Bank Groups Question CFPB's Legal Basis for New Rule Regulating Overdraft Fees

ABSTRACT: A new Consumer Finance Protection Bureau (“CFPB”) rule adopted on Dec. 12, 2024, sought to impose a $5 cap on overdraft fees charged by very large banks and credit unions. On the same day the rule was issued a group of banks filed a Petition for Declaratory and Injunctive Relief in Mississippi federal court arguing, among other things, its reliance on the Truth in Lending Act (“TILA”) runs afoul of regulatory precedent and implementation of the rule would cause irreparable harm to Very Large Financial Institutions (defined as $10 billion or more in total assets) that come under its purview.

A group of banks are attempting to block and invalidate a new CFPB rule by arguing that it lacks authority under TILA, and that the costs for banks to implement the rule cause irreparable harm. The banks also argue that overdraft fees provide liquidity to consumers that lack access to traditional credit cards when they experience an unexpected expense and are short on cash. The banks also argue overdraft services prevent these same consumers from using more harmful financial instruments such as payday or title loans when experience cash shortages.

The CFPB Rule

The CFPB Rule, officially titled Overdraft Lending: Very Large Financial Institutions (“CFPB Rule”), bases its authority for this Rule under TILA. The CFPB Rule starts by stating overdraft services provided by banks fall under the TILA definition of “credit”. It then adds a new subsection to Regulation Z that covers “overdraft credit” and defines it generally as when a customer’s bank extends consumer credit from a checking (or similar account) when the customer has insufficient or unavailable funds. The CFPB Rule then re-writes Regulation Z to include overdraft fees as “finance charges” which in turn requires the overdraft services to be “previously agreed upon in writing” if the fee is generally above $5 or an amount above the bank’s “breakeven” which is a complex definition including revenue and costs.

The Banks’ Arguments

First, the banks argue that the CFPB Rule’s statutory authority from TILA is not supported by legal or regulatory precedent. Specifically, before regulatory authority was transferred to the CFPB, the Board of Governors of the Federal Reserve System had consistently interpreted TILA over several years to conclude that discretionary overdraft services are not credit transactions and are excluded from TILA's credit disclosure requirements because customers lack any right to overdraw their account. The Complaint also alleges Congress did not authorize the agency to rewrite TILA or render statutory terms meaningless, so the CFPB has exceeded its authority by issuing this rule. Finally, the Complaint argues TILA is only a disclosure statute for defined charges related to traditional loans and credit extended to consumers and not for implementing fees caps on deposit accounts.

Analysis