NEWS: Today, the federal Consumer Financial Protection Bureau (CFPB) issued a new final rule on overdraft credit that is offered to consumers.
The rule, which is set to take effect Oct. 1, 2025, applies only to “very large financial institutions,” meaning insured credit unions and other depository institutions with total assets of more than $10 billion “and any affiliate thereof.”
The rule does not change the regulatory framework for overdraft services offered by financial institutions with assets of $10 billion or less, the CFPB said. However, many industry commenters worry that the new rule will pressure credit unions of every size to change their practices and comply with the rule, even if not legally required to do so.
Under the rule, very large financial institutions must choose one of these options when charging for overdrafts:
- Cap their overdraft fee at $5: They could cap their fee at $5, which is “the estimated level at which most banks could be able to cover their costs associated with administering a courtesy overdraft program,” the CFPB wrote.
- Cap their fee at an amount that covers costs and losses: They could set their fee at an amount that covers their costs and losses, calculated by using a standard found in the rule.
- Disclose the terms of their overdraft loan just like other loans: They could offer overdraft credit that complies with the standard requirements governing other loans, like credit cards. This would include giving consumers a choice on whether to open the line of overdraft credit, providing account-opening disclosures that would allow comparison shopping, sending periodic statements, and giving consumers a choice of whether to pay automatically or manually.
The League’s Legal Affairs team will study this new 296-page rule, and we will update relevant ii Releases as needed.
Wisconsin’s credit unions opposed this change
In April, The League submitted a comment letter on the proposed rule to the CFPB, telling them that Wisconsin’s credit unions were against this plan.
The League explained that Wisconsin’s credit unions want to protect U.S. consumers from financial harm, but that we could not support this proposal, which we felt went too far. “It is fundamentally flawed in several ways,” we said.
“The Bureau issued this proposal prematurely and without first studying the full scope of its impact on credit unions and consumers,” we wrote, stressing that credit unions of every size would face market pressure to conform their practices to fit the rule and that members tell us they need and want overdraft protection services. “We respectfully ask that the CFPB reconsider this proposal, withdraw it, and go back to the drawing board.”
Basics of the rule
The following material is adapted from a CFPB executive summary of the new regulation.
Under the rule, Reg. Z (the CFPB’s Truth in Lending regulation) will generally apply to all consumer overdraft credit provided by very large institutions unless that credit is provided at or below the institution’s costs and losses.
The rule defines overdraft credit as generally including consumer credit extended by a financial institution to pay a transaction from a checking or other transaction account (other than a prepaid account) held at the financial institution when the consumer has insufficient or unavailable funds in that account. For ease of reference, the rule generally refers to overdraft credit that is not subject to Reg. Z as “non-covered overdraft credit,” and overdraft credit that is subject to Reg. Z as “covered overdraft credit.”
The rule applies Reg. Z to very large financial institutions’ overdraft credit by updating two regulatory exceptions from the definition of finance charge:
- First, the rule updates an exception that provides that a charge for overdraft is not a finance charge if the financial institution has not previously agreed in writing to pay items that overdraw an account. The rule updates this exception by limiting it to only overdraft credit that is provided at or below costs and losses. The rule lets a financial institution determine whether an overdraft charge is at or below costs and losses by either: (1) calculating its own costs and losses using a standard set forth in the rule; or (2) relying on a benchmark fee of $5. An overdraft that incurs charges that exceed costs and losses is currently non-covered overdraft credit, but it will become covered overdraft credit when this rule becomes effective.
- Second, the rule updates a related exception that provides that a charge imposed in connection with an overdraft credit feature is not a finance charge if the charge does not exceed the charge for a similar transaction account without a credit feature. The rule updates this provision by clarifying what is and is not a comparable charge.
The rule also applies additional requirements to covered overdraft credit offered by a very large financial institution:
- Prohibits compulsory use of preauthorized transfers: The rule removes an exception to Reg. E’s compulsory-use prohibition for covered overdraft credit. As a result, covered overdraft credit offered by very large financial institutions cannot be conditioned on consumer repayment by automatic electronic fund transfers from the consumer’s account (e.g., their checking account). Instead, a very large financial institution must offer a consumer at least one method of repaying an overdraft credit balance other than automatic repayment by preauthorized electronic fund transfer. Under the rule, consumers could still opt into automatic repayments on a periodic basis if offered by their financial institution, but they will have the right to repay this overdraft credit manually if they prefer.
- Requires covered overdraft credit to be structured as a separate credit account: The rule requires covered overdraft credit extended by a very large financial institution to be put in a credit account that is separate from the asset account. Accordingly, the rule prohibits structuring covered overdraft credit as a negative balance on a checking or other transaction account.
- Applies CARD Act provisions to hybrid debit-credit cards: The rule updates exceptions to apply all the credit card provisions of Reg. Z to covered overdraft credit accounts offered by very large financial institutions if the credit account can be accessed by a hybrid debit-credit card. The rule defines hybrid debit-credit card to mean any card, plate, or other single credit device that a consumer may use from time to time to obtain covered overdraft credit from a very large financial institution. This definition includes, for example, a debit card that a consumer can use to complete transactions using funds drawn from an asset account held at a very large financial institution when that device can also be used to access covered overdraft credit.
When consumers at very large financial institutions are offered covered overdraft credit, that covered overdraft credit will not be subject to the Reg. E opt-in requirement. However, that covered overdraft credit will be subject to the requirements of Reg. Z, as applicable. The rule does not modify requirements applicable to non-covered overdraft credit, such as the Reg. E opt-in requirement and those found in Truth in Savings regulations.