CFPB Finalizes Rule On Overdraft Credit – What Financial Institutions Need To Know

On December 12, the Consumer Financial Protection Bureau (CFPB) finalized a rule (Rule) designed to reshape the regulatory framework for overdraft credit provided by very large financial institutions.¹ This highly anticipated Rule amends Regulations E and Z, bringing overdraft programs more in line with traditional consumer credit products under the Truth in Lending Act (TILA). The Rule seeks to enhance consumer protections, particularly for financially vulnerable populations, while holding large institutions accountable for fee practices that have long been a source of regulatory scrutiny.

Key Takeaways

1. Expanded Coverage for Overdraft Credit

1. • The Rule closes long-standing exceptions in Regulation Z, making overdraft credit offered by very large financial institutions (those with assets exceeding $10 billion) subject to TILA requirements if fees exceed cost recovery thresholds.
   • Overdraft fees that generate profits—referred to as "above breakeven overdraft credit"—will now be treated as finance charges, subjecting these transactions to key disclosure, underwriting, and repayment requirements under TILA.²

2. Transaction and Account Coverage

1. • The Rule applies to "above breakeven overdraft credit," meaning credit extended by very large institutions that generate profit through overdraft fees exceeding the institution's costs and losses.

3. Introduction of a Benchmark Fee

• Institutions must demonstrate that overdraft fees are tied to actual costs or use the CFPB's benchmark fee of $5 per transaction, up from the $3 benchmark initially proposed.³

4. Separation of Credit and Asset Accounts

• Covered overdraft credit must be managed in a separate credit account, distinct from the consumer's primary checking account, enhancing transparency.⁴

5. Changes to the Definition of "Finance Charge"

• The Rule narrows the Regulation Z exception to the "finance charge" definition for overdraft credit. Fees for above breakeven overdraft credit now constitute a finance charge, making these transactions subject to TILA disclosures and protections.⁵

6. Changes to Covered Overdraft Credit and Application of the CARD Act

• Covered overdraft credit will now be subject to Regulation Z provisions governing open-end credit products, including APR, account opening disclosures, periodic statements, and advertising rules.
• Hybrid debit-credit cards that access overdraft credit are also now subject to CARD Act protections, including ability-to-repay requirements, caps on penalty fees, and limits on automatic rate increases.⁶

7. Ban on Mandatory Automatic Payments

• Financial institutions may no longer require preauthorized electronic fund transfers for repayment of overdraft credit. Consumers must have a manual repayment option.⁷

Industry Pushback

The industry response to the final Rule has been swift and forceful. Trade associations, including the American Bankers Association (ABA) and the Consumer Bankers Association (CBA), have filed suit challenging the CFPB's authority to implement the Rule. The suit, filed jointly with the Credit Union National Association (CUNA) and the Mid-Size Bank Coalition of America (MBCA), argues that the Rule:

• Exceeds the CFPB's Authority: The plaintiffs contend that the CFPB's reclassification of overdraft fees as finance charges goes beyond the agency's statutory authority under the TILA.
• Threatens Consumer Access to Credit: The associations argue that subjecting overdraft credit to Regulation Z could force financial institutions to scale back or eliminate overdraft programs, which many consumers rely on to bridge short-term gaps.
• Imposes Unreasonable Operational Burdens: The suit highlights the significant compliance costs and technological changes required to separate credit accounts from asset accounts and implement new fee structures.

The lawsuit seeks to overturn the Rule, asserting that it imposes undue burdens on financial institutions and could ultimately harm the very consumers it intends to protect. The full complaint can be accessed here.

Our Take

The Rule marks a fundamental shift in the regulation of overdraft services provided by very large financial institutions. These financial institutions must now reevaluate their overdraft programs, which have historically generated billions in annual revenue. Compliance costs are expected to rise, particularly as institutions adjust their systems to meet Regulation Z requirements. However, the timing of the Rule's release—just weeks before President-Elect Donald Trump's administration takes office—adds layers of uncertainty for stakeholders.

Moreover, the Rule came just one day after Senate Banking Committee ranking Republican Sen. Tim Scott (R-S.C.) publicly criticized CFPB Director Rohit Chopra for not committing to pause rulemaking and enforcement actions until the new administration assumes office. During the hearing, Chopra declined to make that commitment. This development raises significant questions about the future of the CFPB's regulatory agenda, particularly in light of the litigation brought by the ABA and the CBA referenced above. The incoming administration may decline to defend the CFPB against this lawsuit, potentially delaying or dismantling the Rule altogether. Congress, alternatively, could elect to repeal the Rule under its Congressional Review Act power.

Takeaways for Financial Institutions

1. Prepare for Compliance, but Monitor Developments:
   While the Rule's October 1, 2025, effective date provides time to implement changes, institutions should approach compliance planning with a dual focus:
   • Begin assessing whether current overdraft programs will be treated as "above breakeven" overdraft credit under the Rule.
   • Update systems to ensure compliance with Regulation Z requirements for covered overdraft credit, including account disclosures, periodic statements, and CARD Act provisions for hybrid debit-credit cards.
   • However, remain attentive to legal and political developments. A shift in CFPB leadership or a favorable ruling for industry plaintiffs could alter the Rule's trajectory.
2. Monitor Litigation:
   The ABA and CBA's lawsuit challenges the CFPB's authority under TILA to impose this Rule. If the incoming Trump administration declines to defend the CFPB, this case could result in the Rule's suspension or invalidation. Institutions should monitor the progress of the litigation and be prepared to pivot as circumstances evolve.
3. Evaluate Overdraft Program Offerings:
   • Institutions should decide whether to maintain "courtesy overdraft services" within the breakeven threshold (cost-based fees) or transition overdraft programs into regulated credit products under TILA.
   • For institutions that choose to retain overdraft as a revenue-generating service, now is the time to assess cost structures, fee calculations, and system capabilities for separating overdraft credit into distinct accounts.
4. Anticipate Political Uncertainty:
   A new presidential administration will likely bring a broader shift in the CFPB's priorities. Under President-Elect Trump, the CFPB's rulemaking and enforcement focus may change significantly, particularly in areas involving consumer fee regulation. Institutions should prepare for the following:
   • A slowdown or pause in enforcement actions targeting overdraft practices;
   • A potential rollback or revision of the overdraft Rule; and/or
   • Congressional Review Act repeal of the Rule.

Footnotes

1 Overdraft Lending: Very Large Financial Institutions, 12 C.F.R. pts. 1005, 1026 (2024) (to be codified at 12 C.F.R. §§ 1026.4(b)(2), 1026.4(c)(3)).

2 12 C.F.R. § 1026.4(c)(3).

3 12 C.F.R. § 1026.4(c)(3)(ii)(A).

4 Overdraft Lending, 12 C.F.R. § 1026.4(b)(2).

5 12 C.F.R. § 1026.4(b)(2), 1026.4(c)(3).

6 12 C.F.R. § 1026.60.

7 12 C.F.R. § 1005.10(e)(1).

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