After nearly a year of speculation, the Consumer Financial Protection Bureau (“CFPB”) issued a final rule (the “Rule”) to cap overdraft fees that financial institutions with at least $10 billion in assets can assess to consumers. The CFPB has hailed the issuance of the Rule as permitting “consumers to better comparison shop across credit products and provid[ing] substantive protections that apply to other consumer credit,” but many in the banking industry have protested the Rule, including by filing a lawsuit to block its enforcement.[1]
What You Need to Know:
- The CFPB issued a final rule capping late fees on overdrafts that banks with more than $10 billion in assets can charge.
- The rule provides three options for compliance and the CFPB estimates it may save consumers up to $5 billion in annual overdraft fees.
- The rule is set to take effect on October 1, 2025, but has already been challenged in court and may face legislative roadblocks.
On December 12, 2024, the CFPB issued a final rule, set to take effect on October 1, 2025, that updates Regulations Z and E. As the CFPB explained in a press release, the Rule is intended to “close an outdated overdraft loophole that exempted overdraft loans from lending laws” and end so-called “junk fees” by providing large banks to choose from several options when charging overdraft fees:
- Cap their overdraft fee at $5;
- Cap their fee at an amount that covers costs and losses; or
- Disclose the terms of their overdraft loan in order to comply with the standard requirements governing other loans, like credit cards.
While the Rule has yet to take effect and will continue to face industry challenges, the CFPB estimates that the announcement of its “junk fee” initiative has already saved consumers approximately $6 billion in overdraft and non-sufficient fund fees based on policy modifications made by financial institutions. As the CFPB explained, the intent behind the Rule was to close a loophole dating back to the 1960s exempting banks from protections in the Truth in Lending Act that had its origins in ensuring consumers who sent checks by mail were not penalized for, among other things, mail arriving late.
However, the Rule is by no means guaranteed to go into effect. Even setting aside litigation, the imminent administrative changes in Washington may provide significant roadblocks. For example, Rep. Tim Scott – ranking member on the Senate Banking Committee – claimed that the Rule should never have been finalized. Likewise, banking lobbyists have panned the Rule as threatening the “safety net” of overdraft availability as harmful to consumers, and the Congressional Review Act enables Congress to stop proposed regulations in their tracks if both chambers of Congress achieve a simple minority and the sitting president signs off.
Given the uncertainty of the current and future regulatory environment, large banks would be apprised to monitor developments in this space.
