On January 17, 2024 the CFPB dropped the highly anticipated proposed rule on overdraft fees. This rule, if adopted, would amend Regulation Z and Regulation E to update regulatory exceptions for overdraft credit provided by financial institutions with assets over $10 Billion, which covers approximately the 175 largest depository institutions in the country.
The compliance staff at America’s Credit Unions has been hearing from credit unions across the country that are struggling with how to handle fees in light of the pending rule, with growing concern over how it may impact operations. The Biden Administration has been very clear that reducing “junk fees” is a top priority (see the White House press release about the rule here) and overdraft fees are no exception. We have seen several of the large banks publicly vow to reduce or eliminate overdraft fees in advance of the proposed rule, and credit unions are left wondering if they are expected to follow suit.
Currently, overdraft loans are exempt from the Truth in Lending Act (TILA), the result of an exception that was made decades ago when paper checks reigned supreme. As a result, consumers generally do not receive any loan-related disclosures for overdraft loans that would allow them to compare the cost of the credit to other similar loan products. The rule aims to change the way financial institutions utilize overdraft programs through a series of new regulatory provisions.
Key Changes:
- The rule will only apply to banks and credit unions with over $10 Billion in assets (but note that the proposal states that the Bureau intends 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,” indicating a possible intent to expand the rule’s scope).
- Covered institutions may still offer courtesy overdraft programs (which will remain exempt from TILA) where the fees imposed do not exceed the institution’s costs or losses, provided they adopt one of the following two standards for determining the fee amount:
- 1) The “Breakeven Standard” calculates the amount of the allowable fee by using the losses the institution incurs when they write off overdrawn account balances that are not returned to positive. The institution may also include its direct costs specifically traceable to the courtesy overdraft; or
- The financial institution may charge a “Benchmark Fee” in an amount determined by the CFPB, which could be set as low as $3. The proposal seeks feedback on where to set benchmark fees and has proposed $3, $6, $7, or $14 as options.
- As an alternative to courtesy overdraft programs, financial institutions may offer profitable overdraft loans, provided they comply with the regulatory requirements of TILA.
- Consumers would receive loan disclosures in addition to being entitled to the protections that apply to traditional credit cards.
- The proposed rule would go into effect the October 1 that follows the final rule’s publication in the Federal Register by at least six months. The Bureau anticipates this would be October 1, 2025.
Based on these proposed changes, the rule will significantly impact operations for covered credit unions. The reduction in fee income and the increased compliance costs of implementation will serve to further increase the regulatory burden credit unions face today. America’s Credit Unions is following this proposal closely and will continue to update our members as new developments arise. Finally, our Regulatory Advocacy team has created a summary of the proposal, which you can read here.
Credit union compliance professionals have two upcoming opportunities to participate in intensive training to gain essential compliance knowledge and keep their institutions running compliantly and smoothly: Regulatory Compliance School in Arlington, VA March 18-22 and Regulatory Compliance Certification School in Fort Lauderdale, FL (and live online) April 15-19.
Active, unexpired designations and training (including recertifications) earned in 2024 will be fully recognized by America’s Credit Unions. We are committed to serving your professional development needs.