a 1976 report on bank fees presented the results of a survey of banks in New York and Washington, DC. Of the 41 banks surveyed, 39 charged overdraft fees that were equal to or less than the amount of their NSF fees.

See

Senate Staff Report at 10-11.

162

See

81 FR 83934, 83950-51 (Nov. 22, 2016); 70 FR 29582, 29583 (May 24, 2005); CFPB 2013 White Paper at 16-17; CFPB Winter 2015 Highlight at 8-9; FDIC 2018 Highlight at 12; FDIC 2019 Highlight at 2-3.

The proposed changes described in this section would return the exception to its original conception—excepting overdraft services from Regulation Z when offered as a courtesy or accommodation to customers—while adapting it to fit within the modern payments system. The concept of a courtesy or an accommodation is the provision of a service primarily for the convenience of a customer. A credit product that produces large amounts of revenue and profit, and is provided to many people who may not want the service, is not consistent with the concept of providing an additional service as a courtesy. The CFPB preliminarily finds that, where a financial institution sets its overdraft fees at or below its breakeven point, it provides a courtesy service to consumers who overdraw their accounts. Conversely, where a financial institution sets its overdraft fees above its breakeven point, and profits from those fees, it cannot be said to be providing a courtesy. The CFPB has preliminarily determined that the § 1026.4(c)(3) exception should continue to apply to overdraft fees set at or below the breakeven point, so that very large financial institutions have the option to recover their costs and losses associated with providing non-covered overdraft credit to consumers (without having to comply with Regulation Z), and thus, are not disincentivized from providing non-covered overdraft to consumers as a convenience.

In addition to returning the § 1026.4(c)(3) exception to its original courtesy conception, an independent justification for the proposed amendments to § 1026.4(c)(3) is that they would further TILA's purposes of promoting the informed use of credit and comparison shopping across credit products. Currently, most non-covered overdraft credit is subject to Regulations DD and E. Although Regulation DD and Regulation E require certain disclosures for overdraft services, neither regulation requires that such non-covered overdraft credit be disclosed as a credit product. Instead, both regulations use terms like overdraft fees, overdraft practices, or overdraft services that tend to obscure the fact that financial institutions are providing consumers a credit product. Applying the Regulation Z regulatory framework would benefit consumers by ensuring that above breakeven overdraft credit is disclosed as a credit product and treated like other credit products. Treating above breakeven overdraft credit like other credit would benefit consumers by helping them understand that they are entering into a contract for a credit product provided by a creditor. Unlike the disclosures required under Regulation DD and Regulation E, the disclosures required by Regulation Z are designed to set forth contractual terms for credit products clearly. Providing such disclosures will help promote the informed use of credit. In addition, treating above breakeven overdraft credit like other credit would benefit consumers by aligning the disclosures for such credit with other credit types and by applying Regulation Z's substantive credit protections consistently across similar credit products.

Further, disclosing above breakeven overdraft credit under the Regulation Z regulatory framework would make it easier for consumers to compare the cost of such credit with the cost of other credit products, such as linked credit cards, because financial institutions would present the credit terms for above breakeven overdraft credit in the same form that creditors present the credit terms of other credit products. In its November 2009 rulemaking finalizing the current Regulation E opt-in rule, the Board acknowledged that, based on its own consumer testing, consumers are interested in receiving more information about alternatives to non-covered overdraft credit services on ATM and one-time debit card transactions prior to deciding whether or not to opt in to such services.

163

Even though consumers generally are interested in alternatives to non-covered overdraft credit services, some consumers, including consumers who may even have alternative credit available to them,

164

continue to be frequent users of non-covered overdraft credit services despite its higher cost relative to other forms of credit. For example, CFPB research found that in 2012 the median overdraft fee was $34, the median size of a debit card transaction incurring an overdraft fee was $24, and that the majority of non-covered overdraft credit transactions were repaid within three days.

165

Putting these figures in lending terms, the annual percentage rate (APR) for such a non-covered overdraft credit transaction would be 17,000 percent (if transaction fees were included in the APR calculation).

166

By comparison, CFPB research found that the APR for a typical payday loan was 391 percent and APRs on credit cards can range between 12 and 30 percent.

167

The fact that frequent overdrafters continue to use non-covered overdraft credit services despite its higher cost relative to other credit suggests that some frequent overdrafters have difficulty comparing non-covered overdraft credit services with available alternatives. Disclosing above breakeven overdraft credit services under the Regulation Z regulatory framework would promote

the informed use of credit by ensuring that credit terms were disclosed consistently across competing credit products, thereby helping consumers compare such credit with alternative credit options.

163

74 FR 59033, 59048 (Nov. 17, 2009).

164

CFPB 2017 Data Point at 16 tbl. 2.

165

CFPB 2013 White Paper at 52; CFPB 2014 Data Point at 5.

166

Press Release, CFPB,

CFPB Finds Small Debit Purchases Lead to Expensive Overdraft Charges

(July 31, 2014),

https://www.consumerfinance.gov/about-us/newsroom/cfpb-finds-small-debit-purchases-lead-to-expensive-overdraft-charges/.

Recent supervisory data the CFPB has collected, reflecting transactions from 2022 and 2023, found that the median debit card overdraft resulted in an overdraft credit extension of approximately $25.50. Assuming a credit extension of $25.50, the $35 overdraft fee typical of very large financial institutions, and a three-day repayment period results in a similar APR of over 16,000 percent.

167

CFPB,

Payday Loans and Deposit Advance Products,

at 9 (Apr. 24, 2013),

https://files.consumerfinance.gov/f/201304_cfpb_payday-dap-whitepaper.pdf;

CFPB,

Ask CFPB: What is a payday loan?, https://www.consumerfinance.gov/ask-cfpb/what-is-a-payday-loan-en-1567/

(last reviewed Jan. 17, 2022).

Moreover, the CFPB expects that applying the Regulation Z regulatory framework to above breakeven overdraft credit services would benefit consumers by applying the regulation's existing substantive protections to such credit services. For example, the CFPB's proposal, as discussed in additional detail in this notice, would apply the due date requirement in 1026.7(b)(11)(i)(A), the offset prohibitions in § 1026.12(d)(1), and the ability to pay provisions in § 1026.51 to covered overdraft credit accounts (including credit that currently is non-covered above breakeven overdraft credit) that can be accessed by a hybrid debit-credit card. Therefore, applying Regulation Z to above breakeven overdraft credit would prohibit very large financial institutions from immediately taking funds from any incoming deposit in repayment of the consumer's overdraft balance, would require very large financial institutions to establish due dates on the same day of each billing cycle, and would require very large financial institutions to assess the consumer's ability to pay for such credit—all protections that the current Regulation DD and Regulation E regulatory frameworks do not provide.

The CFPB acknowledges that the current § 1026.4(c)(3) exclusion has existed in its present form for decades and that very large financial institutions have undertaken efforts to ensure that their non-covered overdraft credit services comply with Regulations DD and E. The CFPB also recognizes that some consumers have come to rely on the availability of non-covered overdraft credit. The CFPB's proposal reflects, in part, an effort to balance these reliance interests against the other considerations discussed above in this section. The proposed changes to § 1026.4(c)(3) would require very large financial institutions to comply with Regulation Z when providing above breakeven overdraft credit services, but would allow them to continue to comply with Regulations DD and E when providing non-covered overdraft credit services at or below breakeven pricing. Thus, a very large financial institution that has invested in compliance with Regulations DD and E could maintain its current processes for providing consumers with non-covered overdraft credit so long as it priced such credit at or below breakeven pricing.

i. Alternatives to the Proposed § 1026.4(c)(3) Amendment Considered

During the development of its proposal, the CFPB considered alternatives to its proposed amendment to § 1026.4(c)(3) including (1) striking § 1026.4(c)(3) from Regulation Z in its entirety and (2) updating the opt-in disclosure requirements at § 1005.17 of Regulation E in a manner that would better disclose the costs associated with authorizing non-covered overdraft protection for ATM and debit card transactions.

168

Press Release, CFPB,

CFPB Unveils Prototypes of “Know Before You Owe” Overdraft Disclosure Designed to Make Costs and Risks Easier to Understand

(Aug. 4, 2017),

https://www.consumerfinance.gov/about-us/newsroom/cfpb-unveils-prototypes-know-you-owe-overdraft-disclosure-designed-make-costs-and-risks-easier-understand/.

With respect to the first alternative, the CFPB has preliminarily determined that it should not eliminate all non-covered overdraft credit. The CFPB believes that the proposed amendment to § 1026.4(c)(3) is preferable because it would address the CFPB's concerns relating to consumers' informed use of above breakeven overdraft credit, including a consumer's ability to compare competing credit offers, and apply other substantive protections, including ability to pay requirements and offset restrictions, while allowing very large financial institutions to still offer non-covered overdraft credit as a courtesy if they chose to do so.

With respect to the second alternative, the CFPB preliminarily determined that Regulation E opt-in disclosures would not communicate the cost of above breakeven overdraft credit as effectively as Regulation Z disclosures. As discussed above, applying Regulation Z will ensure that above breakeven overdraft credit is disclosed as a credit product and treated like other credit products. In addition, Regulation E disclosures distinguish between overdraft transactions completed via electronic fund transfers and overdraft transactions completed via other funds transfer methods (such as checks), whereas Regulation Z disclosures would apply identically to above breakeven overdraft transactions regardless of fund transfer method. Modifying the opt-in disclosure requirements at § 1005.17 of Regulation E also would not provide other substantive protections available through Regulation Z, such as the ability to pay requirements and the offset prohibition discussed above. These substantive protections are important. For example, by requiring financial institutions to assess consumers' ability to pay, the proposed rule would ensure that financial institutions confirm that consumers could make the required minimum periodic payments under the terms of their account based on their income or assets and their current obligations. As another example, by prohibiting offset and requiring the due date to be on the same day each month for covered overdraft credit accessible by a hybrid debit-credit card, the proposed rule would give consumers more time to repay overdraft credit and greater control over how to structure those repayments. Therefore, the CFPB preliminarily believes that its proposal better protects consumers than an approach that merely updates the opt-in disclosure requirements at § 1005.17 of Regulation E.

ii. How To Calculate Whether Overdraft Credit Is Above Breakeven Overdraft Credit

To clarify the circumstances under which overdraft credit offered by a very large financial institution is “above breakeven overdraft credit” for purposes of proposed § 1026.62(b)(1), the CFPB also proposes to add a paragraph at § 1026.62(d).

Proposed § 1026.62(d)(1) would clarify that overdraft credit offered by a very large financial institution is “above breakeven overdraft credit” for purposes of proposed § 1026.62(b)(1) if the charge or combination of charges for such credit exceeds the greater of (1) the pro rata share of the very large financial institution's annual total direct costs and charge-off losses for providing non-covered overdraft credit calculated in accordance with § 1026.62(d)(2); or (2) an estimate published by the CFPB.

For purposes of proposed § 1026.62(d)(1), a “combination of charges” would include all revenue received in connection with an overdraft transaction when determining whether the charges for that transaction exceed its average costs and charge-off losses for providing non-covered overdraft credit, including any extended or sustained overdraft fees, any interest charges on outstanding overdraft balances, and any other payments the very large financial institution receives in connection with an overdraft transaction or transactions.

The approach outlined in proposed § 1026.62(d)(1) would provide a very large financial institution with two methods for determining whether its current charge for an overdraft transaction exceeds the average of its costs and charge-off losses for providing non-covered overdraft credit—the breakeven standard described at proposed § 1026.62(d)(1)(i) and the benchmark fee described at proposed

§ 1026.62(d)(1)(ii). To the extent that a very large financial institution does not determine or prefers not to calculate its average costs and charge-off losses for providing non-covered overdraft credit using the breakeven standard described at proposed § 1026.62(d)(1)(i), the proposal would permit the very large financial institution to determine whether it is offering above breakeven overdraft credit based solely on the benchmark fee at proposed § 1026.62(d)(1)(ii). The CFPB has preliminarily determined that this approach would decrease compliance costs for some very large financial institutions by providing them with a simple bright-line method for determining whether the overdraft credit they extend is above breakeven overdraft credit. Other very large financial institutions would be permitted the flexibility to calculate on their own whether the overdraft credit they extend is above breakeven pricing.

To employ the breakeven standard described at proposed § 1026.62(d)(1)(i), a very large financial institution would determine its total direct costs and charge-off losses for providing non-covered overdraft credit to all accounts open at any point during the previous 12 months and then divide that figure by the total number of non-covered overdraft transactions attributable to those accounts occurring the previous 12 months. The CFPB proposes to use figures from the prior 12 months because (1) reviewing annualized data would even out any seasonal variations that could occur with a shorter review period; (2) very large financial institutions likely already collect annualized cost and loss data; and (3) reviewing annualized data would require very large financial institutions to make average cost and loss calculations only once per year. When determining the total number of non-covered overdraft transactions occurring the previous 12 months, the financial institution may account for non-covered overdraft transactions that do not incur fees, including those that do not incur fees consistent with fee waiver policies, by excluding from its transaction total any non-covered overdraft transaction for which the financial institution either refunded or did not assess any fee or charge. The CFPB believes that allowing very large financial institutions to adjust their transaction totals to account for overdraft transactions that do not incur fees would give financial institutions flexibility to maintain or to implement fee waiver policies.

Under the proposal, when a very large financial institution applies the breakeven standard either for the first time or after transitioning from the benchmark fee described at proposed § 1026.62(d)(1)(ii), it may include direct costs and charge-off losses from any transaction that was a non-covered overdraft transaction during the prior 12-months even if, applying the breakeven standard, it would have been considered above breakeven overdraft credit during that period. When determining the total number of non-covered overdraft transactions occurring the previous 12 months, a very large financial institution applying the breakeven standard either for the first time or after transitioning from the benchmark fee described at proposed § 1026.62(d)(1)(ii) also may exclude from its transaction total any non-covered overdraft transaction for which the financial institution either refunded or did not assess any fee or charge.

To provide additional guidance regarding the types of costs and charge-off losses a very large financial institution could consider when calculating the breakeven standard, the CFPB also proposes to add a paragraph at § 1026.62(d)(2). Proposed § 1026.62(d)(2) would provide that, when calculating the breakeven standard, a very large financial institution could consider costs and charge-off losses that are specifically traceable to its provision of non-covered overdraft credit in the previous year. The CFPB proposes to allow very large financial institutions to consider only costs and charge-off losses that are specifically traceable to their provision of non-covered overdraft credit to prevent very large financial institutions from employing the breakeven standard in a manner that would circumvent § 1026.62(b)(1). For example, without the specifically traceable restriction, very large financial institutions might include in their average cost and loss calculations costs and charge-off losses that are more appropriately attributable either to other segments of their deposit business or to their deposit business overhead.

Based on its previous experience collecting overdraft cost data from financial institutions, the CFPB has preliminarily determined that specifically traceable costs and charge-off losses would include a very large financial institution's cost of funds for providing non-covered overdraft credit, its charge-off losses for non-covered overdraft credit, and any operational costs that are directly attributable to its non-covered overdraft program. For example, if a very large financial institution uses issue tagging in its call center to reasonably and accurately gauge the number of customer service calls it receives relating to non-covered overdraft credit, direct costs relating to those customer service calls would be specifically traceable and the very large financial institution could include the direct costs relating to those calls in its calculation of costs under the breakeven standard. Conversely, the CFPB preliminarily believes that both general overhead costs and charge-off losses resulting from unauthorized use, EFT errors, billing errors, returned deposit items, or rescinded provisional credit are not specifically traceable to a very large financial institution's provision of non-covered overdraft credit and must not be included in its calculation of costs under the breakeven standard. For example, if a very large financial institution purchases office equipment to support its depository business generally, such costs would not be specifically traceable to its provision of overdraft services and the very large financial institution could not include the cost of such office equipment in its calculation of costs under the breakeven standard.

Under the benchmark fee approach outlined at proposed § 1026.62(d)(1)(ii), a very large financial institution may presume that any charge or combination of charges it imposes for paying a transaction that overdraws an account does not exceed its costs and charge-off losses for providing non-covered overdraft credit if the charge or combination of charges is less than or equal to any benchmark fee established by the CFPB. The CFPB is considering four alternatives for this benchmark fee—$3, $6, $7, and $14. The CFPB views each of these options as potentially viable because, as discussed in additional detail in the following paragraphs, they each apply the calculation method proposed by the breakeven standard to alternative data sets and/or alternative approaches for calculating the total number of non-covered overdraft transactions. (As highlighted at the end of this section, the CFPB seeks comment on each of these alternatives.)

The CFPB requested data, information, and documents from eight financial institutions relating to, among other things, their costs and charge-off losses for providing non-covered overdraft credit in the 2022 calendar year.

169

Each of these eight financial institutions would qualify as very large financial institutions for purposes of

proposed § 1026.62(b)(8) and, collectively, these eight institutions account for over 30 percent of the total assets of very large financial institutions and represent a diverse set of geographic footprints, asset sizes, and business models.

170

The CFPB received data from all eight institutions, but some institutions were unable to provide all the requested data at the level of detail requested.

171

As a result, the CFPB referenced data from five financial institutions to calculate the four alternatives for the proposed benchmark fee.

169

CFPB,

Discretionary Overdraft and NSF Practices at Very Large Financial Institutions

(Jan. 2024),

https://files.consumerfinance.gov/f/documents/cfpb_overdraft-nsf-practices-very-large-financial-institutions_2024-01.pdf

(CFPB 2024 Overdraft NSF Report).

170

Id.

at 4.

171

Id.

The CFPB used the same general formula to calculate all four of the proposed alternative benchmark fees but relied on different datapoints to derive each fee amount. To calculate each benchmark fee, the CFPB first determined the total charge-off losses (excluding losses attributable to unauthorized use, billing errors, rescinded provisional credit, returned deposit items, and other sources not attributable to overdraft transactions) for the financial institutions included in its estimate calculation and then divided that figure by the total number of non-covered overdraft transactions (

i.e.,

overdraft transactions currently excepted from Regulation Z) in the relevant dataset for each estimate. Next, the CFPB adjusted this charge-off loss per transaction figure by adding to it $1 per transaction to account for the CFPB's estimate of a financial institution's cost of funds and operational costs, which the CFPB estimates does not exceed $0.50 per transaction each.

172

To calculate the $0.50 cost of funds figure, the CFPB estimated that financial institutions would pay interest of 5 percent per year to obtain funds and would lend an average of $120 to consumers per transaction for a period of one month. The CFPB preliminarily believes that this cost of funds estimate would cover most institutions' costs given that the median overdraft amount per transaction is $50 and that consumers typically repay overdraft transactions within three days.

173

Based on its supervisory and enforcement experience, the CFPB preliminarily believes that call center expenses represent the bulk of the operational costs associated with providing non-covered overdraft programs at very large financial institutions. To calculate the figure for operational costs, the CFPB estimated that 10 percent of non-covered overdraft transactions would require 10 minutes of a customer service representative's time and that 20 percent of these customer service contacts also would require 10 minutes of a supervisor's time.

174

Based on this estimate, the CFPB determined that at an average hourly wage of $21.07 and $30.81 for customer service representatives and supervisors in the financial sector, respectively, financial institutions would incur roughly $0.45 per non-covered overdraft transaction on call center expenses.

175

The CFPB then rounded this figure up to $0.50 to account for other potential operational costs.

172

Id.

at 8-9.

173

Id.

at 8.

174

Id.

at 9.

175

U.S. Bureau of Labor Stat.,

Occupational Employment and Wage Statistics: May 2022 National Industry-Specific Occupational Employment and Wage Estimates NAICS 5220A1—Credit Intermediation and Related Activities (5221 and 5223 only), https://www.bls.gov/oes/current/naics4_5220A1.htm (last modified Apr. 25, 2023).

To calculate the $3 benchmark fee figure, the CFPB first added together the charge-off losses for the five financial institutions in its sample that produced sufficient data to analyze. Next, the CFPB calculated a charge-off loss per transaction figure by dividing the total charge-off loss figure by the total number of non-covered overdraft transactions paid by those five financial institutions. When tallying the total number of non-covered overdraft transactions for the charge-off loss per transaction figure, the CFPB counted both non-covered overdraft transactions that resulted in an overdraft fee and non-covered overdraft transactions that did not result in an overdraft fee. This approach yielded a charge-off loss per transaction figure of $2 per transaction after rounding to the nearest dollar. The CFPB then added $1 per transaction to this figure to account for the CFPB's estimate of a financial institution's cost of funds and operational costs.

To calculate the $6 benchmark fee figure, the CFPB used the same approach it used to calculate the $3 benchmark fee figure, but changed how it tallied the total number of non-covered overdraft transactions for the charge-off loss per transaction figure. Instead of counting both non-covered overdraft transactions that resulted in an overdraft fee and non-covered overdraft transactions that did not result in an overdraft fee, the CFPB counted only non-covered overdraft transactions that resulted in an overdraft fee. This change increased the charge-off loss per transaction figure to $5 per transaction after rounding to the nearest dollar. The CFPB then added $1 dollar per transaction to this figure to account for the CFPB's estimate of a financial institution's cost of funds and operational costs.

To calculate the $7 benchmark fee figure, the CFPB first identified the financial institution in its sample with the highest charge-off losses. Next, the CFPB calculated a charge-off loss per transaction figure by dividing total charge-off losses by the total number of non-covered overdraft transactions paid by the financial institution. When tallying the total number of non-covered overdraft transactions for the charge-off loss per transaction figure, the CFPB counted both non-covered overdraft transactions that resulted in an overdraft fee and non-covered overdraft transactions that did not result in an overdraft fee. This approach yielded a charge-off loss per transaction figure of $6 per transaction after rounding to the nearest dollar. The CFPB then added $1 dollar per transaction to this figure to account for the CFPB's estimate of a financial institution's cost of funds and operational costs.

To calculate the $14 benchmark fee figure, the CFPB used the same approach it used to calculate the $7 benchmark fee figure (

i.e.,

identifying the financial institution in its sample with the highest charge-off losses) but changed how it tallied the total number of non-covered overdraft transactions for the charge-off loss per transaction figure. Instead of counting both non-covered overdraft transactions that resulted in an overd

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