REGular Blog CFPB Rulemakings - Overdraft and NSF Fees

Yesterday, the Consumer Financial Protection Bureau (CFPB) issued a proposed rule designed to eliminate NSF Fees. This rule comes on the heels of last week's proposed rule targeting overdraft fees charged by very large financial institutions. Let's take a look at the rules and their possible impact for credit unions here in Virginia.

Overdraft

The CFPB's proposed rule on overdraft would amend Regulations E and Z to, as they put it, "close an outdated loophole exploited by very large financial institutions that has exempted highly profitable overdraft loans from longstanding provisions of the Truth in Lending Act and other consumer protection laws."

Currently, overdraft services like courtesy pay are generally exempt from the Truth In Lending Act, while other forms of protection like overdraft lines of credit generally are subject to TILA's open-end loan requirements.

Under the proposed rule, large financial institutions ($10 billion and above) offering overdraft protection could either a) charge a fee amount calculated to breakeven on overdraft costs, b) charge a benchmark fee set by the CFPB, or c) provided loan disclosures required under TILA.

In the proposed rule, the CFPB notes they are considering setting the benchmark fee at $3, $6, $7, or $14, and they include the calculations they made to arrive at each of those figures. The final rule should set one dollar figure as the benchmark fee rate. Of the three methods, the benchmark fee would likely be the most chosen method, as it is the simplest to implement. Of course the fourth option would be to eliminate overdraft fees altogether, a step we have seen from some of the big banks.

One question we often get related to these types of rules and regulations is what impact they will have on smaller financial institutions. There will be real market effects on all financial institutions if all of the biggest banks eliminate their overdraft fees or are forced to limit them to $6. Even more directly, the proposed rule warns of possible future rulemakings expanding these restrictions to all financial institutions, large and small:

• "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 7 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."

So while this rule may not apply to most credit unions on day 1, it will certainly have implications for your overdraft fee rates.

NSF Fees

One week later, the CFPB released a proposed rule to eliminate NSF fees. The rule would classify NSF fees on transactions that are declined instantaneously or near-instantaneously as abusive, and prohibit them under the Consumer Financial Protection Act. Unlike the Overdraft rule, this rule would directly apply to all financial institutions and would cover transactions involving debit cards, ATMs, or certain P2P payment apps.

NSF Fees have been at the top of CFPB's target list in its war on "junk fees." In a meeting with credit union leaders from Virginia in the fall of 2022, Director Rohit Chopra told us he viewed NSF fees differently than overdraft fees because there was no actual service provided with an NSF fee.

While their proposed rule notes that the CFPB has observed significant reductions in NSF fees and NSF fee revenue, they are looking to do away with them for good with this rulemaking. It's also worth noting that in the rule, the CFPB writes that while 65% of banks with over $10 billion in assets have eliminated NSF fees, 80% of credit unions with over $10 billion in assets still charge them.

Timeline

Both proposed rules are in a comment period. Comments on the Overdraft rule are due April 1, and the implementation date for the final rule is expected to be October 1, 2025. Comments on the NSF rule are due March 25, with a final rule expected to come out in the coming months after the comment period closes.

The League will vigorously oppose these measures with the Bureau. These rulemakings, combined with other actions such as the Federal Reserve Board's pending action on debit interchange fee caps, pose threats to revenue our credit unions rely on to provide top-level member service.