DOEREN MAYHEW
CFPB Issues Proposed Rule on Overdrafts
On Jan . 17 , 2024 , the Consumer Financial Protection Bureau ( CFPB ) issued a long-awaited proposed rule on overdraft programs . To the surprise of some , the 211-page proposed rule only applies to 175 financial institutions , those larger than $ 10 billion in assets , and provides two choices : 1 . Treat overdrafts like a credit card and comply with Regulation Z and the rules around finance charges , disclosures etc .
2 . Treat overdrafts like a true courtesy and only charge an amount necessary to cover its costs and losses . That amount could possibly be $ 3 , $ 6 , $ 7 or $ 14 , or some other amount the financial institution determines is the break-even point based on a formula . Doeren Mayhew ’ s compliance specialists highlight the details of the proposal and what it would require if finalized .
Background
An overdraft occurs when consumers do not have a sufficient balance in their asset account to pay a transaction , but the financial institution pays the transaction anyway . Normally , the institution pays an overdraft transaction by either transferring the consumer ’ s own funds from another deposit account held by the institution , such as a savings account , or by extending overdraft credit .
Currently , Regulation Z does not cover all overdraft credit , as it exempts coverage charges honoring checks that overdraw a checking account , unless the payment of the check and imposition of the fee , were previously agreed upon in writing . According to the official interpretation , this exception for
ad hoc credit decisions applies only to regular demand deposit accounts , which carry no credit features and in which a bank may occasionally , as an accommodation to its customer , honor a check which inadvertently overdraws the account . Commentary to the regulation was added , which excludes debit cards with no credit agreement from the definition of a credit card . It appears this exception was intended to exclude discretionary overdraft services from being subject to Regulation Z when they are accessed by a debit card , consistent with the exclusion for overdraft charges from the definition of finance charge .
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