Knowledge and Insights

Overdraft services were originally created to service an occasional inadvertent hiccup by consumers but have since turned into a massive profit driver for financial institutions with fees totaling $7.7 billion in 2022, according to the Offices of Consumer Populations and Markets. Due to an exemption from the Federal Reserve Board, overdraft protection fees (ODP) were exempt from the Truth in Lending Act (TILA). Now, the CFPB looks to reform their stance on Overdraft Protection Services and help mitigate the risk consumers face because these services are often deceptively sold to consumers as “Free.”

KEY ASPECTS OF THE CFPB’S PROPOSED RULE

The CFPB’s proposed overdraft and junk fee rule would only apply to very large financial institutions with assets of $10 billion or more. That would impact roughly 175 of the largest banks and credit unions that control the ODP lending market. The proposed rule would preserve courtesy overdraft protection services where the fees do not exceed costs and losses. This would be achieved through two options: a breakeven standard set by the institution itself or a benchmark fee set by the CFPB. The institution would then determine the fee charged to their customers either using the breakeven standard or the benchmark fee. The CFPB has proposed several options for the benchmark fee, including $3, $6, $7, or $14, as detailed in the CFPB’s fact sheet.

Financial institutions may opt to provide an Overdraft Protection Loan monitored by TILA requirements. This would be labeled as a Covered Overdraft Credit and not a courtesy. This would require the customer to receive disclosures under TILA requirements promoting informed use of credit and the ability to compare products. The protections that apply to traditional credit cards would apply to these accounts, including payment features such as auto pay or manual pay, according to the CFPB. The proposal is touted to cut the average overdraft fee by more than half, saving the typical American family that pays these fees $150 a year.

ADDRESSING JUNK FEES

The CFPB has initiated a campaign against junk fees and has proposed a rule banning non-sufficient funds (NSF) fees. This proposed rule would pertain to covered institutions as defined by Regulation E and would cover transactions involving the use of debit cards, ATMs, or certain person-to-person apps, as outlined by the Consumer Financial Protection Bureau.

Another focus of this rule is banning NSF fees associated with representments, arguing that consumers are unaware and have no control over when a merchant will represent a transaction. The CFPB is still looking into other junk fees associated with banking to help ensure that financial institutions are not making junk fees a part of their core business model. Examples provided for junk fees include surprise depositor fees and surprise overdraft fees, as highlighted by the Consumer Financial Protection Bureau.

FINAL RULE ON AMENDMENTS TO REGULATION Z

On March 5, 2024, the CFPB passed a final rule amending Regulation Z, which implements TILA, that adopts a safe harbor fee threshold of $8. This applies to cardholders who have accounts with card issuers who have one million or more open credit card accounts. This goes into effect on May 14, 2024, according to the Consumer Financial Protection Bureau.

STAY COMPLIANT WITH MERCADIEN

Navigating the CFPB Overdraft and Junk Fee Rule can be complex. Let Mercadien’s Financial Institutions Services team help you effectively mitigate risk and maintain compliance. Our team of experts has extensive experience in the financial industry and a deep understanding of the regulatory landscape. We can help you navigate the complexities of the proposed rule to ensure that your institution is fully compliant. Learn more about our services or contact us today to discuss how we can help.

DISCLAIMER: This advisory resource is for general information purposes only. It does not constitute business or tax advice and may not be used and relied upon as a substitute for business or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified accountant, tax practitioner or attorney licensed to practice in the jurisdiction where that advice is sought.