On December 12, 2024, the Consumer Financial Protection Bureau (CFPB) made a significant announcement. It unveiled its final rule, redefining overdraft fees as finance charges. This move aims to put a cap on overdraft fees and save consumers a substantial amount of money. The CFPB estimates that this new rule could save consumers $5 billion annually.

Overdraft Fees: A Historical Perspective

For over 50 years, overdraft fees have been exempt from the definition of "finance charge" under the Truth in Lending Act (TILA). The CFPB explains that this exception was necessary when checks were the primary form of payment due to mail and deposit delays. However, with the evolution of digital transactions, the CFPB now views this exception as a profitable loophole for financial institutions. Removing this exception is seen as crucial as it no longer serves its intended purpose.The CFPB's study reveals that financial institutions have made over $280 billion in revenue from overdraft fees since 2000. A significant portion of these fees, 68%, is charged by very large financial institutions, with a range of $30 to $37 per overdraft transaction. More than half of these institutions charge $35 per transaction. Moreover, most financial institutions' policies allow consumers to incur multiple overdraft fees per day. The CFPB emphasizes that these fees far exceed the actual cost and losses incurred by the institutions due to overdrafts.

CFPB's New Overdraft Rule - Options for Financial Institutions

With this final rule, financial institutions now have three distinct options regarding overdraft fees. Firstly, they can choose to cap overdraft fees at $5 per day. The CFPB estimates that this is a "breakeven" fee that allows banks to recover their costs for the overdraft program. Secondly, they can cap fees at an amount sufficient to cover the actual costs and losses incurred. Finally, they can continue to charge any amount as long as they disclose the terms of the overdraft credit as "overdraft lending" in compliance with Regulation Z. This requires TILA disclosures, an ability to repay determination, and periodic statements.The final rule also restricts banks from automatically withdrawing overdraft fees from consumer accounts. Consumers now have the option to either opt into automatic withdrawal of overdraft fees on a periodic basis or pay the fees manually. This gives consumers more control over their finances.

Impact and Future of the Rule

While the final rule does not come into effect until October 1, 2025, its fate is already uncertain. It was immediately challenged in a lawsuit filed in the United States District Court for the Southern District of Mississippi by notable industry groups. These groups allege that the CFPB has overstepped its authority and that the rule will harm the very consumers it aims to benefit. Additionally, President-elect Trump may work to rescind the rule as he has typically opposed the CFPB Director Rohit Chopra's initiatives. Congress may also attempt to rescind the rule through the Congressional Review Act.In conclusion, the CFPB's final rule on overdraft fees is a significant development that has the potential to reshape the financial landscape. It remains to be seen how these changes will play out and what impact they will have on consumers and financial institutions in the long run.