NEWS: Today, The League submitted a comment letter to the federal Consumer Financial Protection Bureau (CFPB), telling them that Wisconsin’s credit unions are opposed to their plan to limit the fees large financial institutions can charge for overdraft protections services.
Under this proposed rule, “very large financial institutions” – insured credit unions and other financial institutions with assets of more than $10 billion – would have two options for offering consumer overdraft services, where they pay a transaction (including a check or other item) that would otherwise overdraw an account instead of returning it unpaid. They could offer either a “courtesy overdraft service” or a line of credit:
Courtesy overdraft service: Overdraft fees would remain exempt from Reg. Z if the fees are determined by either of two approaches (the higher of the two resulting fees would be permitted):
- Calculating the institution’s own costs and losses using a method set out in the proposed rule (i.e., the “breakeven standard”) and setting the institution’s overdraft fee at or below the breakeven point; or
- Relying on a benchmark fee established by the CFPB (with proposals ranging from $3 to $14). The CFPB says that “most very large financial institutions continue to charge $35 today.”
Overdraft line of credit (outside of the courtesy exception): If overdraft fees do not meet the courtesy overdraft services criteria, overdraft services would be considered extensions of credit that are subject to Reg. Z. The proposal refers to these overdraft loans as “covered overdraft credit,” meaning:
- Overdraft credit would have to be held in a covered overdraft credit account separate from the customer’s checking or transaction account.
- Consumers would need to receive protections provided by Reg. Z, such as account opening and loan disclosures, APR calculations, and periodic statements. Protections applicable to credit cards would also apply to covered overdraft credit that is accessible by means of a “hybrid debit-credit card” (as defined in the rule to include debit cards or other single credit device), including those for ability-to-pay underwriting requirements and requirements for rate change notices.
- Extending the credit could not be conditioned on preauthorized electronic funds transfers from a customer’s account, with at least one more method of repayment being provided. (The proposed change would amend Reg. E along with a change to clarify that covered overdraft credit is a line of credit subject to Reg. Z.)
The CFPB expects the rule would take effect on Oct. 1, 2025.
Our comments
Our letter goes on to describe the negative impacts of this proposal, which would:
- Artificially distort the unique, member-focused relationship that credit unions have with their member-owners, hindering their efforts to effectively help members who experience financial shortfalls;
- Reduce consumers’ access to responsible, fairly priced overdraft protection services that consumers say they need and want;
- Cause significant financial impacts on financial institutions, which the CFPB has not accounted for; and
- Affect credit unions and other small financial institutions, not just big banks. For this reason, the proposal should have gone through a Small Business Regulatory Enforcement Fairness Act review.
“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.”
Several credit unions responded to our January 18 Comment Call and shared their misgivings about this proposal. We are grateful for their input, and our letter quoted them (without naming them).
The League will let you know about developments on the CFPB’s overdraft plans.