[Federal Register Volume 89, Number 37 (Friday, February 23, 2024)]
[Proposed Rules]
[Pages 13852-13908]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-01095]



[[Page 13851]]

Vol. 89

Friday,

No. 37

February 23, 2024

Part III





Consumer Financial Protection Bureau





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12 CFR Parts 1005 and 1026





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Overdraft Lending: Very Large Financial Institutions; Proposed Rule

Federal Register / Vol. 89 , No. 37 / Friday, February 23, 2024 / 
Proposed Rules

[[Page 13852]]


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CONSUMER FINANCIAL PROTECTION BUREAU

12 CFR Parts 1005 and 1026

[Docket No. CFPB-2024-0002]
RIN 3170-AA42


Overdraft Lending: Very Large Financial Institutions

AGENCY: Consumer Financial Protection Bureau.

ACTION: Proposed rule; request for public comment.

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SUMMARY: The Consumer Financial Protection Bureau (CFPB) proposes to 
amend Regulations E and Z to update regulatory exceptions for overdraft 
credit provided by very large financial institutions, thereby ensuring 
that extensions of overdraft credit adhere to consumer protections 
required of similarly situated products, unless the overdraft fee is a 
small amount that only recovers applicable costs and losses. The 
proposal would allow consumers to better comparison shop across credit 
products and provide substantive protections that apply to other 
consumer credit.

DATES: Comments must be received on or before April 1, 2024.

ADDRESSES: You may submit comments, identified by Docket No. CFPB-2024-
0002 or RIN 3170-AA42, by any of the following methods:
    <bullet> Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments. A brief summary of 
this document will be available at https://www.regulations.gov/docket/CFPB-2024-0002.
    <bullet> Email: <a href="/cdn-cgi/l/email-protection#4f7d7f7d7b62011f1d026200190a1d0b1d0e091b0f2c293f2d61282039"><span class="__cf_email__" data-cfemail="6e5c5e5c5a43203e3c234321382b3c2a3c2f283a2e0d081e0c40090118">[email protected]</span></a>. Include Docket No. 
CFPB-2024-0002 or RIN 3170-AA42 in the subject line of the message.
    <bullet> Mail/Hand Delivery/Courier: Comment Intake--2024 NPRM 
Overdraft, c/o Legal Division Docket Manager, Consumer Financial 
Protection Bureau, 1700 G Street NW, Washington, DC 20552.
    Instructions: The CFPB encourages the early submission of comments. 
All submissions should include the agency name and docket number or 
Regulatory Information Number (RIN) for this rulemaking. Commenters are 
encouraged to submit comments electronically. In general, all comments 
received will be posted without change to https://www.regulations.gov.
    All submissions, including attachments and other supporting 
materials, will become part of the public record and subject to public 
disclosure. Proprietary information or sensitive personal information, 
such as account numbers or Social Security numbers, or names of other 
individuals, should not be included. Submissions will not be edited to 
remove any identifying or contact information.

FOR FURTHER INFORMATION CONTACT: Anna Boadwee, Attorney-Advisor; Joseph 
Baressi, Pedro De Oliveira, Thomas Dowell, Brandy Hood, Kristin 
McPartland, or Mark Morelli, Senior Counsels, Office of Regulations, at 
202-435-7700 or https://reginquiries.consumerfinance.gov/. If you 
require this document in an alternative electronic format, please 
contact <a href="/cdn-cgi/l/email-protection#b6f5f0e6f4e9f7d5d5d3c5c5dfd4dfdadfc2cff6d5d0c6d498d1d9c0"><span class="__cf_email__" data-cfemail="c0838690829f81a3a3a5b3b3a9a2a9aca9b4b980a3a6b0a2eea7afb6">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Summary of Proposed Rule
II. Background
    A. Overview of Overdraft Credit
    B. Evolution and Growth of Non-Covered Overdraft
    C. Non-Covered Overdraft Credit Today
    D. Consumer Impact of Overdraft Fees
    E. Growing Regulatory Concerns About Non-Covered Overdraft 
Credit
    F. Need for CFPB Action
III. Outreach and Related Research
IV. Legal Authority
    A. Truth in Lending Act
    B. Electronic Fund Transfer Act
    C. Consumer Financial Protection Act
V. Discussion of the Proposed Rule
    A. Who is covered? (Sec.  1026.62(b)(8))
    B. What transactions and accounts are covered?
    C. Changes to the Definition of ``Finance Charge'' (Sec.  
1026.4(b)(2), (b)(12), and (c)(3); Sec.  1026.62(d))
    D. Changes to Covered Overdraft Credit Offered by Very Large 
Financial Institutions
VI. Proposed Effective Date
VII. Severability
VIII. CFPA Section 1022(b) Analysis
    A. Overview
    B. Data Limitations and Quantification of Benefits, Costs, and 
Impacts
    C. Baseline for Analysis
    D. Potential Benefits and Costs to Consumers and Covered Persons 
of the Proposed Changes That Affect Charges for Non-Covered and 
Covered Overdraft Credit
    E. Potential Benefits and Costs to Consumers and Covered Persons 
of Further Provisions of the Proposed Rule
    F. Potential Specific Impacts of the Proposed Rule on Depository 
Institutions and Credit Unions With $10 Billion or Less in Total 
Assets, as Described in CFPA Section 1026
    G. Potential Specific Impacts of the Proposed Rule on Consumer 
Access to Credit and on Consumers in Rural Areas
IX. Regulatory Flexibility Act Analysis
X. Paperwork Reduction Act

I. Summary of Proposed Rule

Overview

    This proposed rule would update non-statutory exceptions in 
Regulations Z and E that have allowed very large financial institutions 
to avoid statutory requirements when extending certain overdraft 
credit.\1\
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    \1\ When amending commentary, the Office of the Federal Register 
(OFR) requires reprinting of certain subsections being amended in 
their entirety rather than providing more targeted amendatory 
instructions. The sections of regulatory text and commentary 
included in this document show the language of those sections if the 
Bureau adopts its changes as proposed. In addition, the Bureau is 
releasing an unofficial, informal redline to assist industry and 
other stakeholders in reviewing the changes that it proposes to make 
to the regulatory text and commentary of Regulation E and Regulation 
Z. This redline may be found on the Bureau's website, https://files.consumerfinance.gov/f/documents/cfpb_unofficial-redline_overdraft-credit-very-large-financial-institutions-proposed-rule_2024-01.pdf. If any conflicts exist between the redline and the 
text of Regulation E or Regulation Z, its commentary, or this 
proposed rule, the documents published in the Federal Register are 
the controlling documents.
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    Consumer credit is subject to Regulation Z if the creditor imposes 
a finance charge, which generally includes any charge payable directly 
or indirectly by the consumer and imposed directly or indirectly by the 
creditor as an incident to or a condition of the extension of 
credit.\2\ However, when the Board of Governors of the Federal Reserve 
System (Board) first adopted Regulation Z in 1969,\3\ it excepted from 
Regulation Z's definition of finance charge any charges for honoring 
checks that overdraw a checking account unless the payment of the check 
and imposition of the fee were previously agreed upon in writing. The 
Board subsequently made ``minor editorial changes'' to this exception, 
e.g., to reflect ``items that are similar to checks, such as negotiable 
orders of withdrawal.'' \4\ This exception is unique to credit extended 
to pay account overdrafts. In adopting this exception, the Board did 
not rely on an interpretation of the statute; rather, the Board used 
its authority to create regulatory exceptions. Similar consumer credit 
products are subject to Regulation Z.
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    \2\ Consumer credit is also subject to Regulation Z in other 
circumstances. See, e.g., 12 CFR 1026.1(c).
    \3\ 34 FR 2002 (Feb. 11, 1969).
    \4\ 46 FR 20848, 20855 (Apr. 7, 1981).
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    This exception was evidently intended to allow banks to continue 
providing limited overdraft services, as a courtesy to consumers who 
inadvertently overdrew their account, without the banks complying with 
Regulation Z. In the early years of the regulation, decisions to pay an 
item that

[[Page 13853]]

overdraws an account instead of returning it unpaid were made as a 
relatively infrequent part of administering asset accounts. At the 
time, consumers typically withdrew funds from their bank accounts 
through in-person withdrawals or by writing checks. If a consumer 
mistimed when funds from a check deposit would be available for 
withdrawal \5\ and inadvertently overdrew their account and the 
overdrawing check were returned unpaid, the bank would typically charge 
the consumer a nonsufficient funds (NSF) fee and the consumer could be 
subject to additional fees imposed by the payee and other negative 
consequences from bounced checks. If, instead of returning the check, 
the financial institution paid it notwithstanding the unavailable or 
insufficient funds in the account, such courtesy payment could provide 
a benefit to the consumer, who would avoid all of the negative 
consequences of a bounced check without being charged any additional 
fees beyond the amount charged for nonsufficient funds.
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    \5\ In 1987, Congress enacted the Expedited Funds Availability 
Act (12 U.S.C. 4001 et seq.) to provide depositors of checks with 
prompt funds availability and to foster improvements in the check 
collection and return processes. See 82 FR 27552, 27552 (June 15, 
2017). Section 229.2(d) of Regulation CC (12 CFR 229), which 
implements that act, defines ``available for withdrawal.''
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    Over the last 30 years, in conjunction with widespread financial 
institution adoption of information technology systems as well as the 
expansion of debit card transactions that can overdraw an account, 
overdraft credit products provided under the exception have morphed 
from an occasional courtesy provided to consumers into frequently used 
and promoted products that increase costs to consumers (in certain 
instances) and generate a substantial portion of the direct fee revenue 
that financial institutions make from checking accounts (and much of 
the total revenue that financial institutions make from low-balance 
accounts). The volume of overdrawing transactions rose drastically over 
the years, including on transactions where the consumer may have 
suffered no negative consequences if the transaction were declined. 
Since the CFPB focused substantial enforcement and supervision 
attention on overdraft fees in 2021, overdraft fee revenue has 
contracted somewhat. However, it is still a source of billions of 
dollars in profits every year, and most very large financial 
institutions continue to charge $35 today. Financial institutions today 
generally make pay/no-pay decisions in advance--for example, by setting 
overdraft limits that the consumer may not be aware of and using 
information technology systems to make automated pay/no-pay decisions. 
They sometimes calibrate these systems with the goal of generating fee 
revenue. Because of these market changes, which increase the risk that 
a consumer will unwittingly incur high overdraft fees, helping 
consumers make informed decisions about overdraft credit has become a 
much more serious concern.

Key Changes

    Given these changes over the past 30 years and consistent with 
TILA's purpose of promoting the informed use of credit, the CFPB is 
proposing to update several non-statutory exceptions in Regulation Z to 
extend consumer credit protections that generally apply to other forms 
of consumer credit to certain overdraft credit provided by very large 
financial institutions. These changes would allow consumers to better 
compare certain overdraft credit to other types of credit and would 
provide consumers with several substantive protections that already 
apply to other consumer credit.
    These amendments would apply only to very large financial 
institutions--i.e., insured depository institutions and credit unions 
with more than $10 billion in assets. The proposal would not change the 
regulatory framework for overdraft services offered by financial 
institutions with assets of $10 billion or less. The CFPB plans to 
monitor the market's response to this rule before determining whether 
to alter the regulatory framework for financial institutions with 
assets less than or equal to $10 billion.
    Under this proposal, Regulation Z would generally apply to 
overdraft credit provided by very large institutions unless it is 
provided at or below costs and losses as a true courtesy to consumers. 
The proposed rule would accomplish this result by updating two 
regulatory exceptions from the statutory definition of finance charge. 
First, the proposal would update an exception that currently 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 \6\ so that the exception would not apply to 
``above breakeven overdraft credit'' offered by a very large financial 
institution. The proposal would give financial institutions the ability 
to determine whether an overdraft charge is considered above breakeven 
overdraft credit by either: (1) calculating its own costs and losses 
using standards set forth in the proposal; or (2) relying on a 
benchmark fee set by the CFPB in the proposal. The CFPB is considering 
setting the benchmark fee at $3, $6, $7, or $14. Second, the proposal 
would update a related exception that provides that a charge imposed in 
connection with an overdraft credit feature (e.g., a charge for each 
item that results in an overdraft) is not a finance charge if the 
charge does not exceed the charge for a similar transaction account 
without a credit feature (e.g., the charge for returning each item).\7\ 
As a result of the proposed change, all transfer charges that very 
large financial institutions impose on asset accounts with linked 
overdraft lines of credit (i.e., fees imposed for transferring funds to 
an asset account from an overdraft line of credit to cover an item that 
would otherwise take the asset account's balance negative) would be 
finance charges.
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    \6\ 12 CFR 1026.4(c)(3).
    \7\ 12 CFR 1026.4(b)(2).
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    If the proposal is finalized, above breakeven overdraft credit that 
is not currently subject to Regulation Z would become subject to 
Regulation Z, including provisions in subpart B that govern open-end 
credit (e.g., the account opening disclosures, periodic statements, and 
advertising rules). For ease of reference, this proposal generally 
refers to overdraft credit that is not subject to Regulation Z as non-
covered overdraft credit and overdraft credit that is subject to 
Regulation Z as covered overdraft credit. Above breakeven overdraft 
credit is currently a type of non-covered overdraft credit, but it 
would become covered overdraft credit if this proposal is finalized.
    The proposal would also require covered overdraft credit offered by 
very large financial institutions to be put in a credit account 
separate from the asset account, and it would update exceptions 
relating to credit cards. Among other changes, it would apply the 
portions of Regulation Z that implement the Credit Card Accountability 
Responsibility and Disclosure Act of 2009 (CARD Act) to covered 
overdraft credit that can be accessed by a hybrid debit-credit card, 
such as a debit card or other single credit device (including certain 
account numbers) that a consumer may use from time to time to obtain 
covered overdraft credit from a very large financial institution. 
Provisions of the CARD Act that would apply to such overdraft credit 
include, but are not limited to, ability-to-pay underwriting 
requirements, limitations on penalty fees including certain fees on

[[Page 13854]]

transactions that are declined due to nonsufficient funds, and various 
requirements related to rate changes.
    The proposal would also prohibit compulsory use of preauthorized 
electronic fund transfers (EFTs) for repayment of covered overdraft 
credit provided by very large financial institutions, which would 
ensure that consumers using those products have a choice of at least 
one alternative method of repayment. As a result of this change, 
covered overdraft credit offered by very large financial institutions 
could not be conditioned on consumers agreeing to automatic debits from 
their checking account. Consumers could still opt into automatic 
payments on a periodic basis if offered by their financial institution, 
but they would have the right to repay this overdraft credit manually 
if they prefer.
    The CFPB proposes that the final rule, if adopted, would take 
effect on the October 1 which follows by at least six months the date 
it is published in the Federal Register, consistent with 15 U.S.C. 
1604(d). The CFPB expects that would likely fall on October 1, 2025.
    The CFPB invites comment on all aspects of this notice of proposed 
rulemaking and on the specific issues on which it solicits comment 
elsewhere herein, including on any appropriate modifications or 
exceptions to the Proposed Rule.

II. Background

A. Overview of Overdraft Credit

    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. Typically, the financial 
institution pays an overdraft transaction by either transferring the 
consumer's own funds from another asset account held by the financial 
institution, such as a savings account, or by extending overdraft 
credit (i.e., using the financial institution's own funds and requiring 
the consumer to repay).
    Currently, not all overdraft credit is subject to Regulation Z. For 
example, when the Board first adopted Regulation Z in 1969,\8\ it 
excepted from Regulation Z's coverage charges for honoring checks that 
overdraw a checking account unless the payment of the check and 
imposition of the fee were previously agreed upon in writing. A Board 
official interpretation stated that 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 that account.'' \9\ The Board subsequently adopted commentary 
excluding debit cards with no credit agreement from Regulation Z's 
definition of ``credit card.'' \10\ While the Board did not explain 
this exception, it appears it 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.\11\
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    \8\ 34 FR 2002 (Feb. 11, 1969).
    \9\ 42 FR 22360, 22362 (May 3, 1977).
    \10\ 46 FR 50288, 50293 (Oct. 9, 1981) (providing that a 
``credit card'' does not include ``[a] check-guarantee or debit card 
with no credit feature or agreement, even if the creditor 
occasionally honors an inadvertent overdraft''); see also Regulation 
Z comment 2(a)(15)-2.ii.A.
    \11\ Under Regulation Z, an issuer of a credit card can be a 
creditor regardless of whether the credit is subject to a finance 
charge. 12 CFR 1026.2(a)(17)(iii); see also 12 CFR 1026.2(a)(7) 
(defining ``card issuer''). Thus, without the 1981 exception, a 
financial institution that extends overdrafts could be a 
``creditor'' for purposes of subpart B of TILA even with an 
exemption of overdraft fees from the finance charge.
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    Some overdraft credit is previously agreed upon in writing and is 
currently covered by Regulation Z. Such covered overdraft credit 
enables consumers to link a checking account to a credit account, like 
an overdraft line of credit or a credit card, from which funds are 
transferred automatically to pay transactions when the checking account 
balance is insufficient to pay them. Some financial institutions charge 
a fee, often referred to as an overdraft protection transfer fee, for 
these transfers.\12\ Financial institutions may assess such a fee once 
per day that a transfer is made, once to transfer a round dollar value 
increment (e.g., a fee for $100 transferred to cover any overdraft(s) 
less than $100), or, less commonly, once per overdraft transaction; 
\13\ however, since late 2021, a number of financial institutions have 
voluntarily eliminated such fees.\14\ Credit accounts used to cover 
overdrafts also carry an interest rate applied to the outstanding 
balance. Repayment of the overdrawn amount and interest is typically 
made periodically according to a payment schedule. The ability to 
obtain and use covered overdraft credit is typically limited to 
consumers whose credit history allows them to qualify for an overdraft 
line of credit or who have available credit on a credit card.
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    \12\ Consumer Fin. Prot. Bureau (CFPB), CFPB Study of Overdraft 
Programs: A white paper of initial data findings, at 55 (June 2013), 
https://files.consumerfinance.gov/f/201306_cfpb_whitepaper_overdraft-practices.pdf (CFPB 2013 White 
Paper) (noting 28 of a sample of 33 large institutions charged a 
transfer fee in 2012, ranging from $3 to $20 per transfer, with a 
median of $10, while smaller institutions charged a median of $5).
    \13\ Id.
    \14\ Between December 2022 and July 2023, CFPB reviewed publicly 
available information describing the overdraft-related practices of 
very large financial institutions (CFPB Market Monitoring of 
Publicly Available Overdraft Practices, Dec. 2022-July 2023).
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    Financial institutions may also pay overdrafts through currently 
non-covered overdraft credit, where the financial institution typically 
pays overdrafts up to certain limits but does not agree in advance to 
pay the overdrawn transactions, reserving discretion to decline any 
given overdraft transaction. This type of overdraft credit is currently 
non-covered overdraft credit because it is currently not subject to 
Regulation Z. This proposal may also refer to currently non-covered 
overdraft credit as an overdraft service, overdraft services, or an 
overdraft program. With certain exceptions provided for by internal 
policies, the financial institution typically assesses a flat fee for 
each overdraft transaction the financial institution pays. In addition, 
some financial institutions charge an additional fee or fees, known as 
extended or sustained overdraft fees, if the consumer does not bring 
the account back to a positive balance within a specified period. To 
collect repayment of the funds advanced to cover overdraft transactions 
as well as payment of the fees assessed, the financial institution 
typically deducts those amounts as a lump sum from the consumer's next 
incoming deposit(s), usually within three days after the account became 
overdrawn.\15\
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    \15\ Trevor Bakker et al., CFPB, Data Point: Checking account 
overdraft, at 5, 22 (July 2014), https://files.consumerfinance.gov/f/201407_cfpb_report_data-point_overdrafts.pdf (CFPB 2014 Data 
Point).
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    Financial institutions typically provide non-covered overdraft 
credit for certain transaction types--primarily checks, automated 
clearinghouse (ACH) transactions, and recurring debit card 
transactions--as a default, up to certain coverage limits. For one-time 
(non-recurring) debit card and ATM transactions, financial institutions 
may not assess overdraft fees for paying such transactions without 
first obtaining the consumer's opt-in following the process required by 
Regulation E 12 CFR 1005.17(b).
    Financial institutions employ a number of different practices and 
policies when making pay/return decisions in connection with non-
covered overdraft.\16\ While, as noted above, overdraft credit must 
technically be discretionary to be excepted from Regulation Z, in 
practice, financial

[[Page 13855]]

institutions typically assign each account an overdraft coverage limit 
representing the maximum amount of overdraft coverage the financial 
institution will extend on the account. Once an account reaches its 
overdraft coverage limit, the financial institution will no longer pay 
transactions into overdraft and will return those transactions unpaid. 
Overdraft coverage limits may be static (i.e., the financial 
institution assigns an unchanging limit to each customer) or dynamic 
(i.e., the financial institution changes the limit for each account 
periodically based on account usage patterns, market conditions, or 
account and accountholder characteristics in an attempt to manage more 
precisely credit risk, overdraft program revenues, and customer 
retention).\17\ Financial institutions that use static limits may 
communicate those limits to account holders, while financial 
institutions that use dynamic limits generally do not communicate those 
limits to account holders.
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    \16\ CFPB 2013 White Paper at 48-52.
    \17\ Common account and account holder characteristics include 
account tenure, average balance, overdraft history, and deposit 
patterns, as well as other relationships the accountholder may have 
with the institution.
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    Historically, financial institutions have charged an NSF fee when 
they reject, rather than pay, transactions initiated by check or ACH or 
other electronic payments; in contrast, financial institutions have 
rarely if ever charged an NSF fee when declining a one-time debit card 
purchase or an ATM withdrawal. Financial institutions typically have 
charged the same amount for an NSF fee as for a non-covered overdraft 
fee.\18\ As noted in part II.C, many financial institutions have 
eliminated NSF fees over the past two years.
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    \18\ See Consumers Guide to Banking: Staff Report on Commercial 
Bank Charges in the New York and Washington, DC Metropolitan Area, 
S. Comm. on Banking, Hous. and Urban Affairs, 94th Cong. 10-11 tbl.3 
(1976) (Senate Staff Report); see also 70 FR 8428, 8429 (Feb. 18, 
2005) (``Regardless of whether the overdraft is paid, institutions 
typically charge the NSF fee when an overdraft occurs.''); 74 FR 
59033, 59035 (Nov. 17, 2009) (``Second, a consumer will generally be 
charged the same fee by the financial institution whether or not a 
check is paid; yet if the institution covers an overdrawn check, the 
consumer may avoid other adverse consequences, such as the 
imposition of additional merchant fees); Fed. Deposit Ins. Corp. 
(FDIC), 2008 FDIC Study of Bank Overdraft Programs, at 16 n.18 (Nov. 
2008), https://www.fdic.gov/bank/analytical/overdraft/FDIC138_Report_Final_v508.pdf (FDIC 2008 Study) (``For most of the 
survey population operating automated programs, the per-item fee 
charged when items were paid under automated overdraft programs was 
the same as the fee charged by the bank on NSF items that it did not 
pay. These two fees were equal to each other for 98.1 percent of 451 
institutions reporting the two fee items.'').
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B. Evolution and Growth of Non-Covered Overdraft

    Non-covered overdraft credit started as a courtesy that financial 
institutions provided when they would decide on a manual, ad hoc basis 
to pay particular check transactions into overdraft rather than 
returning those checks unpaid.\19\ This courtesy would help consumers 
avoid NSF fees, merchant fees, and other negative consequences from 
bounced checks. Over time, non-covered overdraft credit began to move 
away from that historical model, as financial institutions shifted to a 
system involving heavy reliance on automated programs to process 
transactions and to make overdraft decisions.\20\ Financial 
institutions also began to extend overdraft credit to debit card 
transactions, even though a declined debit card transaction did not 
pose the same risk to consumers of an NSF fee, a merchant fee, or 
certain other consequences associated with a bounced check.\21\ Over 
time, debit card transactions became more numerous than checks, 
increasing the number of transactions that could generate overdrafts, 
with typical debit card transactions involving smaller amounts than 
typical check transactions.\22\ Even as transaction processing and 
overdraft decisioning became more automated and overdraft transactions 
increased in frequency and decreased in size, financial institutions 
increased the size of overdraft fees. In 1976, when the process was 
typically manual and included only checks, one survey of banks in 
Washington, DC, and New York found that the median fee was $5, while 
some banks charged zero.\23\ By 1994, concern had risen about the 
increase in the average fee to over $15 ($5.77 in 1976 dollars); \24\ 
by 2000, the average had surpassed $20 ($6.61 in 1976 dollars) and 
continued to increase thereafter.\25\
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    \19\ See 42 FR 22360, 22362 (May 3, 1977) (describing the 
exception from Regulation Z as applying when overdraft is provided 
``as an accommodation . . . honoring a check which inadvertently 
overdraws that account.''); see also Federal Reserve Board Staff 
Opinion Letter No. 948 (Nov. 17, 1975) (explaining that the 
exception ``relates only to regular demand deposit accounts which 
carry no credit feature and in which a bank may occasionally, as an 
accommodation to its customer, honor a check which inadvertently 
overdraws that account'').
    \20\ See 74 FR 59033, 59033 n.1 (Nov. 17, 2009) (citing FDIC's 
Study of Bank Overdraft Programs (Nov. 2008), which found that 
nearly 70 percent of banks surveyed implemented their automated 
overdraft program after 2001).
    \21\ See id. at 59035; see also id. at 59034 n.6 (citing 
Overdraft Protection: Fair Practices for Consumers: Hearing before 
the House Subcomm. On Financial Institutions and Consumer Credit, 
House Comm. On Financial Services, 110th Cong., at 72 (2007)) 
(``noting that as recently as 2004, 80 percent of banks still 
declined ATM and debit card transactions without charging a fee when 
account holders did not have sufficient funds in their account.'').
    \22\ Federal Reserve Payments Studies from 2004 to 2013 (exhibit 
1 in each study) show that from 2000 to 2012, annual debit card 
transactions increased from 8.3 billion to 47 billion, while annual 
check transactions decreased from 41.9 billion to billion to 18.3 
billion. By 2008, debit card transactions exceeded the number of 
checks. See Bd. of Governors of the Fed. Rsrv. Sys. (FRS), Federal 
Reserve Payments Study (FRPS)--Previous Studies, https://www.federalreserve.gov/paymentsystems/frps_previous.htm (last 
updated Apr. 21, 2023); see also FRS, The 2013 Federal Reserve 
Payments Study, at 9 ex.2 (Dec. 2013), https://www.frbservices.org/binaries/content/assets/crsocms/news/research/2013-fed-res-paymt-study-summary-rpt.pdf (showing the average debit card transaction 
ranged from $37 to $40 from 2003-2012, while the average check 
transaction ranged from $1,103 to $1,410). The CFPB has found that 
the median transaction amount that leads to an overdraft fee in the 
case of debit card transactions is $24, while the median check and 
ACH transactions that lead to overdraft fees are $100 and $90, 
respectively. See CFPB 2014 Data Point at 5; see also Fin. Health 
Network (FHN), Overdraft Trends Amid Historic Policy Shifts (June 1, 
2023), https://finhealthnetwork.org/research/overdraft-trends-amid-historic-policy-shifts/ (FHN Brief 2023) (finding almost half (45 
percent) of overdrafters reported that their most recent overdraft 
occurred on a transaction of $50 or less).
    \23\ Senate Staff Report at 10-11.
    \24\ See Bank Fees Associated with Maintaining Depository, 
Checking, and Credit Card Accounts, Hearing Before the Subcomm. on 
Consumer Credit and Ins., Comm. on Banking, Finance and Urban 
Affairs, 103rd Cong. 73 tbl.3 (1993) (Testimony by Susan M. 
Phillips, Member, Bd. of Governors of the Fed. Rsrv. Sys.) (showing 
average overdraft fee of over $15 in 1993); see also id. at 95-96, 
101-02 (Statement of Chris Lewis, Dir. of Banking and Hous. Pol'y, 
Consumer Fed'n of Am.) (noting concerns about the rise in the size 
of ``bounced check fees'', a term the organization used to describe 
the fee assessed when funds were insufficient, whether the 
transaction was returned unpaid or paid into overdraft).
    \25\ Gov't Accountability Off., Bank Fees: Federal Banking 
Regulators Could Better Ensure That Consumers Have Required 
Disclosure Documents Prior to Opening Checking or Savings Accounts, 
at 14 (Jan. 2008), https://www.gao.gov/assets/gao-08-281.pdf; see 
also FDIC 2008 Study (by 2007, among primarily financial 
institutions with less than $5 billion in assets, the average fee 
was $27); CFPB 2013 White Paper at 52 (by 2012, among the nation's 
largest financial institutions, the average fee was $34).
---------------------------------------------------------------------------

    As a result of these market shifts and operational changes, fee 
revenue from non-covered overdraft credit began to significantly 
influence the overall business model for many asset accounts. Financial 
institutions became less likely to charge consumers upfront monthly 
checking account fees, which consumers could more easily compare across 
the market, and instead began to rely heavily overdraft fees.\26\ In 
essence, the provision of non-covered overdraft credit moved away from 
its original purpose--paying occasional or inadvertent overdrafts as a 
courtesy--and became the dominant component of

[[Page 13856]]

a back-end pricing business model. By 2004, marketwide overdraft 
revenue was estimated at approximately $10 billion and, by 2009, had 
increased to an estimated $25 billion.\27\
---------------------------------------------------------------------------

    \26\ CFPB 2013 White Paper at 16-17.
    \27\ CFPB's estimates of marketwide overdraft revenue, before 
banks with over $1 billion in assets began reporting overdraft/NSF 
revenue on call reports in 2015, are based on the esitmated share of 
aggregated fee revenue that banks and credit unions reported on call 
reports that was attributable to overdraft fees. For more details on 
methodology, see Jacqueline Duby et al., Ctr. for Responsible 
Lending (CRL), High Cost & Hidden From View: The $10 Billion 
Overdraft Loan Market (May 26, 2005), https://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/ip009-High_Cost_Overdraft-0505.pdf; see also Leslie 
Parrish, CRL, Overdraft Explosion: Bank fees for overdrafts increase 
35% in two years, at 4 (Oct. 6, 2009), https://www.responsiblelending.org/research-publication/overdraft-explosion-bank-fees-overdrafts-increase-35-two-years.
---------------------------------------------------------------------------

C. Non-Covered Overdraft Credit Today

    Marketwide overdraft revenue declined following the 2010 
implementation of the Board's ``opt-in'' rule under Regulation E to an 
estimated $12 billion in 2011 before beginning to increase again.\28\ 
In the several years preceding the COVID-19 pandemic, marketwide 
overdraft revenue was persistent, climbing from an estimated $11.8 
billion in 2015 to $12.6 billion in 2019.\29\ With the onset of the 
pandemic in March 2020, overdraft revenue dropped significantly. The 
drop was likely primarily due to pandemic-related stimulus payments 
pushing up average checking account balances, as well as temporarily 
decreased use of debit cards.\30\ In addition, Federal regulators 
encouraged, and some State regulators encouraged or mandated, financial 
institutions to offer leniency around imposition of overdraft fees in 
light of the pandemic.\31\ Notwithstanding the trend downward during 
the pandemic, estimated marketwide overdraft revenue exceeded $9 
billion in 2020 and 2021.\32\
---------------------------------------------------------------------------

    \28\ Id.
    \29\ CFPB's estimates of marketwide overdraft revenue for 2015 
to 2022 extrapolate total overdraft/NSF revenue reported on call 
reports by banks with over $1 billion in assets to banks with less 
than $1 billion in assets and to credit unions in order to reach a 
total marketwide estimate of overdraft/NSF revenue, and then 
estimate the portion of that combined overdraft/NSF revenue that is 
attributable to overdraft revenue alone. To extrapolate reported 
overdraft/NSF revenue to banks with less than $1 billion in assets 
and to credit unions, the CFPB uses data collected from core 
processors for the number of accounts by asset size and the 
overdraft/NSF revenue per account, and from 2014 call report data 
for distribution of institutions by asset size, and then assumes 
that overdraft/NSF revenue at small institutions saw the same growth 
from 2014 to 2019 as at large banks to arrive at the 2019 estimate. 
These extrapolations result in estimates where banks with over $1 
billion in assets comprise 77.4 percent of marketwide overdraft/NSF 
revenue, banks with less than $1 billion in assets comprise 7.3 
percent of such revenue, and credit unions comprise 15.3 percent of 
such revenue. See [Eacute]va Nagyp[aacute]l, Ph.D., CFPB, Data 
Point: Overdraft/NSF Fee Reliance Since 2015--Evidence from Bank 
Call Reports, at 7 (Dec. 2021), https://files.consumerfinance.gov/f/documents/cfpb_overdraft-call_report_2021-12.pdf (CFPB 2021 Data 
Point). For the 2022 estimate, the CFPB assumes that banks with 
assets over $1 billion, banks with assets below $1 billion, and all 
credit unions represent the same relative portions of total 
marketwide overdraft/NSF revenue in 2022 as they did in 2019.
    \30\ CFPB 2021 Data Point at 22-24.
    \31\ See Press Release, FRS, FDIC & Off. of the Comptroller of 
the Currency (OCC), Joint Statement on CRA Consideration for 
Activities in Response to COVID-19 (Mar. 19, 2020), https://www.occ.gov/news-issuances/bulletins/2020/bulletin-2020-19a.pdf; 
Press Release, CFPB, Consumer Financial Protection Bureau Encourages 
Financial Institutions and Debt Collectors to Allow Stimulus 
Payments to Reach Consumers (Mar. 17, 2021), https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-encourages-financial-institutions-and-debt-collectors-to-allow-stimulus-payments-to-reach-consumers/; see also, 
e.g., State of Cal. Bus., Consumer Servs. & Hous. Agency, Guidance 
to Financial Institutions During the COVID-19 Pandemic (Mar. 22, 
2020), https://www.bcsh.ca.gov/coronavirus19/dbo_banks.pdf; Press 
Release, N.Y. State Dep't of Fin. Servs., DFS Issues New Emergency 
Regulation Requiring New York Regulated Financial Institutions To 
Provide Financial Relief To New Yorkers Demonstrating Financial 
Hardship From COVID-19 Pandemic (Mar. 24, 2020), https://www.dfs.ny.gov/reports_and_publications/press_releases/pr202003241.
    \32\ See discussion of methodology at FN 29.
---------------------------------------------------------------------------

    Beginning in late 2021, a number of large banks began announcing 
and implementing changes to their overdraft policies.\33\ Some banks 
eliminated overdraft fees altogether or reduced them to $10 or $15 per 
transaction.\34\ Some banks made changes to their policies by expanding 
their fee waiver policies, including establishing a daily limit of one 
fee per day; \35\ establishing de minimis negative balance thresholds, 
within which overdrafts do not result in a fee of $50 or more; and 
implementing grace periods giving consumers time through the next 
business day to bring their accounts positive before a fee is 
assessed.\36\ Collectively these changes resulted in a sustained 
reduction in overdraft revenues as compared to pre-pandemic levels.\37\ 
Marketwide overdraft revenue in 2022 was an estimated $9.1 billion 
($7.9 billion in 2019 dollars, a 37 percent drop in real terms).\38\ Of 
that, an estimated $6.16 billion, or 68 percent, was earned by 
financial institutions with above $10 billion in assets.\39\ At the 
same time, most very large financial institutions eliminated NSF 
fees.\40\
---------------------------------------------------------------------------

    \33\ Rebecca Born[eacute] & Amy Zirkle, Comparing overdraft fees 
and policies across banks, CFPB (Feb. 10, 2022), https://www.consumerfinance.gov/about-us/blog/comparing-overdraft-fees-and-policies-across-banks/.
    \34\ Id.
    \35\ Id.
    \36\ Id.
    \37\ CFPB, Data Spotlight: Overdraft/NSF revenue down nearly 50% 
versus pre-pandemic levels (May 24, 2023), https://www.consumerfinance.gov/data-research/research-reports/data-spotlight-overdraft-nsf-revenue-in-q4-2022-down-nearly-50-versus-pre-pandemic-levels/full-report/ (CFPB May 2023 Data Spotlight).
    \38\ See discussion of methodology at FN 29.
    \39\ Estimated using data from 2022 Federal Financial 
Institutions Examination Council (FFIEC) Call Reports and 
methodology discussed at FN 29.
    \40\ CFPB, Data spotlight: Vast majority of NSF fees have been 
eliminated, saving consumers nearly $2 billion annually (Oct. 11, 
2023), https://www.consumerfinance.gov/data-research/research-reports/vast-majority-of-nsf-fees-have-been-eliminated-saving-consumers-nearly-2-billion-annually/ (CFPB October 2023 Data 
Spotlight) (finding that nearly two-thirds of banks with over $10 
billion in assets have eliminated NSF fees).
---------------------------------------------------------------------------

    Despite these changes, the vast majority of banks and credit unions 
with over $10 billion in assets continue to charge between $30 and $37 
per overdraft fee, and more than half charge $35.\41\ Most financial 
institutions' policies allow consumers to incur multiple overdraft fees 
per day. Financial institutions continue charging these high fees even 
though the fees far exceed institutions' costs and losses associated 
with providing non-covered overdraft credit. CFPB data collections and 
outreach have found that the single largest cost or loss to financial 
institutions associated with overdraft programs is charged-off account 
balances, which most frequently occur when a consumer's subsequent 
deposits do not cover the negative balance created by the overdraft(s) 
and associated fee(s).\42\ The CFPB's study of 2011 bank data found 
that charge-offs were small relative to the fee revenue banks earned 
through their overdraft programs.\43\ Among those banks, charged-off 
principal account balances due to overdraft programs represented 14.4 
percent of the net overdraft fees (not including NSF fees) at those 
banks.\44\ During the first half of 2023, the CFPB collected additional 
data from several banks, which again showed that charge-offs associated 
with negative account balances were the largest cost or loss associated 
with providing overdraft. As discussed further in part V.C.2, charge-
offs amounted to an average of $2 per overdraft transaction whether or 
not such transaction incurred an overdraft fee, and an average of $5 
per overdraft transaction that incurred an overdraft fee--representing 
6 percent and 15 percent, respectively, of the average fee of $32.50 
charged by the banks during the period studied.
---------------------------------------------------------------------------

    \41\ CFPB Market Monitoring of Publicly Available Overdraft 
Practices, Dec. 2022-July 2023.
    \42\ CFPB 2013 White Paper at 17.
    \43\ Id.
    \44\ Id.

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[[Page 13857]]

D. Consumer Impact of Overdraft Fees

    As cumulative overdraft fee revenue for financial institutions 
increased, so did the cumulative burden of overdraft fees on consumers. 
CFPB research found that 79 percent of combined overdraft and NSF fees 
were paid by 9 percent of consumers who paid more than 10 such fees per 
year, incurring a median of $380 in these fees in a year.\45\ Consumers 
paying more than 20 such fees in a year accounted for about 5 percent 
of accounts, while paying over 63 percent of the fees.\46\
---------------------------------------------------------------------------

    \45\ David Low et al., CFPB, Data Point: Frequent Overdrafters, 
at 5 (Aug. 2017), https://files.consumerfinance.gov/f/documents/201708_cfpb_data-point_frequent-overdrafters.pdf (CFPB 2017 Data 
Point); CFPB 2014 Data Point at 12 (both analyzing 2011-2012 data).
    \46\ CFPB 2017 Data Point at 5.
---------------------------------------------------------------------------

    High overdraft fees can make it more difficult for consumers to 
return their account to a positive balance, contributing to account 
charge-offs, involuntary account closures, and consumers blocked out of 
the banking system. The CFPB found that the banks with the highest 
share of accounts with frequent overdrafts tended to have the highest 
rates of involuntary account closure; conversely, those with the lowest 
share of accounts with frequent overdrafts tended to have the lowest 
rates of involuntary closure.\47\ Account closures, in turn, are often 
reported to account screening consumer reporting agencies, and a 
negative report from an account screening company may limit a 
consumer's ability to open an account at a bank or credit union in the 
future. Negative experiences with overdraft fees likely also discourage 
many consumers from wanting a bank account at all. The FDIC estimates 
that there were nearly 6 million unbanked households in the U.S. in 
2021,\48\ nearly half of which had a bank account in the past.\49\ Of 
those previously banked households, more than two-thirds have little or 
no interest in having a bank account again,\50\ with high fees, 
unpredictable fees, and not enough funds to meet minimum balance 
requirements among the most cited reasons.\51\
---------------------------------------------------------------------------

    \47\ CFPB 2013 White Paper at 25.
    \48\ FDIC, 2021 FDIC National Survey of Unbanked and Underbanked 
Households, at 1, https://www.fdic.gov/analysis/household-survey/2021report.pdf (last updated July 24, 2023).
    \49\ Id. at 17 tbl.3.3 (48.8 percent of unbanked households 
previously had a bank account).
    \50\ Id. at 18 fig.3.4 (49.4 percent of previously banked 
households are not at all interested in having a bank account, and 
18.3 percent are not very interested).
    \51\ FDIC, 2021 FDIC National Survey of Unbanked and Underbanked 
Households--Appendix Tables, at 11 tbl.A.6, https://www.fdic.gov/analysis/household-survey/2021appendix.pdf (last updated July 24, 
2023) (FDIC Tables) (among previously banked households, 30.5 
percent cited bank account fees are too high, 28.8 percent cited 
bank account fees are too unpredictable, and 43 percent cited that 
they do not have enough money to meet minimum balance requirements).
---------------------------------------------------------------------------

    Consumers can face significant uncertainty about whether they will 
incur overdraft fees. Though financial institutions may provide 
disclosures related to their transaction processing, deposit 
availability, and overdraft assessment policies, these policies can be 
extraordinarily complex.\52\ Even consumers who closely monitor their 
account balances may not know with certainty when transactions will 
post to their accounts, whether a particular transaction will be paid 
or returned unpaid, and whether a particular paid transaction will be 
deemed an overdraft and assessed an overdraft fee.\53\
---------------------------------------------------------------------------

    \52\ See Press Release, CFPB, CFPB Orders Regions Bank to Pay 
$191 Million for Illegal Surprise Overdraft Fees (Sept. 28, 2022), 
https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-regions-bank-pay-191-million-for-illegal-surprise-overdraft-fees/.
    \53\ Id.; see also 87 FR 66935, 66935-40 (Nov. 7, 2022).
---------------------------------------------------------------------------

    In response to the CFPB's 2022 request for information regarding 
fees that are not subject to competitive processes that ensure fair 
pricing, which received over 80,000 responses,\54\ overdraft-related 
fees were by far the most common issue raised. Common concerns included 
that the fees were unclear or confusing, disproportionate compared to 
the incidents resulting in the fees, and difficult or impossible to 
avoid. These concerns were generally consistent with those reflected in 
complaints about overdraft fees consumers have submitted to the CFPB's 
Consumer Complaints Database since its inception in 2011.
---------------------------------------------------------------------------

    \54\ 87 FR 5801 (Feb. 2, 2022).
---------------------------------------------------------------------------

    The CFPB has also studied how consumers who are opted-in to 
overdraft services on one-time debit card and ATM transactions--and 
thus subject to overdraft fees on those transactions--fare compared to 
those who are not opted-in. In total, opted-in accounts incurred more 
than seven times as many overdraft fees as accounts that were not 
opted-in.\55\ At the account level, opted-in accounts were three times 
as likely to have more than 10 overdrafts per year as accounts that 
were not opted-in.\56\ And among frequent overdrafters, those who were 
opted-in appeared similar across a number of dimensions to frequent 
overdrafters who were not opted-in, but incurred significantly more--at 
the median, 13 more--overdraft/NSF fees per year.\57\ In addition, 
involuntary account closure was about 2.5 times as likely for consumers 
who had opted-in than for consumers who had not.\58\
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    \55\ CFPB 2014 Data Point at 21.
    \56\ Id. at 13.
    \57\ CFPB 2017 Data Point at 6, 32-33. This dynamic was likely 
driven primarily by the scenario where a debit card or ATM 
transaction is authorized against a sufficient balance but then 
settles against an insufficient balance. A consumer who was not 
opted-in would have had this transaction approved and assessed no 
fee. A consumer who was opted-in may have been charged a fee. For 
discussion of regulatory guidance and CFPB enforcement actions 
addressing overdraft fees assessed on these ``authorize positive, 
settle negative'' transactions, see part II.E.
    \58\ CFPB, A Closer Look: Overdraft and the Impact of Opting-In 
(Jan. 19, 2017), https://files.consumerfinance.gov/f/documents/201701_cfpb_Overdraft-and-Impact-of-Opting-In.pdf (citing a rate of 
6.2 percent in a given year for non-opted-in consumers and 2.5 
percent for opted-in consumers, based on calculations using the same 
large bank data used in CFPB 2014 Data Point).
---------------------------------------------------------------------------

    Consumers whose accounts are frequently overdrawn are typically 
more financially insecure than those who do not overdraw or who do so 
infrequently.\59\ Compared to non- or infrequent overdrafters, frequent 
overdrafters tend to have lower incomes and lower end-of-day 
balances.\60\ They are also less likely to have access to alternative 
credit options: they have lower credit scores, are less likely to have 
a general purpose credit card, and, if they do have such a card, they 
have less credit available on it.\61\ Black households and Latino 
households are more likely to incur overdraft fees than white 
households.\62\
---------------------------------------------------------------------------

    \59\ CFPB has previously used ``frequent overdrafters'' to 
describe those who incur more than 10 overdraft/NSF fees in one year 
and ``very frequent overdrafters'' to describe those who incur more 
than 20 overdraft/NSF fees in one year. See CFPB 2017 Data Point at 
4-5.
    \60\ CFPB 2017 Data Point at 15-16 (finding that as neighborhood 
income decreases, overdraft frequency increases); id. at 6 (finding 
that nearly 70 percent of frequent overdrafters had end-of-day 
balances with medians between $237 and $439, while another 20 
percent had median end-of-day balances of $140). See also FHN Brief 
2023 (finding that households with incomes under $30,000 were twice 
as likely to report at least one overdraft than those with incomes 
of $100,000 or more).
    \61\ CFPB 2017 Data Point at 15-16.
    \62\ FHN Brief 2023 (finding that 26 percent of Black, 23 
percent of Latinx, and 14 percent of White households reported 
having overdrafted, making Black and Latinx households 1.9 and 1.6 
times as likely as White households, respectively, to have 
overdrafted); see also Meghan Greene et al., FHN, FinHealth Spend 
Report 2022: What U.S. Households Spent on Financial Services During 
COVID-19, at 14 (Apr. 2022), https://finhealthnetwork.org/wp-content/uploads/2022/05/FinHealth_Spend_Report_2022_Final.pdf 
(finding in a 2021 survey that Black and Latinx households with a 
savings or checking account were 1.8 and 1.4 times as likely as 
White households to report having overdrafted).
---------------------------------------------------------------------------

E. Growing Regulatory Concerns About Non-Covered Overdraft Credit

    As financial institutions began to evolve provision of non-covered 
overdraft away from the historical

[[Page 13858]]

model and toward increased automation, greater frequency, and higher 
revenues, Federal regulators expressed increasing consumer protection 
concerns. In 2001, in declining to issue a requested ``comfort letter'' 
for a financial institution's overdraft program, the OCC stated that 
overdraft services are extensions of credit and that the associated 
charges may be ``just as burdensome as those imposed on borrowers 
utilizing other types of high interest rate credit.'' \63\ In 2002, the 
Board noted that some non-covered overdraft credit may not be all that 
different from overdraft lines of credit,\64\ and in 2004 the Board 
stated that further consideration of the need for Regulation Z coverage 
of overdraft services would be appropriate if consumer protection 
concerns were to persist.\65\ In 2005, the Federal banking agencies 
issued joint guidance on non-covered overdraft credit noting that ``the 
existing regulatory exceptions [i.e., exceptions in Regulation Z such 
that it does not apply] were created for the occasional payment of 
overdrafts, and as such could be reevaluated by the Board in the 
future, if necessary. Were the Board to address these issues more 
specifically, it would do so separately under its clear [TILA] 
authority.'' \66\ In 2009, the Board adopted a rule under Regulation E 
prohibiting institutions from assessing overdraft fees on one-time 
debit card and ATM transactions unless the institution obtained the 
consumer's affirmative consent to such fees (``opt-in rule'').\67\ 
Following the adoption of the Board's rule, the FDIC issued additional 
supervisory guidance,\68\ which advises, among other things, that where 
transactions overdraw an account by a de minimis amount, the overdraft 
fee should be eliminated or be reasonable and proportional to the 
amount of the transaction.\69\
---------------------------------------------------------------------------

    \63\ OCC, Interpretive Letter No. 914, at 6 (Sept. 2001), 
https://www.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2001/int914.pdf.
    \64\ 67 FR 72618, 72620 (Dec. 6, 2002). In 2003, the Board noted 
that ``[t]he Board's staff is continuing to gather information on 
these services, which are not addressed in the final rule.'' (68 FR 
16185 (Apr. 3, 2003)).
    \65\ 69 FR 31760, 31761 (June 7, 2004).
    \66\ See 70 FR 9127, 9128-29 (Feb. 24, 2005).
    \67\ 74 FR 5212 (Jan. 28, 2009).
    \68\ FDIC, Final Overdraft Payment Supervisory Guidance, FIL-81-
2010 (Nov. 24, 2010), https://www.fdic.gov/news/news/financial/2010/fil10081.html.
    \69\ Id.
---------------------------------------------------------------------------

    More recently, in October 2022, the CFPB issued a policy statement 
stating that the assessment of overdraft fees that consumers would not 
reasonably anticipate, including overdraft fees on debit card or ATM 
transactions that are authorized when the consumer's available balance 
is sufficient to cover the transaction but that later settle against a 
negative balance due to intervening transactions or complex processes 
(``authorize positive, settle negative'' or ``APSN'' transactions), 
likely violates the Consumer Financial Protection Act of 2010 (CFPA)'s 
statutory prohibition against unfair practices.\70\ In April 2023, the 
OCC and FDIC issued guidance advising that overdraft fees charged on 
such transactions raise heightened risk of unfair, deceptive, or 
abusive acts or practices.\71\ The OCC's guidance also describes 
certain practices that it notes may help to manage risks associated 
with overdraft programs, including assisting consumers in avoiding 
``unduly high costs'' in relation to the face value of the item being 
presented, the amount of their regular deposits, and their average 
account balances, and implementing fees and practices that bear a 
reasonable relationship to the risks and costs of providing overdraft 
programs.\72\
---------------------------------------------------------------------------

    \70\ CFPB Circular 2022-06: Unanticipated Overdraft Fee 
Assessment Practices, 87 FR 66935 (Nov. 7, 2022). The CFPB, the 
Board, and the FDIC also highlighted risks related to the imposition 
of overdraft fees from 2015 to 2018. See CFPB, Supervisory 
Highlights, at 8-9 (Winter 2015), https://files.consumerfinance.gov/f/201503_cfpb_supervisory-highlights-winter-2015.pdf (last visited 
Jan. 4, 2024) (CFPB Winter 2015 Highlight); FRS, Interagency 
Overdraft Services Consumer Compliance Discussion, Outlook Live 
presentation slides, at 20-21 (Nov. 9, 2016), https://www.consumercomplianceoutlook.org/-/media/cco/Outlook-Live/2016/110916.pdf; FRS, Consumer Compliance Supervision Bulletin, at 12 
(July 2018), https://www.federalreserve.gov/publications/files/201807-consumer-compliance-supervision-bulletin.pdf (FDIC 2018 
Highlight); FDIC, Consumer Compliance Supervisory Highlights, at 2-3 
(June 2019), https://www.fdic.gov/regulations/examinations/consumercomplsupervisoryhighlights.pdf?source=govdelivery&utm_medium=email&utm_source=govdelivery (FDIC 2019 Highlight).
    \71\ OCC, OCC Bulletin 2023-12, Overdraft Protection Programs: 
Risk Management Practices (Apr. 26, 2023), https://www.occ.treas.gov/news-issuances/bulletins/2023/bulletin-2023-12.html (OCC Bulletin 2023-12); FDIC, Supervisory Guidance on 
Charging Overdraft Fees for Authorize Positive, Settle Negative 
Transactions, FIL-19-2023 (Apr. 26, 2023), https://www.fdic.gov/news/financial-institution-letters/2023/fil23019a.pdf.
    \72\ OCC Bulletin 2023-12.
---------------------------------------------------------------------------

    The CFPB has previously established rules governing overdraft 
credit on prepaid accounts. In 2016, the CFPB amended Regulation Z to 
provide that prepaid accounts that offer credit features are generally 
covered under Regulation Z's credit card rules.\73\ The CFPB also 
amended the compulsory-use provision under Regulation E to prohibit 
prepaid card issuers from requiring consumers to set up preauthorized 
EFTs to repay credit extended through an overdraft credit feature 
accessible by a hybrid prepaid-credit card.\74\
---------------------------------------------------------------------------

    \73\ 81 FR 83934, 83934-35 (Nov. 22, 2016). The CFPB amended the 
2016 Prepaid Final Rule in 2017 and 2018. See 82 FR 18975 (Apr. 25, 
2017); 83 FR 6364 (Feb. 13, 2018). The 2016 Prepaid Final Rule and 
subsequent amendments to that rule are referred to collectively 
herein as the Prepaid Accounts Rule.
    \74\ 81 FR 83934, 83935-36 (Nov. 22, 2016).
---------------------------------------------------------------------------

    In applying Regulation Z to overdraft credit features on prepaid 
accounts, the CFPB noted that the term ``credit'' in TILA includes 
``the right to . . . incur debt and defer its payment'' \75\ and 
explained that that definition ``covers the situation when a consumer 
makes a transaction that exceeds the funds in the consumer's account 
and a person elects to cover the transaction by advancing funds to the 
consumer.'' \76\ The CFPB further stated that overdraft fees on prepaid 
accounts ``generally constitute finance charges, because they are 
directly payable by the consumer and imposed directly by the creditor 
as a condition of the extension of credit.'' \77\ The CFPB also stated 
that overdraft services offered in connection with prepaid accounts 
``can be regulated by Regulation Z as a `plan' when the consumer is 
contractually obligated to repay the debt, even if the creditor 
retains, by contract, the discretion not to extend credit.'' \78\ At 
that time, the CFPB stated that it was continuing to study overdraft 
services on checking accounts and would propose any further regulatory 
consumer protections in that space through a separate rulemaking.\79\
---------------------------------------------------------------------------

    \75\ 15 U.S.C. 1602(f).
    \76\ 81 FR 83934, 84168 (Nov. 22, 2016).
    \77\ Id. at 84160.
    \78\ Id.
    \79\ Id. at 84162.
---------------------------------------------------------------------------

F. Need for CFPB Action

    As a result of the evolution of the overdraft market over the last 
few decades, the overdraft-related exception to the definition of 
finance charge in Regulation Z no longer serves its original purpose. 
The CFPB is proposing to update the exception, and several others that 
allow financial institutions to follow different rules for overdraft 
credit than for other forms of consumer credit, to ensure that 
overdraft credit offered by very large financial institutions is 
generally treated no differently than any other form of consumer 
credit, except in the narrow cases where it is provided as a courtesy 
to consumers. Preserving a limited exception from Regulation Z may 
encourage the availability of overdraft coverage, which can benefit 
consumers, especially given that much overdraft

[[Page 13859]]

credit is incidental in nature, as consumers often do not know with 
certainty whether or not a transaction will be presented against 
sufficient funds. But a blanket exception for all of today's non-
covered overdraft credit--which poses serious risks to consumers as 
reflected in the discussion of consumer impacts noted above, and 
resembles other mass-marketed high-cost consumer credit products--
cannot be justified as an exception for a courtesy, nor as consistent 
with TILA's purposes of promoting the informed use of credit and 
comparison shopping across credit products. Therefore, the CFPB 
proposes to limit the exception from TILA, for very large financial 
institutions, to overdraft credit that is offered at a cost to the 
consumer that does not exceed the financial institution's costs and 
losses associated with providing such coverage.

III. Outreach and Related Research

    The CFPB has engaged in outreach and research related to overdraft 
fees since soon after the CFPB's inception. In 2012, the CFPB initiated 
a broad inquiry into overdraft programs for consumer checking 
accounts.\80\ This inquiry included a request for information on the 
impacts of overdraft fees on consumers,\81\ and collection and analysis 
of overdraft-related data from several large banks with over $10 
billion in assets that provided a significant portion of all U.S. 
consumer checking accounts.\82\ The CFPB published analyses of these 
data in a series of reports from 2013-2017, which examined institution-
level policies and data, as well as account- and transaction-level 
data.\83\ These studies assessed, among other things, overdraft fee 
size, prevalence, and related account closure; overdraft policies and 
practices across institutions; the distribution of overdraft fee 
incurrence across accounts; how overdraft transactions and fees vary 
across opt-in status; the size of transactions that lead to overdrafts; 
how long account balances stay negative after overdrafts; and the 
characteristics of account holders (including end-of-day balance, 
deposits, credit score, and available credit on a credit card) across 
distributions of overdraft frequency. The CFPB also collected 
anonymized institution-level information from several core processors, 
which provide operations and accounting systems to financial 
institutions. This data collection informed the CFPB's 2021 report 
assessing policies and practices among a large sample of financial 
institutions using core processors.\84\
---------------------------------------------------------------------------

    \80\ Press Release, CFPB, CFPB Launches Inquiry into Overdraft 
Practices (Feb. 22, 2012), https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-launches-inquiry-into-overdraft-practices/.
    \81\ 77 FR 12031 (Feb. 28, 2012).
    \82\ See CFPB 2013 White Paper at 8; see also CFPB 2014 Data 
Point at 6-7.
    \83\ See CFPB 2013 White Paper; CFPB 2014 Data Point; CFPB 2017 
Data Point.
    \84\ Nicole Kelly & [Eacute]va Nagyp[aacute]l, Ph.D., CFPB, Data 
Point: Checking Account Overdraft at Financial Institutions Served 
by Core Processors (Dec. 2021), https://files.consumerfinance.gov/f/documents/cfpb_overdraft-core-processors_report_2021-12.pdf.
---------------------------------------------------------------------------

    In 2021, the CFPB examined financial institutions' reliance on 
overdraft/NSF fees from 2015 to 2019, finding that it was 
persistent.\85\ Since then, the CFPB has continued tracking trends in 
the marketplace \86\ and evaluating some banks' key overdraft-related 
metrics through the CFPB's supervision work.\87\ From December 2022 to 
June 2023, the CFPB reviewed the publicly available overdraft practices 
of financial institutions with assets over $10 billion.\88\ In 
addition, the CFPB has recently collected information from several 
financial institutions under the CFPB's supervision, including data 
regarding financial institutions' costs associated with offering 
overdraft credit, which is discussed further in part V.C.2 as well as 
in a separate report titled Overdraft and NSF Practices at Very Large 
Financial Institutions.
---------------------------------------------------------------------------

    \85\ CFPB 2021 Data Point.
    \86\ CFPB, Trends in overdraft/non-sufficient fund (NSF) fee 
revenue and practices, https://content.consumerfinance.gov/data-research/research-reports/trends-in-overdraftnon-sufficient-fund-nsf-fee-revenue-and-practices/ (last updated Oct. 11, 2023) 
(reflecting data and analysis published periodically from Dec. 1, 
2021 to present).
    \87\ See Patrick Gibson & Lisa Rosenthal, Measuring the impact 
of financial institution overdraft programs on consumers, CFPB (June 
16, 2022), https://www.consumerfinance.gov/about-us/blog/measuring-the-impact-of-financial-institution-overdraft-programs-on-consumers/
; CFPB, Fall 2023 Supervisory Highlights Junk Fees Update Special 
Edition, at 7-9 (Oct. 2023), https://files.consumerfinance.gov/f/documents/cfpb_supervisory_highlights_junk_fees-update-special-ed_2023-09.pdf (CFPB Fall 2023 Highlight).
    \88\ CFPB Market Monitoring of Publicly Available Overdraft 
Practices, Dec. 2022-July 2023.
---------------------------------------------------------------------------

    Consistent with the CARD Act, the CFPB consulted with the following 
agencies regarding rules that implement TILA section 149: (1) the 
Office of the Comptroller of the Currency; (2) the Board of Directors 
of the Federal Deposit Insurance Corporation; and (3) the National 
Credit Union Administration Board. The CFPB also consulted with the 
Board and several other Federal agencies, as discussed in [part VIII].

IV. Legal Authority

    The CFPB is issuing this proposal pursuant to its authority under 
TILA, EFTA, and the CFPA. This part includes a general discussion of 
the provisions on which the CFPB relies in this rulemaking.

A. Truth in Lending Act

    TILA section 105(a). TILA section 105(a) directs the CFPB to 
prescribe regulations to carry out the purposes of TILA and provides 
that such regulations may contain additional requirements, 
classifications, differentiations, or other provisions, and may provide 
for such adjustments and exceptions for all or any class of 
transactions, that the CFPB judges are necessary or proper to 
effectuate the purposes of TILA, to prevent circumvention or evasion 
thereof, or to facilitate compliance therewith.\89\ A purpose of TILA 
is to assure a meaningful disclosure of credit terms so that the 
consumer will be able to compare more readily the various available 
credit terms and avoid the uninformed use of credit.\90\ This stated 
purpose is tied to Congress's finding that economic stabilization would 
be enhanced and competition among the various financial institutions 
and other firms engaged in the extension of consumer credit would be 
strengthened by the informed use of credit.\91\ Thus, strengthened 
competition among financial institutions is a goal of TILA, achieved 
through the effectuation of TILA's purposes. A purpose of TILA is also 
to protect the consumer against inaccurate and unfair credit billing 
and credit card practices.\92\
---------------------------------------------------------------------------

    \89\ 15 U.S.C. 1604(a).
    \90\ 15 U.S.C. 1601(a).
    \91\ Id.
    \92\ Id.
---------------------------------------------------------------------------

    CARD Act Section 2. Section 2 of the CARD Act, which amended TILA 
to establish fair and transparent practices relating to the extension 
of credit under an open-end consumer plan, and for other purposes, also 
specifically grants the CFPB authority to issue rules and model forms 
it considers necessary to carry out the CARD Act and amendments made by 
the CARD Act.\93\
---------------------------------------------------------------------------

    \93\ Public Law 111-24; Sec.  2, 123 Stat. 1734, 1735 (2009).
---------------------------------------------------------------------------

    For the reasons discussed in this notice, the CFPB is proposing 
amendments to Regulation Z with respect to overdraft credit to carry 
out TILA's purposes. The CFPB at this time is proposing to retain 
additional requirements, adjustments, and exceptions as, in the CFPB's 
judgment, are necessary and proper to carry out the purposes of TILA, 
prevent

[[Page 13860]]

circumvention or evasion thereof, or to facilitate compliance. In 
developing these aspects of the proposal pursuant to its authority 
under TILA section 105(a), the CFPB has considered the purposes of 
TILA, including ensuring meaningful disclosures, facilitating 
consumers' ability to compare credit terms, helping consumers avoid the 
uninformed use of credit, and protecting consumers against inaccurate 
and unfair credit billing and credit card practices, and the findings 
of TILA, including strengthening competition among financial 
institutions and promoting economic stabilization.

B. Electronic Fund Transfer Act

    EFTA section 902 establishes that the purpose of the statute is to 
provide a basic framework establishing the rights, liabilities, and 
responsibilities of participants in EFT and remittance transfer systems 
but that its primary objective is the provision of individual consumer 
rights.\94\ Among other things, EFTA contains provisions regarding 
compulsory use of EFTs.\95\
---------------------------------------------------------------------------

    \94\ 15 U.S.C. 1693.
    \95\ 15 U.S.C. 1693k.
---------------------------------------------------------------------------

    EFTA section 904(a) authorizes the CFPB to prescribe regulations to 
carry out the purposes of EFTA.\96\ EFTA section 904(c) provides that 
regulations prescribed by the CFPB may contain such classifications, 
differentiations, or other provisions, and may provide for such 
adjustments or exceptions for any class of EFTs or remittance 
transfers, that the CFPB deems necessary or proper to effectuate the 
purposes of EFTA, to prevent circumvention or evasion, or to facilitate 
compliance.\97\ The Senate Report accompanying EFTA noted that 
regulations are ``essential to the act's effectiveness'' and ``will add 
flexibility to the act by permitting the [CFPB] to modify the act's 
requirements to suit the characteristics of individual EFT services. 
Moreover, since no one can foresee EFT developments in the future, 
regulations would keep pace with new services and assure that the act's 
basic protections continue to apply.'' \98\
---------------------------------------------------------------------------

    \96\ 15 U.S.C. 1693b(a).
    \97\ 15 U.S.C. 1693b(c).
    \98\ See S. Rept. No. 95-1273, at 26 (1978).
---------------------------------------------------------------------------

    EFTA section 904(c) also provides that the ``CFPB shall by 
regulation modify the requirements imposed by this subchapter on small 
financial institutions if the CFPB determines that such modifications 
are necessary to alleviate any undue compliance burden on small 
financial institutions and such modifications are consistent with the 
purpose and objective of this subchapter.''
    As discussed in part V below, the CFPB is adopting amendments to 
Regulation E, including with respect to compulsory use of preauthorized 
repayment and the definition of overdraft services, pursuant to the 
CFPB's authority under, as applicable, EFTA section 904(a) and (c). The 
CFPB is proposing to retain existing rules for financial institutions 
with less than $10 billion in assets because the CFPB has determined 
that such exceptions will alleviate undue compliance burdens as the 
CFPB continues to examine the market for smaller financial 
institutions.

C. Consumer Financial Protection Act

    CFPA section 1022(b)(1). Section 1022(b)(1) of the CFPA authorizes 
the CFPB to prescribe rules ``as may be necessary or appropriate to 
enable the [CFPB] to administer and carry out the purposes and 
objectives of the Federal consumer financial laws, and to prevent 
evasions thereof.'' \99\
---------------------------------------------------------------------------

    \99\ 12 U.S.C. 5512(b)(1).
---------------------------------------------------------------------------

    Among other statutes, TILA, EFTA, and the CFPA are Federal consumer 
financial laws.\100\ Accordingly, in setting forth this proposal, the 
CFPB is exercising its authority under CFPA section 1022(b) to 
prescribe rules that carry out the purposes and objectives of TILA, 
EFTA, and the CFPA and prevent evasion of those laws.
---------------------------------------------------------------------------

    \100\ CFPA section 1002(14), 12 U.S.C. 5481(14) (defining 
``Federal consumer financial law'' to include the provisions of the 
CFPA and enumerated consumer laws; ``enumerated consumer laws'' is 
defined in CFPA section 1002(12), 12 U.S.C. 5481(12)).
---------------------------------------------------------------------------

V. Discussion of the Proposed Rule

A. Who is covered? (Sec.  1026.62(b)(8))

    This proposed rule would expand protections to consumers of 
overdraft credit at financial institutions with more than $10 billion 
in assets. This proposal would not change the regulatory framework for 
overdraft credit offered by financial institutions with $10 billion or 
less in assets.
    To limit the proposed rule to overdraft credit offered by financial 
institutions with assets of more than $10 billion, the proposed rule 
would define in proposed Sec.  1026.62(b)(8) the term ``very large 
financial institution'' as an insured depository institution or an 
insured credit union with total assets of more than $10 billion and any 
affiliate thereof. A financial institution may determine whether it has 
total assets of more than $10 billion using the same determination that 
is used to determine whether such institutions are subject to the 
CFPB's supervisory authority under 12 U.S.C. 5515(a). The CFPB 
currently publishes a list of such institutions at https://www.consumerfinance.gov/compliance/supervision-examinations/institutions/. As discussed below, the proposed rule then uses the term 
``very large financial institution'' to limit the scope of overdraft 
credit that would be subject to the proposed rule.
    The CFPB has preliminarily determined that overdraft services 
offered by financial institutions with more than $10 billion in assets 
should be subject to this rule. As noted above, in the supervisory 
context, Congress adopted in 12 U.S.C. 5515(a) a $10 billion threshold 
to define the ``very large banks, savings associations, and credit 
unions'' that would be subject to the CFPB's primary supervision 
authority. The CFPB has preliminarily determined that a $10 billion 
threshold similarly should be used to define ``very large financial 
institution'' for limiting the scope of overdraft credit that would be 
covered by the proposed rule.
    The CFPB has preliminarily determined that consumers would benefit 
from the CFPB's proceeding with a rule that would apply to very large 
financial institutions--i.e., those with assets of $10 billion or more. 
Such a rule would increase protections for the overwhelming majority of 
consumers of overdraft credit. This proposal would cover financial 
institutions holding approximately 80 percent of consumer deposits as 
of December 2022 \101\ and responsible for approximately 68 percent of 
overdraft charges as of December 2022.\102\ The CFPB believes that 
consumers at very large financial institutions would benefit from the 
expanded protections that would be provided by the proposed rule.
---------------------------------------------------------------------------

    \101\ Computed from 2022 FFIEC and National Credit Union 
Administration call report data.
    \102\ Estimated using data from 2022 FFIEC Call Reports and 
methodology discussed at FN 29.
---------------------------------------------------------------------------

    In light of the different circumstances smaller financial 
institutions may face in adapting to the proposed regulatory framework, 
the CFPB is proposing not to extend the new rule to those institutions 
with $10 billion or less in assets. While the CFPB is not proposing any 
changes to the regulatory requirements for smaller financial 
institutions, the CFPB will continue to monitor the market in 
coordination with State and Federal supervisors.
    The CFPB seeks comment on its preliminary determination to apply 
the proposed rule only to very large financial institutions and on 
whether $10 billion is an appropriate threshold for defining very large 
financial institutions.

[[Page 13861]]

B. What transactions and accounts are covered?

    The CFPB proposes to add Sec.  1026.62(a) and (b) to define the 
scope of transactions and accounts that would be covered under the 
proposed rule. The proposed rule would introduce new terms and amend 
several existing Regulation Z definitions and their commentary to state 
that overdraft credit is credit and assist with ease of reference to 
various types of overdraft credit. First, the proposal would define 
overdraft credit in proposed Sec.  1026.62(a)(2), and proposed comment 
2(a)(14)-4 would provide a brief example to illustrate that overdraft 
credit is credit under TILA and Regulation Z.
    The CFPB's proposed rule would add commentary to the definition of 
open-end credit in Sec.  1026.2(a)(20) to confirm that overdraft credit 
that is subject to a finance charge is generally open-end credit and is 
therefore subject to the Regulation Z provisions that apply to open-end 
credit. The proposed definitions of covered overdraft credit and non-
covered overdraft credit in new Sec.  1026.62(b) would assist with 
referencing overdraft credit that would be or not be credit subject to 
Regulation Z under this proposal. Covered overdraft credit under this 
proposal would be overdraft credit that is subject to a finance charge 
or is payable by written agreement in more than four installments, and 
would be subject to Regulation Z. Non-covered overdraft credit under 
this proposal would be overdraft credit that is neither subject to a 
finance charge nor payable by written agreement in more than four 
installments, and would not be subject to Regulation Z. Additionally, 
the CFPB proposes to add a new definition of covered overdraft credit 
account to facilitate ease of reference to credit accounts through 
which the financial institutions extend or can extend covered overdraft 
credit.
1. Overdraft Credit (Sec. Sec.  1026.2(a)(14) and 1026.62(a))
    TILA defines ``credit'' to mean the right granted by a creditor to 
a debtor to defer payment of debt or to incur debt and defer its 
payment.\103\ Regulation Z similarly defines ``credit'' in existing 
Sec.  1026.2(a)(14) to mean the right to defer payment of debt or to 
incur debt and defer its payment. To facilitate compliance with the 
proposed rule, proposed comment 2(a)(14)-4 would provide a brief, 
illustrative example of overdraft credit. The 2016 Prepaid Final Rule 
similarly notes that a ``person, in extending overdraft funds, has 
provided the consumer with `the right . . . to incur debt and defer its 
payment.' '' \104\
---------------------------------------------------------------------------

    \103\ 15 U.S.C. 1602(f).
    \104\ 81 FR 83934, 84168 (Nov. 22, 2016).
---------------------------------------------------------------------------

    The CFPB is proposing to update several exceptions in Regulation Z, 
increasing consumer protections that apply to overdraft credit offered 
by very large financial institutions. To that end, the CFPB would add a 
definition of ``overdraft credit'' in proposed Sec.  1026.62(a) to help 
clarify the scope of transactions covered by the proposed rule. 
Proposed Sec.  1026.62(a) would define ``overdraft credit'' as any 
consumer credit extended by a financial institution to pay a 
transaction from a checking or other transaction account (other than a 
prepaid account as defined in Sec.  1026.61) held at the financial 
institution when the consumer has insufficient or unavailable funds in 
that account. Proposed Sec.  1026.62(a) would provide non-exhaustive 
examples, such as consumer credit extended through a transfer from a 
credit card account or overdraft line of credit.
    The proposed definition of ``overdraft credit'' would not cover 
credit features with respect to a prepaid account as defined in Sec.  
1026.61. The CFPB has preliminarily determined that it would be 
unnecessary and unduly burdensome to include prepaid accounts within 
the scope of this proposed rule. The CFPB's Prepaid Accounts Rule 
already provides comprehensive consumer protections tailored to prepaid 
accounts.\105\
---------------------------------------------------------------------------

    \105\ The 2016 Prepaid Final Rule and subsequent amendments to 
that rule are referred to collectively herein as the Prepaid 
Accounts Rule.
---------------------------------------------------------------------------

    Proposed Sec.  1026.62(a) would also clarify that the term 
``overdraft credit'' does not include credit exempt from Regulation Z 
pursuant to existing Sec.  1026.3. For example, consistent with TILA 
section 104(2),\106\ transactions in securities or commodities accounts 
in which credit is extended by a broker-dealer registered with the 
Securities and Exchange Commission or the Commodity Futures Trading 
Commission are not subject to Regulation Z pursuant to existing Sec.  
1026.3(d).
---------------------------------------------------------------------------

    \106\ 15 U.S.C. 1603(2).
---------------------------------------------------------------------------

2. Open-End Credit (Sec.  1026.2(a)(20))
    The term ``open-end credit'' is defined in Sec.  1026.2(a)(20) as 
(1) consumer ``credit,'' (2) that is extended under a ``plan,'' (3) 
where the person extending the credit may impose a ``finance charge'' 
from time to time on an outstanding unpaid balance, (4) the person 
extending the credit is a ``creditor,'' (5) the person extending the 
credit reasonably contemplates repeated transactions, and (6) the 
amount of credit that may be extended to the consumer during the term 
of the plan (up to any limit set by the creditor) is generally made 
available to the extent that any outstanding balance is repaid.
    For the reasons discussed below, the CFPB has preliminarily 
determined that virtually all overdraft credit that financial 
institutions provide today, such as through negative balances on 
checking accounts, would meet the Regulation Z definition of open-end 
credit, but for Regulation Z excepting overdraft fees from the 
definition of finance charge. Specifically, but for those exceptions, 
the typical $35 overdraft fee plainly constitutes a finance charge and 
a financial institution that regularly assesses such a finance charge 
is a creditor.\107\
---------------------------------------------------------------------------

    \107\ See Sec.  1026.2(a)(17)(i) (defining ``creditor'' as ``[a] 
person who regularly extends consumer credit that is subject to a 
finance charge. . . .'').
---------------------------------------------------------------------------

    The CFPB has preliminarily determined that overdraft credit that is 
typical in the market today would become covered overdraft credit under 
the proposed rule and would meet the six elements of open-end credit 
under Regulation Z. For clarity and to facilitate compliance, the CFPB 
is proposing additional commentary regarding two terms used in the 
definition of open-end credit: ``plan'' and ``finance charge.'' The 
following discusses each of the six elements in turn.
    (1) Credit. As discussed above, a person extending overdraft funds 
has provided credit under TILA and Regulation Z.\108\ Because the 
consumer is obligated to repay the funds, the financial institution is 
allowing the consumer to incur debt and defer its payment consistent 
with the TILA and Regulation Z definitions of ``credit.''
---------------------------------------------------------------------------

    \108\ 15 U.S.C. 1602(f); 12 CFR 1026.2(a)(14).
---------------------------------------------------------------------------

    (2) Plan. The CFPB has preliminarily determined that a checking 
account agreement offered in connection with overdraft credit would--
but for the Regulation Z exceptions of overdraft fees from the 
definition of finance charge--constitute a ``plan'' consistent with the 
definition of ``open-end credit plan'' in TILA.\109\ Specifically, but 
for the Regulation Z exceptions, the checking account agreement--
consistent with the language of comment 2(a)(20)-2.i--would be ``a 
contractual arrangement between the creditor [the institution offering 
checking account overdraft credit] and the consumer.'' As noted, the 
CFPB's proposed rule would modify those exceptions. The CFPB has 
preliminarily determined that an

[[Page 13862]]

institution offering checking account overdraft credit would be a 
creditor (discussed under (4) Person extending credit is a creditor, 
below) and the account agreement would be ``a contractual arrangement 
between the creditor and the consumer.'' The CFPB proposes to add 
comment 2(a)(20)-2.iv to clarify that with respect to covered overdraft 
credit, a plan means a program where the consumer is obligated 
contractually to repay any credit extended by the creditor, even if the 
creditor retains discretion not to extend credit in individual 
transactions.
---------------------------------------------------------------------------

    \109\ 15 U.S.C. 1602(j).
---------------------------------------------------------------------------

    The CFPB has preliminarily determined that the reservation of such 
discretion in connection with covered overdraft credit does not connote 
the absence of an open-end credit plan. The CFPB understands that 
financial institutions offering automated overdraft services include in 
their agreements provisions about how the overdraft service will 
operate and information about overdraft fees. These terms-and-
conditions documents typically stipulate that consumers using overdraft 
programs must and do agree to repay the debt created by an overdraft 
and the related fee, indicating that a contractual arrangement between 
the creditor and the consumer exists. Although these agreements 
typically state that the financial institution retains discretion to 
authorize or decline any particular overdraft, as a practical matter, 
financial institutions operating automated overdraft programs exercise 
limited if any discretion in authorizing particular transactions so 
long as the overdraft transaction is within the overdraft coverage 
limit that the institution internally established. The CFPB notes that 
credit card issuers similarly reserve the right to reject individual 
transactions in their contractual agreements, yet credit card programs 
are treated as open-end credit plans under TILA and Regulation Z. 
Treating the provision of automated overdraft credit in a comparable 
way would promote consistency. Therefore, the CFPB has preliminarily 
determined that a checking account agreement offered in connection with 
overdraft credit is a plan notwithstanding that the person offering the 
agreement reserves the right to not extend credit on individual 
transactions.
    (3) Imposing a ``finance charge'' from time to time. The CFPB has 
preliminarily determined that overdraft credit is generally subject to 
fees that would be finance charges but for Regulation Z's exceptions to 
the statutory finance charge definition. As noted, the CFPB's proposed 
rule would modify those exceptions such that checking account overdraft 
fees would generally be finance charges. In the absence of the 
exceptions, the CFPB has preliminarily determined that an institution 
offering checking account overdraft credit would be imposing a finance 
charge from time to time.
    While the proposed definition of covered overdraft credit includes 
overdraft credit that is subject to a finance charge as well as 
overdraft credit payable by a written agreement in more than four 
installments, the CFPB anticipates that most overdraft credit would 
meet the definition of covered overdraft credit because it is subject 
to a finance charge rather than because it is payable in more than four 
installments.\110\ The CFPB proposes comment 2(a)(20)-4.iii to explain 
that charges for paying a transaction that overdraws a consumer's 
account generally would be finance charges unless they are expressly 
excluded from the definition of finance charge by the proposed rule.
---------------------------------------------------------------------------

    \110\ A card issuer that extends covered overdraft credit that 
takes the form of closed-end credit and is subject to a finance 
charge or payable by a written agreement in more than four 
installments (including closed-end credit accessed by a hybrid 
debit-credit card) would be a creditor under Sec.  1026.2(a)(17)(iv) 
and subject to the special rules in that paragraph. A person who is 
not a card issuer and regularly extends covered overdraft credit 
that takes the form of closed-end credit and is subject to a finance 
charge or is payable by written agreement in more installments would 
be a creditor under Sec.  1026.2(a)(17)(i) and subject to the 
closed-end credit rules in Regulation Z, subpart C.
---------------------------------------------------------------------------

    Proposed comment 2(a)(20)-4.iii would clarify that these are 
charges ``imposed from time to time on an outstanding unpaid balance'' 
as long as there is no specific amount financed for the plan for which 
the finance charge, total of payments, and payment schedule can be 
calculated. The CFPB does not anticipate that there will be a specific 
amount financed for overdraft credit at the time the credit plan is 
established because the CFPB anticipates that the credit lines on these 
credit plans generally will be replenishing (discussed under (6) Amount 
of credit replenishes when outstanding balance is repaid, below). In 
such cases, an amount financed for the plan could not be calculated 
because the creditor will not know at the time the plan is established 
the amount of credit that will be extended under the plan. Thus, to the 
extent that any finance charge may be imposed in connection with such a 
credit plan, the credit plan will meet this criterion.
    (4) Person extending credit is a creditor. Assuming overdraft fees 
are finance charges, the CFPB has preliminarily determined that an 
institution providing covered overdraft credit is a ``creditor'' for 
purposes of the definition of ``open-end credit.'' A ``creditor'' is 
generally defined under Regulation Z to mean a person who regularly 
extends consumer credit that is subject to a finance charge or is 
payable by written agreement in more than four installments (not 
including a down payment), and to whom the obligation is initially 
payable, either on the face of the note or contract, or by agreement 
when there is no contract.\111\ Therefore, to the extent that overdraft 
credit is subject to a finance charge and is accordingly covered 
overdraft credit, it is also extended by a creditor if the creditor 
``regularly extends'' overdraft credit. The CFPB anticipates that most 
persons offering covered overdraft credit regularly extend overdraft 
credit and therefore would meet the definition of ``creditor.'' If an 
institution providing open-end covered overdraft credit is considered a 
``card issuer,'' then it would also be considered a creditor under 
current Sec.  1026.2(a)(17)(iii) for purposes of Regulation Z, subpart 
B.
---------------------------------------------------------------------------

    \111\ See Sec.  1026.2(a)(17)(i).
---------------------------------------------------------------------------

    (5) Reasonably contemplates repeated transactions. The CFPB has 
preliminarily determined that institutions providing checking account 
overdraft credit typically contemplate repeated overdraft transactions 
as the CFPB found that 93.2 percent of overdraft and NSF fees were 
assessed on consumers with four or more overdraft and NSF transactions 
per year.\112\ The CFPB has therefore preliminarily determined that 
this fifth element of the open-end credit definition is satisfied.
---------------------------------------------------------------------------

    \112\ CFPB 2017 Data Point at 13.
---------------------------------------------------------------------------

    (6) Amount of credit replenishes when outstanding balance is 
repaid. The CFPB has preliminarily determined that institutions 
providing checking account overdraft credit generally replenish the 
amount of overdraft credit available to consumers up to any overdraft 
coverage limit (i.e., consumers' ``shadow lines'') to the extent that 
any outstanding overdraft balance is repaid. This replenishable credit 
distinguishes open-end credit from a series of advances made pursuant 
to a closed-end credit loan commitment, but it does not mean that the 
credit plan must always be replenished to the original amount. The 
creditor may refuse to extend new credit in a particular case due to 
changes in the creditor's financial condition or the consumer's 
creditworthiness, if permitted by Regulation Z. While consumers should 
have a reasonable expectation of obtaining credit as long as they 
remain current, further extensions of credit need not be an

[[Page 13863]]

absolute right in order for the plan to meet the self-replenishing 
criterion. Because the CFPB anticipates that financial institutions 
will generally replenish overdraft credit to the extent that any 
outstanding overdraft balance is repaid, the CFPB has preliminarily 
determined that covered overdraft credit plans are generally 
replenishing.
3. Covered Overdraft Credit (Sec.  1026.62(b)(3)), Non-Covered 
Overdraft Credit (Sec.  1026.62(b)(6)), and Card Issuer (Sec.  
1026.2(a)(7))
    The CFPB proposes to define ``covered overdraft credit'' as 
overdraft credit that is subject to a finance charge or is payable by 
written agreement in more than four installments and ``non-covered 
overdraft credit'' as overdraft credit that is not subject to a finance 
charge and is not payable by written agreement in more than four 
installments. The purpose of the proposed definitions is to assist with 
ease of reference to overdraft credit that is subject to, or covered 
by, Regulation Z. As discussed in more detail in part V.C, some charges 
imposed in connection with overdraft credit are not considered finance 
charges. Thus, use of the proposed definitions will also help a person 
extending overdraft credit to readily ascertain whether they are 
subject to the requirements of the regulation.
    The proposed definition of ``overdraft credit'' is limited to 
consumer credit, but, even with that qualification, not all overdraft 
credit would be subject to Regulation Z if the definition is finalized 
as proposed. Many provisions of Regulation Z apply to a ``creditor,'' 
which generally is defined at Sec.  1026.2(a)(17)(i) as ``[a] person 
who regularly extends consumer credit that is subject to a finance 
charge or is payable by written agreement in more than four 
installments.'' Thus, a financial institution must offer overdraft 
credit that is subject to a finance charge or is payable by written 
agreement in more than four installments (i.e., covered overdraft 
credit) to be considered a creditor under Regulation Z. (Any financial 
institution offering overdraft credit will generally satisfy the 
definition of ``regularly'' under Sec.  1026.2(a)(17)(v).) Because some 
charges imposed in connection with overdraft credit are not considered 
finance charges, a financial institution may charge for overdraft 
credit without being considered a creditor under Regulation Z if 
certain requirements are met.
    Section 1026.2(a)(7) defines ``card issuer'' as a person that 
issues a credit card or that person's agent with respect to the card. 
Unlike other creditors, card issuers are subject to Regulation Z even 
if they extend credit that is not subject to a finance charge and is 
not payable by written agreement in more than four installments.\113\ 
However, this does not apply to overdraft credit that is not subject to 
a finance charge or repayable by written agreement in more than four 
installments, even if the financial institution extending such credit 
would otherwise be considered a card issuer.\114\ Under the proposal, 
extensions of overdraft credit that are not subject to a finance charge 
and are not payable by written agreement in more than four-installments 
(non-covered overdraft credit) would continue to not be covered by 
Regulation Z. Further, under the proposal, institutions providing debit 
cards that access only non-covered overdraft credit would continue to 
not be card issuers, and would therefore not be creditors under Sec.  
1026.2(a)(17)(iii), because the CFPB has preliminarily determined that 
allowing financial institutions to offer debit cards that access only 
below breakeven overdraft credit without being subject to Regulation Z 
would further the purposes of this proposal as discussed in part V.C.
---------------------------------------------------------------------------

    \113\ See 12 CFR 1026.1(c), and 1026.2(a)(17)(iii). Card issuers 
are also covered by the general rule that subjects them to 
Regulation Z if they extend open-end credit.
    \114\ Comment 2(a)(15)-2.ii.A. This comment provides that a 
debit card is not a credit card if there is no credit agreement, 
even if the creditor occasionally honors an inadvertent overdraft. 
Because the debit card is not considered a ``credit card'' under 
Regulation Z, a financial institution offering a debit card that can 
access non-covered overdraft credit is not considered a card issuer.
---------------------------------------------------------------------------

    For these reasons, the CFPB has preliminarily determined that a new 
definition of ``covered overdraft credit'' that parallels the general 
definition of creditor will assist with ease of reference to overdraft 
credit that is subject to Regulation Z. Additionally, the CFPB has 
preliminarily determined that a new definition of ``non-covered 
overdraft credit'' will assist with ease of reference to overdraft 
credit that is not subject to, or covered by, Regulation Z, 
particularly in the proposed rule's costs and losses calculation in 
Sec.  1026.62(d).
4. Covered Overdraft Credit Account (Sec.  1026.62(b)(4))
    The CFPB proposes to define ``covered overdraft credit account'' as 
a credit account through which a financial institution extends or can 
extend covered overdraft credit. The term includes any line of credit, 
credit card account, credit feature, credit line, credit plan, or 
credit subaccount through which the financial institution extends or 
can extend covered overdraft credit. Proposed Sec.  1026.62(c) would 
require very large financial institutions to structure covered 
overdraft credit as a separate credit account. Therefore, the term 
``covered overdraft credit account'' would assist in ease of reference 
to these separate credit accounts and in distinguishing them from tied 
checking or other transaction accounts.

C. Changes to the Definition of ``finance charge'' (Sec.  1026.4(b)(2), 
(b)(12), and (c)(3); Sec.  1026.62(d))

    Under Regulation Z, the term ``finance charge'' generally is 
defined in Sec.  1026.4(a) to mean ``the cost of consumer credit as a 
dollar amount.'' It includes any charge payable directly or indirectly 
by the consumer and imposed directly or indirectly by the creditor as 
an incident to or a condition of the extension of credit. It does not 
include any charge of a type payable in a comparable cash transaction.
    Regulation Z currently excludes certain fees or charges imposed by 
a financial institution for paying items that overdraw an account from 
the definition of ``finance charge'' unless ``the payment of such items 
and the imposition of the charge were previously agreed upon in 
writing.'' \115\ Additionally, where the payment of such items and 
imposition of the charge were previously agreed upon in writing, when a 
creditor imposes a service, transaction, activity, or carrying charge 
for each item that results in an overdraft on an account, such fees are 
excluded from the definition of finance charge if they do not exceed 
the charges imposed for paying or returning overdrafts on a similar 
transaction account that does not have such a written agreement.\116\ 
Neither of these exclusions appear within the statutory text of TILA.
---------------------------------------------------------------------------

    \115\ 12 CFR 1026.4(c)(3).
    \116\ 12 CFR 1026.4(b)(2).
---------------------------------------------------------------------------

    The proposal would amend the definition of ``finance charge'' in 
Sec.  1026.4 in three ways. First, it would modify the partial 
exception provided in Sec.  1026.4(b)(2) for certain charges imposed on 
checking and other transaction accounts so that the partial exception 
would no longer apply to ``covered asset accounts'' as defined in 
proposed Sec.  1026.62. Second, it would add proposed Sec.  
1026.4(b)(12) that would provide examples of charges imposed in 
connection with covered overdraft credit that are finance charges. 
Third, it would amend the exception provided in Sec.  1026.4(c)(3) so 
that the exception would no longer apply to ``above breakeven overdraft 
credit'' as defined

[[Page 13864]]

in proposed Sec.  1026.62. These proposed amendments are intended to 
specify which overdraft transactions include a finance charge and, 
therefore, may be subject to the requirements of TILA and Regulation Z.
1. Comparable Cash Transactions (Sec.  1026.4(b)(2))
    Under TILA section 106(a) (15 U.S.C. 1605(a)), the term ``finance 
charge'' generally provides that ``the amount of the finance charge in 
connection with any consumer credit transaction shall be determined as 
the sum of all charges, payable directly or indirectly by the person to 
whom the credit is extended, and imposed directly or indirectly by the 
creditor as an incident to the extension of credit.'' \117\ The finance 
charge does not include any charge of a type payable in a comparable 
cash transaction.\118\
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    \117\ 12 CFR 1026.4(a). Current Sec.  1026.4 implements TILA 
section 106 by largely mirroring the statutory definition of finance 
charge and the specific exclusions from that definition. In 
addition, Sec.  1026.4 specifies certain inclusions and exclusions 
from the finance charge that are not specifically listed in the 
statute. For example, Sec.  1026.4(c) specifically excludes 
application fees and forfeited interest from the definition of 
finance charge, whereas TILA does not.
    \118\ See 15 U.S.C. 1605(a).
---------------------------------------------------------------------------

    The current official interpretations address comparable cash 
transactions by stating that charges imposed uniformly in cash and 
credit transactions are not finance charges and by instructing that, to 
determine whether a transaction is a finance charge, the creditor 
should compare the credit transaction to a similar cash 
transaction.\119\ The Board updated the commentary addressing finance 
charges numerous times.\120\
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    \119\ Regulation Z comment 4(a)-1.
    \120\ For example, the Board initially adopted comment 226.4(a)-
4 to indicate that a fee charged by a card issuer when a consumer 
takes a cash advance on a credit card account using an ATM was not a 
finance charge to the extent that it did not exceed the charge 
imposed by the card issuer on its cardholders for using an ATM to 
withdraw cash from a consumer asset account, such as a checking or 
savings account. 48 FR 54642 (Dec. 6, 1983) and 49 FR 40560 (Oct. 
17, 1984). After subsequent rulemaking activity, current comment 
4(a)-4.1 provides that, for example, any charge imposed on a credit 
cardholder by a card issuer for the use of an ATM to obtain a cash 
advance is a finance charge regardless of whether the card issuer 
imposes a charge on its debit cardholders for using the ATM to 
withdraw cash from a consumer asset account, such as a checking or 
savings account. 74 FR 5263 (Jan. 29, 2009).
---------------------------------------------------------------------------

    Section 1026.4(b) lists examples of the types of charges that 
generally are finance charges. In particular, Sec.  1026.4(b)(2) 
provides that the finance charge includes ``[s]ervice, transaction, 
activity, and carrying charges, including any charge imposed on a 
checking or other transaction account (except a prepaid account as 
defined in Sec.  1026.61) to the extent that the charge exceeds the 
charge for a similar account without a credit feature.''
    The historical roots of Sec.  1026.4(b)(2) trace back to the first 
version of Regulation Z, published by the Board in 1969. In that 
version, Sec.  226.4(a)(2) indicated that the finance charge included 
service, transaction, activity, or carrying charges. The 1969 version 
of Sec.  226.4(a)(2) also included a footnote stating that the charges 
listed in Sec.  226.4(a)(2) included ``any charges imposed by the 
creditor in connection with a checking account to the extent that such 
charges exceed any charges the customer is required to pay in 
connection with such account when it is not being used to extend 
credit.'' \121\
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    \121\ 34 FR 2002, 2004 n.2 (Feb. 11, 1969).
---------------------------------------------------------------------------

    As part of its 1981 amendments to Regulation Z, the Board moved the 
text of Sec.  226.4(a)(2) to its current location in Sec.  1026.4(b)(2) 
and incorporated the language from the accompanying footnote into the 
main regulation text.\122\ Later that year, the Board also published 
comment 4(b)(2)-1, which provided two examples of service charges 
assessed on asset accounts with tied overdraft lines of credit that are 
not finance charges.\123\ In 1998, the Board revised comment 4(b)(2)-1 
to clarify that a service charge on a checking or other transaction 
account with a credit feature is a finance charge only if the charge 
exceeds the charge for a similar account without a credit feature.\124\
---------------------------------------------------------------------------

    \122\ 46 FR 20848, 20894 (Apr. 7, 1981).
    \123\ 46 FR 50288, 50299 (Oct. 9, 1981).
    \124\ 63 FR 16669, 16675 (Apr. 6, 1998).
---------------------------------------------------------------------------

    The CFPA generally granted rulemaking authority under the TILA and 
transferred primary oversight of Regulation Z to the CFPB. 
Subsequently, the CFPB renumbered Sec.  226.4 to Sec.  1026.4.\125\ In 
2016, the CFPB amended both Sec.  1026.4(b)(2) and comment 4(b)(2)-1 to 
exclude prepaid accounts as defined in Sec.  1026.61.\126\ As part of 
that rulemaking, the CFPB provided detailed guidance in comment 
4(b)(11)(ii) regarding how fees on prepaid accounts with a covered 
separate credit feature accessible by a hybrid prepaid-credit card 
should be compared to fees imposed on prepaid accounts without a 
covered separate credit feature. This guidance was more detailed and 
more restrictive than the guidance provided under Sec.  1026.4(b)(2) 
with regard to checking and transaction accounts other than prepaid 
accounts.\127\ As part of this guidance, the CFPB noted that the per 
transaction fee for a credit extension in the course of a transaction 
from a covered separate credit feature cannot be compared to a fee for 
declining to pay a transaction that is imposed on a prepaid account 
without such a credit feature in the same prepaid account program.\128\ 
The CFPB was concerned about possible evasion of the rule, noting that 
many prepaid cardholders who wish to use covered separate credit 
features may not have other asset accounts or savings accounts from 
which they can transfer funds to prevent an overdraft on the prepaid 
account in the course of authorizing, settling, or otherwise completing 
a transaction to obtain goods or services, obtain cash, or conduct 
person-to-person (P2P) transfers.\129\ As a result, if such a 
comparison were permitted, card issuers could charge a substantial fee 
to transfer funds from the checking account or savings account during 
the course of a transaction using the prepaid account (which many 
prepaid cardholders who wish to use covered separate credit features 
may not be able to use as a practical matter) and then charge that same 
substantial per transactions fee for credit drawn or transferred from 
the covered separate credit feature during the course of a transaction 
without such fee being considered a finance charge.\130\ The CFPB thus 
concluded that it was appropriate to limit the comparable fee in this 
case to per transaction fees imposed on prepaid accounts for 
transactions that access funds in the prepaid account in the same 
prepaid account program that does not have a covered separate credit 
feature because all prepaid accountholders can use prepaid accounts to 
make transactions that access available funds in the prepaid account 
and thus these types of transactions are available to all prepaid 
accountholders.\131\
---------------------------------------------------------------------------

    \125\ 76 FR 79767 (Dec. 22, 2011).
    \126\ 81 FR 83934, 84369, 84374 (Nov. 22, 2016).
    \127\ Id. at 84185.
    \128\ Id. at 84186.
    \129\ Id.
    \130\ Id. at 84186-87.
    \131\ Id. at 84187.
---------------------------------------------------------------------------

i. What is changing?
    The proposal would revise Sec.  1026.4(b)(2) and comment 4(b)(2)-1 
to provide that Sec.  1026.4(b)(2) does not apply to ``covered asset 
accounts'' as defined in Sec.  1026.62. This proposed exception would 
mirror the exception created by the CFPB's Prepaid Rule.
    The proposal also would add a paragraph at Sec.  1026.4(b)(12). 
Proposed Sec.  1026.4(b)(12) would add examples of finance charges with 
regard to covered asset accounts, as defined in proposed Sec.  
1026.62(b)(2). These proposed changes would broaden the definition of

[[Page 13865]]

``finance charge'' for covered asset accounts to apply the applicable 
rules to such accounts so that the full cost of credit is more 
accurately disclosed. The effect of the proposed changes would be to 
limit the existing exclusion in Sec.  1026.4(b)(2) such that nearly all 
service, transaction, activity, and carrying charges imposed on covered 
asset accounts, including, in particular, fees commonly known as 
``transfer fees'' for moving funds from overdraft lines of credit to 
covered asset accounts, would be ``finance charges'' under Regulation Z 
unless subject to another exclusion or limitation.\132\
---------------------------------------------------------------------------

    \132\ Under the proposal, fees would continue to be excluded 
from the definition of finance charge if they are described in 
existing Sec.  1026.4(c) through (e).
---------------------------------------------------------------------------

ii. Charges Imposed on Credit Accounts Required by Sec.  1026.62(c) 
(Sec.  1026.4(b)(12)(i))
    Proposed Sec.  1026.4(b)(12)(i) would specify that any service, 
transaction, activity, or carrying charge imposed on the separate 
credit account required by Sec.  1026.62(c) is a finance charge. That 
is, the fees described in proposed Sec.  1026.4(b)(12)(i) would be 
finance charges without regard to a comparison to fees for a comparable 
cash transaction.
    Under Sec.  1026.62(c), the required credit account exists for the 
purpose of providing credit. Therefore, service, transaction, activity, 
or carrying charges on this separate credit account are, per the 
finance charge definition in Sec.  1026.4(a), generally imposed as an 
incident to or a condition of the extension of credit, separate and 
distinct from any such fees applied to a separate checking or other 
transaction account. Because of the nature of the credit account, it 
would be difficult or impossible to determine which, if any, charge 
applied to a checking or other asset account is a charge for a similar 
or comparable cash transaction for the purpose of Sec.  1026.4(a). As 
with the Board's analysis in the 2009 amendment regarding credit card 
fee transactions, there is not necessarily a single or standard 
checking account to use for fee comparison. For example, there may be 
different fees applied to a checking account with a low balance minimum 
versus another type of checking account. Thus, it would be difficult in 
many cases to say which checking account provides the appropriate fee 
for comparison. Even assuming a comparable transaction could be 
identified, the disclosure a consumer might receive would depend on 
whether the creditor provides other asset accounts and imposes service, 
transaction, activity, or carrying charges on those accounts and 
whether the fees applied to those accounts exceed the fees for those on 
the separate credit account. As with the distinctions analyzed by the 
Board in the 2009 amendment, it is not clear that these distinctions 
are meaningful to consumers.\133\ The CFPB has thus preliminarily 
determined that any service, transaction, activity, or carrying charge 
imposed on the separate credit account required by Sec.  1026.62(c) 
would be a finance charge, except for charges specifically excluded by 
paragraphs (c) through (e) of section 1026.4.
---------------------------------------------------------------------------

    \133\ 74 FR 5263 (Jan. 29, 2009). As discussed above, the 
purposes of TILA are to provide a meaningful disclosure of credit 
terms to enable consumers to compare credit terms available in the 
marketplace more readily and avoid the uninformed use of credit and 
to protect consumers against inaccurate and unfair credit billing 
and credit card practices. 15 U.S.C. 1601(a).
---------------------------------------------------------------------------

iii. Charges Imposed on Covered Asset Accounts (Sec.  
1026.4(b)(12)(ii))
    Proposed Sec.  1026.4(b)(12)(ii) would specify that any service, 
transaction, activity, or carrying charge imposed on the covered asset 
account is a finance charge to the extent that the charge exceeds a 
comparable charge imposed on a checking or other transaction account 
that does not have covered overdraft credit tied to it. That is, any 
such charge is a finance charge to the extent that it exceeds a 
comparable charge imposed on a checking or other transaction account 
that is not a covered asset account. This provision would largely 
mirror existing Sec.  1026.4(b)(2) but with adjustments for covered 
asset accounts.
iv. Examples of Charges Imposed on Covered Asset Accounts (Sec.  
1026.4(b)(12)(iii)(A) Through (C))
    Proposed Sec.  1026.4(b)(12)(iii) would describe certain charges on 
a checking or other transaction account that does not have covered 
overdraft credit tied to it that are not comparable to charges imposed 
on a covered asset account, which, by definition, does have covered 
overdraft credit tied to it. These charges would therefore not be 
permitted to be subtracted from charges applied to the covered asset 
account for the purpose of determining whether or not a charge on the 
covered asset account is a finance charge.
    Proposed Sec.  1026.4(b)(12)(iii)(A) would exclude from the 
determination of a finance charge comparison of a charge for 
authorizing or paying a transaction that overdraws the checking or 
other transaction account that does not have covered overdraft credit. 
Proposed Sec.  1026.4(b)(12)(iii)(B) would exclude from the 
determination of a finance charge comparison of a charge for declining 
to authorize or pay a transaction, and proposed Sec.  
1026.4(b)(12)(iii)(C) would exclude from the determination of a finance 
charge comparison of a charge for returning a transaction unpaid.\134\ 
Thus, under proposed Sec.  1026.4(b)(12)(iii)(A) through (C), a very 
large financial institution may impose a service fee on a covered asset 
account when the institution transfers funds into the account from a 
covered overdraft credit account to cover a transaction that would 
otherwise overdraw the covered asset account. The institution may also 
impose a fee on a checking or other transaction account that does not 
have covered overdraft credit (i.e., is not a covered asset account) 
when the institution authorizes or pays a transaction that would 
otherwise overdraw the checking or other transaction account, declines 
to authorize or pay a transaction that would otherwise overdraw the 
checking or other transaction account, or returns unpaid a transaction 
that would otherwise overdraw the checking or other transaction 
account. However, the fee applied to a checking or other transaction 
account that does not have covered overdraft credit may not be compared 
to the fee on a covered asset account for the transfer of funds to 
cover a transaction. Accordingly, under proposed Sec.  
1026.4(b)(12)(iii)(A) through (C), the full amount of the service fee 
on a covered asset account when a very large financial institution 
transfers funds into the account from a covered overdraft credit 
account to cover a transaction that would otherwise overdraw the 
covered asset account would be a finance charge. Taken together, these 
three provisions would clarify that the service, transaction, activity, 
or carrying charges imposed on covered asset accounts may not, for the 
purposes of determining whether such fees are ``finance charges,'' be 
reduced by fees that relate to granting or denying a transaction that 
would overdraw an account without covered overdraft credit.
---------------------------------------------------------------------------

    \134\ Some or all of the fees described in proposed Sec.  
1026.4(b)(12)(iii)(A) through (C) are sometimes referred to as 
``overdraft fees,'' ``declination fees,'' or ``NSF fees.'' Proposed 
Sec.  1026.4(b)(12)(iii)(A) through (C) are broadly inclusive of the 
types of fees described therein, regardless of how such fees are 
labeled.
---------------------------------------------------------------------------

    The CFPB has made the preliminary determination to exclude from the 
determination of a finance charge these categories of charges for two 
reasons.

[[Page 13866]]

First, these types of charges are charges associated with decisions 
regarding whether or not to extend credit. The charges described in 
proposed Sec.  1026.4(b)(12)(iii)(A) are applied if credit is extended; 
the charges described in proposed Sec.  1026.4(b)(12)(iii)(B) and (C) 
are applied if credit is denied. As such, they are not charges 
associated with cash transactions, comparable or otherwise, and should 
not be compared to or subtracted from fees associated with covered 
overdraft credit. Additionally, the charges described in proposed Sec.  
1026.4(b)(12)(iii)(B) may be described as a penalty, while the charges 
described in proposed Sec.  1026.4(b)(12)(iii)(C) may be described as a 
service charge. In neither case are the charges of a type payable in 
comparable cash transactions.
v. Additional Examples of Charges Imposed on Covered Asset Accounts 
(Sec.  1026.4(b)(12)(iii)(D) and (E))
    Proposed Sec.  1026.4(b)(12)(iii)(D) would exclude, for purposes of 
determining whether the fee is a finance charge, comparison of a charge 
for transferring funds from any credit account into a checking or other 
transaction account that does not have covered overdraft credit. 
Proposed Sec.  1026.4(b)(12)(iii)(E) would exclude, for purposes of 
determining whether the fee is a finance charge, comparison of a charge 
for transferring funds from any other asset account, such as a savings 
account, into a checking or other transaction account that does not 
have covered overdraft credit. Thus, under proposed Sec.  
1026.4(b)(12)(iii)(D) and (E), a very large financial institution may 
impose a service fee on a covered asset account when the institution 
transfers funds into the account from a covered overdraft credit 
account to cover a transaction that would otherwise overdraw the 
covered asset account. The institution may also impose a fee to 
transfer funds into the checking or other transaction account (i.e., an 
account that is not a covered asset account) from any credit account or 
from any other asset account, such as a savings account, to cover a 
transaction that would otherwise overdraw the checking or other 
transaction account. But the fee applied to a checking or other 
transaction account that does not have covered overdraft credit may not 
be compared to the fee on a covered asset account for the transfer of 
funds to cover a transaction. Accordingly, under proposed Sec.  
1026.4(b)(12)(iii)(D) and (E), the full amount of the service fee on a 
covered asset account when a very large financial institution transfers 
funds into the account from a covered overdraft credit account to cover 
a transaction that would otherwise overdraw the covered asset account 
would be a finance charge.
    The exclusion in proposed Sec.  1026.4(b)(12)(iii)(D) addresses 
charges in connection with an extension of credit that is regulated as 
credit, albeit not overdraft credit. Because these are charges payable 
in a credit transaction, the CFPB has preliminarily determined that 
these are not charges payable in a comparable cash transaction and 
should not be used for comparison in the determination of a finance 
charge.
    The exclusion in proposed Sec.  1026.4(b)(12)(iii)(E) addresses 
charges to transfer funds into a checking or other transaction account 
that is not a covered asset account from any other asset account to 
cover a transaction that would otherwise overdraw the checking or other 
transaction account. This is because the CFPB is concerned about the 
possibility for evasion from the requirements of Regulation Z if 
comparison of the charges described in Sec.  1026.4(b)(12)(iii)(E) were 
to be permitted.
    The majority of combined overdraft and NSF fees are paid by a small 
subset of consumers. CFPB research found that 79 percent of combined 
overdraft and NSF fees were paid by 9 percent of consumers who paid 
more than 10 such fees per year, incurring a median of $380 in these 
fees in a year.\135\ Consumers paying more than 20 such fees in a year 
accounted for about 5 percent of accounts, while paying over 63 percent 
of the fees.\136\
---------------------------------------------------------------------------

    \135\ CFPB 2017 Data Point at 5; CFPB 2014 Data Point at 12.
    \136\ CFPB 2017 Data Point at 5.
---------------------------------------------------------------------------

    Consumers whose accounts are frequently overdrawn are typically 
more financially insecure than those who do not overdraw or who do so 
infrequently.\137\ Accordingly, many consumers who overdraft may not 
have other asset accounts or may not have sufficient funds in those 
accounts from which they can transfer funds to prevent such overdraft.
---------------------------------------------------------------------------

    \137\ See id. at 5-6.
---------------------------------------------------------------------------

    If such a comparison were permitted, a bank could potentially avoid 
the definition of ``finance charge'' by charging a substantial fee for 
transferring funds into a checking or other transaction account that is 
not a covered asset account from any other asset account and then 
charge that same substantial amount for any service, transaction, 
activity, or carrying charge imposed on the covered asset account. By 
comparing the two substantial fees to each other, the amount of the 
charge on the covered asset account would not be considered a finance 
charge. For the subset of consumers who pay the majority of overdraft 
and NSF fees, however, this comparison of fees would be a comparison 
between a product that such consumers can readily access (i.e., covered 
asset accounts) to a product that a majority of such consumers may not 
be able to access (i.e., other asset accounts) because they do not have 
such accounts or do not have sufficient funds in those accounts to 
easily execute transfers. As a result, the CFPB preliminarily concludes 
that a per transaction fee for transferring asset funds from other 
asset accounts such as a savings account should not be compared with 
(should not be allowed to be subtracted from) a service, transaction, 
activity, or carrying charge assessed on a covered asset account. The 
CFPB seeks comment on the proposed revisions to Sec.  1026.4(b)(2), the 
proposal to add Sec.  1026.4(b)(12), and the CFPB's preliminary 
conclusions regarding comparable cash transactions.
2. History of the Current Sec.  1026.4(c)(3) Exception
    Historically, whenever a consumer bounced a check written against a 
deposit account that lacked a credit feature, the consumer's financial 
institution typically returned the check unpaid and assessed the 
consumer an NSF fee. In addition, the payee on the check might have 
taken various actions against the consumer, such as assessing the 
consumer a late fee or returned item fee, reporting the consumer's 
payment as late to a credit bureau, or bringing legal action against 
the consumer for writing a bad check.\138\ However, instead of 
returning the check unpaid, a financial institution, in its discretion, 
might have paid the check into overdraft as a courtesy.\139\
---------------------------------------------------------------------------

    \138\ 74 FR 5212, 5214 (Jan. 29, 2009); 74 FR 59033, 59035 (Nov. 
17, 2009); Steve Cocheo, Follow the Bouncing Check, 95 ABA Banking 
J. 32, at 34 (Apr. 2003) (Cocheo 2003).
    \139\ See Peter G. Weinstock & Stephanie E. Dreyer, Overdraft 
Protection Programs: The Emerging Battleground for Bankers and 
Consumer Advocates, 121 Banking L. J. 791, at 795 (2004) (``Banks 
have been paying NSF items as a service to customers on a case-by-
case basis for decades.''); see also Cocheo 2003 at 34 (``Our 
overdraft program formalizes the traditional courtesy of paying 
insufficient checks. . . .'') (quoting Gaynell Lawson, Executive 
Vice-President and Chief Financial Officer of Citizens Bank of 
Blount County).
---------------------------------------------------------------------------

    Although Congress did not exempt any category of overdraft credit 
from TILA,\140\ the Board used its exception (not its interpretive) 
authority to create a limited exception for this longstanding practice 
when it issued Regulation Z in

[[Page 13867]]

1969.\141\ Specifically, the Board added Sec.  226.4(d), which provided 
that ``[a] charge imposed by a bank for paying checks which overdraw or 
increase an overdraft in a checking account is not a finance charge 
unless the payment of such checks and the imposition of such finance 
charge were previously agreed upon in writing.'' \142\ A bank providing 
discretionary, check-centric overdraft (a.k.a. ``bounce-check 
protection'' or ``courtesy overdraft protection'' services, as noted in 
later Federal Register publications \143\) was not a creditor subject 
to Regulation Z because, pursuant to this exception, it did not impose 
a finance charge (and otherwise did not structure the repayment of 
credit by written agreement in more than four installments).\144\ As 
Board commentary on Regulation Z noted, this exception enabled a bank 
to ``occasionally, as an accommodation to its customer, honor a check 
which inadvertently overdraws that account'' without having to comply 
with the requirements of Regulation Z.\145\
---------------------------------------------------------------------------

    \140\ See Public Law 90-321, 82 Stat. 146 (May 29, 1968), 
codified as amended at 15 U.S.C. 1601 et seq.
    \141\ 34 FR 2002, 2004 (Feb. 11, 1969); 73 FR 28904, 28927 (May 
19, 2008) (``Historically, if a consumer engaged in a transaction 
that overdrew his or her account, depository institutions used their 
discretion on an ad hoc basis to pay the overdraft, usually imposing 
a fee. The Board recognized this longstanding practice when it 
initially adopted Regulation Z in 1969 to implement TILA.'').
    \142\ 34 FR 2002, 2004 (Feb. 11, 1969).
    \143\ 70 FR 29582, 29582 n.1 (May 24, 2005).
    \144\ See 12 CFR 1026.2(a)(17)(i).
    \145\ 42 FR 22360, 22362 (May 3, 1977).
---------------------------------------------------------------------------

    In 1981, the Board amended Regulation Z to, among other things, 
make ``a few minor editorial changes'' to the Sec.  226.4(d) 
exception.\146\ Specifically, the Board changed the term ``bank'' to 
``financial institution'' and the term ``checks'' to ``items.'' \147\ 
The Board made these changes ``to reflect the ability of financial 
institutions other than banks, such as savings and loan associations, 
to pay items that are similar to checks, such as negotiable orders of 
withdrawal, into overdraft.'' \148\ Additionally, the Board renumbered 
Sec.  226.4(d) to Sec.  226.4(c)(3).\149\ By making these ``minor 
editorial changes,'' the Board stated that ``[n]o substantive change is 
intended . . . .'' \150\ In other words, the Board did not change the 
purpose of the Sec.  226.4(d) exception, which was to allow financial 
institutions to provide consumers with courtesy check-centric overdraft 
services without having to comply with the requirements of TILA and 
Regulation Z.
---------------------------------------------------------------------------

    \146\ 46 FR 20848, 20855 (Apr. 7, 1981).
    \147\ Id.
    \148\ Id.
    \149\ Id.
    \150\ Id.
---------------------------------------------------------------------------

    The language from the Board's 1981 version of Sec.  226.4(c)(3) 
remains in effect unchanged at Sec.  1026.4(c)(3) in the CFPB's current 
version of Regulation Z.\151\
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    \151\ In 2016, the CFPB added an additional sentence to the end 
of Sec.  1026.4(c)(3) to clarify that the paragraph does not apply 
to credit offered in connection with a prepaid account as defined in 
Sec.  1026.61. See 81 FR 83934, 84179 (Nov. 22, 2016). However, this 
amendment did not impact the text of the portion of Sec.  
1026.4(c)(3) adopted in 1981.
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3. Proposed Changes to the Sec.  1026.4(c)(3) Exception
    It is the CFPB's preliminary view that the Sec.  1026.4(c)(3) 
exception is overbroad for purposes of the current non-covered 
overdraft market. To address the issue, the CFPB proposes to add a new 
sentence to the end of Sec.  1026.4(c)(3) that would provide that the 
paragraph no longer applies to ``above breakeven overdraft credit'' as 
that term is defined in proposed Sec.  1026.62. As discussed in part 
V.A, the CFPB proposes to apply its proposed Sec.  1026.4(c)(3) 
amendment only to very large financial institutions.
    The CFPB proposes to define the term ``above breakeven overdraft 
credit'' at Sec.  1026.62(b)(1) to mean overdraft credit extended by a 
very large financial institution to pay a transaction on which, as an 
incident to or a condition of the overdraft credit, the very large 
financial institution imposes a charge or combination of charges 
exceeding the average of its costs and charge-off losses for providing 
non-covered overdraft credit as described in Sec.  1026.62(d). The CFPB 
proposes to establish above breakeven overdraft credit by reference to 
the average of a very large financial institution's cost and charge off 
losses for providing non-covered overdraft credit rather than the cost 
and estimated charge-off losses for providing non-covered overdraft 
credit for each separate transaction because the CFPB has preliminarily 
determined, based on its supervisory experience, that many financial 
institutions currently do not track their costs and charge-off losses 
at the transaction level, but generally can calculate their average 
costs and charge-off losses at the product level. Further, the CFPB 
expects that an institution-wide calculation would be easier for very 
large financial institutions to administer.
    The CFPB is proposing these changes for several independent 
reasons.
    First, the market for non-covered overdraft credit has changed in 
important ways--many financial institutions have automated their non-
covered overdraft programs and expanded them to cover non-check 
transactions, while also adjusting their account pricing structure to 
more heavily emphasize overdraft fees.\152\ These changes have caused 
the market for non-covered overdraft credit to move away from the 
historical courtesy model to the point that, for a significant number 
of consumers, non-covered overdraft credit is no longer an occasional 
accommodation for inadvertent overdrafts.
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    \152\ 74 FR 5212 (Jan. 29, 2009); 81 FR 83934, 83950-51 (Nov. 
22, 2016).
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    Unlike in 1969, when checks made up the lion's share of overdraft 
transactions,\153\ recent CFPB analysis of account data from a number 
of large banks showed that on average overall only 10.36 percent of 
monthly debit transactions occurred by check, while 62.14 percent 
occurred by debit card (both one-time and recurring), 12.14 percent 
occurred by ACH, 6.43 percent occurred by ATM, 0.71 percent occurred by 
bank teller, and the remainder occurred by other means.\154\
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    \153\ Stephen Quinn & William Roberds, The Evolution of the 
Check as a Means of Payment: A Historical Survey, 93 Fed. Rsrv. Bank 
of Atlanta Econ. Rev. 1, at 21 (2008).
    \154\ CFPB 2014 Data Point at 17.
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    This shift away from check transactions is significant because, as 
financial institutions have automated their non-covered overdraft 
programs and expanded them to cover non-check transactions, the sheer 
volume of overdraft transactions and associated fees has 
increased.\155\ This trend especially is pronounced with respect to 
debit cards, where CFPB research shows that incidence of overdraft 
increases for consumers who use debit cards. For example, CFPB research 
shows that 92.3 percent of accounts that do not use debit cards have no 
overdrafts in a year of account use and only 0.6 percent of such 
accounts incur more than 10 overdrafts per year.\156\ In contrast, 
accounts that use their debit cards more than 30 times per month have 
the lowest percentage of accounts with no overdraft (51.2 percent) and 
the highest percentage of accounts that overdraft more than 10 times 
per year (18.0 percent).\157\ In other words, for many consumers who 
use debit cards frequently, non-covered overdraft credit services are 
no longer provided as an occasional accommodation.\158\

[[Page 13868]]

Moreover, financial institutions today routinely extend overdraft 
credit in circumstances where they stand to generate more direct 
revenue from extending overdraft credit to cover a transaction than 
they would from declining it (because, for example, consumers are 
rarely charged NSF fees for declined debit card transactions,\159\ and 
nearly two-thirds of banks with over $10 billion in assets have 
eliminated NSF fees \160\).\161\ As a result of these changes, non-
covered overdraft programs now generate a substantial portion of the 
direct fee revenue that many financial institutions make from checking 
accounts (and much of the total revenue that financial institutions 
make from low-balance accounts), which has encouraged some financial 
institutions to promote consumers' use of non-covered overdraft credit 
and/or to calibrate their systems to increase overdraft fee 
revenue.\162\ This shift represents a significant departure from the 
historical courtesy model, which provided an accommodation to consumers 
for the occasional inadvertent overdraft.
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    \155\ 81 FR 83934, 83950-51 (Nov. 22, 2016).
    \156\ CFPB 2014 Data Point at 15 tbl.4c.
    \157\ Id.
    \158\ 42 FR 22360, 22362 (May 3, 1977) (``[Section 226.4(d) (now 
section 1026.4(c)(3)] relates 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 that account.'').
    \159\ 74 FR 5212, 5217 (Jan. 29, 2009).
    \160\ See CFPB October 2023 Data Spotlight.
    \161\ This was not always the case. Historically, financial 
institutions charged no more for honoring an overdrawing check 
through non-covered overdraft credit than they did for returning the 
check unpaid. For example, a 1976 report on bank fees presented the 
results of a survey of banks in New York and Washington, DC. Of the 
41 banks surveyed, 39 charged overdraft fees that were equal to or 
less than the amount of their NSF fees. See Senate Staff Report at 
10-11.
    \162\ See 81 FR 83934, 83950-51 (Nov. 22, 2016); 70 FR 29582, 
29583 (May 24, 2005); CFPB 2013 White Paper at 16-17; CFPB Winter 
2015 Highlight at 8-9; FDIC 2018 Highlight at 12; FDIC 2019 
Highlight at 2-3.
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    The proposed changes described in this section would return the 
exception to its original conception--excepting overdraft services from 
Regulation Z when offered as a courtesy or accommodation to customers--
while adapting it to fit within the modern payments system. The concept 
of a courtesy or an accommodation is the provision of a service 
primarily for the convenience of a customer. A credit product that 
produces large amounts of revenue and profit, and is provided to many 
people who may not want the service, is not consistent with the concept 
of providing an additional service as a courtesy. The CFPB 
preliminarily finds that, where a financial institution sets its 
overdraft fees at or below its breakeven point, it provides a courtesy 
service to consumers who overdraw their accounts. Conversely, where a 
financial institution sets its overdraft fees above its breakeven 
point, and profits from those fees, it cannot be said to be providing a 
courtesy. The CFPB has preliminarily determined that the Sec.  
1026.4(c)(3) exception should continue to apply to overdraft fees set 
at or below the breakeven point, so that very large financial 
institutions have the option to recover their costs and losses 
associated with providing non-covered overdraft credit to consumers 
(without having to comply with Regulation Z), and thus, are not 
disincentivized from providing non-covered overdraft to consumers as a 
convenience.
    In addition to returning the Sec.  1026.4(c)(3) exception to its 
original courtesy conception, an independent justification for the 
proposed amendments to Sec.  1026.4(c)(3) is that they would further 
TILA's purposes of promoting the informed use of credit and comparison 
shopping across credit products. Currently, most non-covered overdraft 
credit is subject to Regulations DD and E. Although Regulation DD and 
Regulation E require certain disclosures for overdraft services, 
neither regulation requires that such non-covered overdraft credit be 
disclosed as a credit product. Instead, both regulations use terms like 
overdraft fees, overdraft practices, or overdraft services that tend to 
obscure the fact that financial institutions are providing consumers a 
credit product. Applying the Regulation Z regulatory framework would 
benefit consumers by ensuring that above breakeven overdraft credit is 
disclosed as a credit product and treated like other credit products. 
Treating above breakeven overdraft credit like other credit would 
benefit consumers by helping them understand that they are entering 
into a contract for a credit product provided by a creditor. Unlike the 
disclosures required under Regulation DD and Regulation E, the 
disclosures required by Regulation Z are designed to set forth 
contractual terms for credit products clearly. Providing such 
disclosures will help promote the informed use of credit. In addition, 
treating above breakeven overdraft credit like other credit would 
benefit consumers by aligning the disclosures for such credit with 
other credit types and by applying Regulation Z's substantive credit 
protections consistently across similar credit products.
    Further, disclosing above breakeven overdraft credit under the 
Regulation Z regulatory framework would make it easier for consumers to 
compare the cost of such credit with the cost of other credit products, 
such as linked credit cards, because financial institutions would 
present the credit terms for above breakeven overdraft credit in the 
same form that creditors present the credit terms of other credit 
products. In its November 2009 rulemaking finalizing the current 
Regulation E opt-in rule, the Board acknowledged that, based on its own 
consumer testing, consumers are interested in receiving more 
information about alternatives to non-covered overdraft credit services 
on ATM and one-time debit card transactions prior to deciding whether 
or not to opt in to such services.\163\ Even though consumers generally 
are interested in alternatives to non-covered overdraft credit 
services, some consumers, including consumers who may even have 
alternative credit available to them,\164\ continue to be frequent 
users of non-covered overdraft credit services despite its higher cost 
relative to other forms of credit. For example, CFPB research found 
that in 2012 the median overdraft fee was $34, the median size of a 
debit card transaction incurring an overdraft fee was $24, and that the 
majority of non-covered overdraft credit transactions were repaid 
within three days.\165\ Putting these figures in lending terms, the 
annual percentage rate (APR) for such a non-covered overdraft credit 
transaction would be 17,000 percent (if transaction fees were included 
in the APR calculation).\166\ By comparison, CFPB research found that 
the APR for a typical payday loan was 391 percent and APRs on credit 
cards can range between 12 and 30 percent.\167\ The fact that frequent 
overdrafters continue to use non-covered overdraft credit services 
despite its higher cost relative to other credit suggests that some 
frequent overdrafters have difficulty comparing non-covered overdraft 
credit services with available alternatives. Disclosing above breakeven 
overdraft credit services under the Regulation Z regulatory framework 
would promote

[[Page 13869]]

the informed use of credit by ensuring that credit terms were disclosed 
consistently across competing credit products, thereby helping 
consumers compare such credit with alternative credit options.
---------------------------------------------------------------------------

    \163\ 74 FR 59033, 59048 (Nov. 17, 2009).
    \164\ CFPB 2017 Data Point at 16 tbl. 2.
    \165\ CFPB 2013 White Paper at 52; CFPB 2014 Data Point at 5.
    \166\ Press Release, CFPB, CFPB Finds Small Debit Purchases Lead 
to Expensive Overdraft Charges (July 31, 2014), https://www.consumerfinance.gov/about-us/newsroom/cfpb-finds-small-debit-purchases-lead-to-expensive-overdraft-charges/. Recent supervisory 
data the CFPB has collected, reflecting transactions from 2022 and 
2023, found that the median debit card overdraft resulted in an 
overdraft credit extension of approximately $25.50. Assuming a 
credit extension of $25.50, the $35 overdraft fee typical of very 
large financial institutions, and a three-day repayment period 
results in a similar APR of over 16,000 percent.
    \167\ CFPB, Payday Loans and Deposit Advance Products, at 9 
(Apr. 24, 2013), https://files.consumerfinance.gov/f/201304_cfpb_payday-dap-whitepaper.pdf; CFPB, Ask CFPB: What is a 
payday loan?, https://www.consumerfinance.gov/ask-cfpb/what-is-a-payday-loan-en-1567/ (last reviewed Jan. 17, 2022).
---------------------------------------------------------------------------

    Moreover, the CFPB expects that applying the Regulation Z 
regulatory framework to above breakeven overdraft credit services would 
benefit consumers by applying the regulation's existing substantive 
protections to such credit services. For example, the CFPB's proposal, 
as discussed in additional detail in this notice, would apply the due 
date requirement in 1026.7(b)(11)(i)(A), the offset prohibitions in 
Sec.  1026.12(d)(1), and the ability to pay provisions in Sec.  1026.51 
to covered overdraft credit accounts (including credit that currently 
is non-covered above breakeven overdraft credit) that can be accessed 
by a hybrid debit-credit card. Therefore, applying Regulation Z to 
above breakeven overdraft credit would prohibit very large financial 
institutions from immediately taking funds from any incoming deposit in 
repayment of the consumer's overdraft balance, would require very large 
financial institutions to establish due dates on the same day of each 
billing cycle, and would require very large financial institutions to 
assess the consumer's ability to pay for such credit--all protections 
that the current Regulation DD and Regulation E regulatory frameworks 
do not provide.
    The CFPB acknowledges that the current Sec.  1026.4(c)(3) exclusion 
has existed in its present form for decades and that very large 
financial institutions have undertaken efforts to ensure that their 
non-covered overdraft credit services comply with Regulations DD and E. 
The CFPB also recognizes that some consumers have come to rely on the 
availability of non-covered overdraft credit. The CFPB's proposal 
reflects, in part, an effort to balance these reliance interests 
against the other considerations discussed above in this section. The 
proposed changes to Sec.  1026.4(c)(3) would require very large 
financial institutions to comply with Regulation Z when providing above 
breakeven overdraft credit services, but would allow them to continue 
to comply with Regulations DD and E when providing non-covered 
overdraft credit services at or below breakeven pricing. Thus, a very 
large financial institution that has invested in compliance with 
Regulations DD and E could maintain its current processes for providing 
consumers with non-covered overdraft credit so long as it priced such 
credit at or below breakeven pricing.
i. Alternatives to the Proposed Sec.  1026.4(c)(3) Amendment Considered
    During the development of its proposal, the CFPB considered 
alternatives to its proposed amendment to Sec.  1026.4(c)(3) including 
(1) striking Sec.  1026.4(c)(3) from Regulation Z in its entirety and 
(2) updating the opt-in disclosure requirements at Sec.  1005.17 of 
Regulation E in a manner that would better disclose the costs 
associated with authorizing non-covered overdraft protection for ATM 
and debit card transactions.\168\
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    \168\ Press Release, CFPB, CFPB Unveils Prototypes of ``Know 
Before You Owe'' Overdraft Disclosure Designed to Make Costs and 
Risks Easier to Understand (Aug. 4, 2017), https://www.consumerfinance.gov/about-us/newsroom/cfpb-unveils-prototypes-know-you-owe-overdraft-disclosure-designed-make-costs-and-risks-easier-understand/.
---------------------------------------------------------------------------

    With respect to the first alternative, the CFPB has preliminarily 
determined that it should not eliminate all non-covered overdraft 
credit. The CFPB believes that the proposed amendment to Sec.  
1026.4(c)(3) is preferable because it would address the CFPB's concerns 
relating to consumers' informed use of above breakeven overdraft 
credit, including a consumer's ability to compare competing credit 
offers, and apply other substantive protections, including ability to 
pay requirements and offset restrictions, while allowing very large 
financial institutions to still offer non-covered overdraft credit as a 
courtesy if they chose to do so.
    With respect to the second alternative, the CFPB preliminarily 
determined that Regulation E opt-in disclosures would not communicate 
the cost of above breakeven overdraft credit as effectively as 
Regulation Z disclosures. As discussed above, applying Regulation Z 
will ensure that above breakeven overdraft credit is disclosed as a 
credit product and treated like other credit products. In addition, 
Regulation E disclosures distinguish between overdraft transactions 
completed via electronic fund transfers and overdraft transactions 
completed via other funds transfer methods (such as checks), whereas 
Regulation Z disclosures would apply identically to above breakeven 
overdraft transactions regardless of fund transfer method. Modifying 
the opt-in disclosure requirements at Sec.  1005.17 of Regulation E 
also would not provide other substantive protections available through 
Regulation Z, such as the ability to pay requirements and the offset 
prohibition discussed above. These substantive protections are 
important. For example, by requiring financial institutions to assess 
consumers' ability to pay, the proposed rule would ensure that 
financial institutions confirm that consumers could make the required 
minimum periodic payments under the terms of their account based on 
their income or assets and their current obligations. As another 
example, by prohibiting offset and requiring the due date to be on the 
same day each month for covered overdraft credit accessible by a hybrid 
debit-credit card, the proposed rule would give consumers more time to 
repay overdraft credit and greater control over how to structure those 
repayments. Therefore, the CFPB preliminarily believes that its 
proposal better protects consumers than an approach that merely updates 
the opt-in disclosure requirements at Sec.  1005.17 of Regulation E.
ii. How To Calculate Whether Overdraft Credit Is Above Breakeven 
Overdraft Credit
    To clarify the circumstances under which overdraft credit offered 
by a very large financial institution is ``above breakeven overdraft 
credit'' for purposes of proposed Sec.  1026.62(b)(1), the CFPB also 
proposes to add a paragraph at Sec.  1026.62(d).
    Proposed Sec.  1026.62(d)(1) would clarify that overdraft credit 
offered by a very large financial institution is ``above breakeven 
overdraft credit'' for purposes of proposed Sec.  1026.62(b)(1) if the 
charge or combination of charges for such credit exceeds the greater of 
(1) the pro rata share of the very large financial institution's annual 
total direct costs and charge-off losses for providing non-covered 
overdraft credit calculated in accordance with Sec.  1026.62(d)(2); or 
(2) an estimate published by the CFPB.
    For purposes of proposed Sec.  1026.62(d)(1), a ``combination of 
charges'' would include all revenue received in connection with an 
overdraft transaction when determining whether the charges for that 
transaction exceed its average costs and charge-off losses for 
providing non-covered overdraft credit, including any extended or 
sustained overdraft fees, any interest charges on outstanding overdraft 
balances, and any other payments the very large financial institution 
receives in connection with an overdraft transaction or transactions.
    The approach outlined in proposed Sec.  1026.62(d)(1) would provide 
a very large financial institution with two methods for determining 
whether its current charge for an overdraft transaction exceeds the 
average of its costs and charge-off losses for providing non-covered 
overdraft credit--the breakeven standard described at proposed Sec.  
1026.62(d)(1)(i) and the benchmark fee described at proposed

[[Page 13870]]

Sec.  1026.62(d)(1)(ii). To the extent that a very large financial 
institution does not determine or prefers not to calculate its average 
costs and charge-off losses for providing non-covered overdraft credit 
using the breakeven standard described at proposed Sec.  
1026.62(d)(1)(i), the proposal would permit the very large financial 
institution to determine whether it is offering above breakeven 
overdraft credit based solely on the benchmark fee at proposed Sec.  
1026.62(d)(1)(ii). The CFPB has preliminarily determined that this 
approach would decrease compliance costs for some very large financial 
institutions by providing them with a simple bright-line method for 
determining whether the overdraft credit they extend is above breakeven 
overdraft credit. Other very large financial institutions would be 
permitted the flexibility to calculate on their own whether the 
overdraft credit they extend is above breakeven pricing.
    To employ the breakeven standard described at proposed Sec.  
1026.62(d)(1)(i), a very large financial institution would determine 
its total direct costs and charge-off losses for providing non-covered 
overdraft credit to all accounts open at any point during the previous 
12 months and then divide that figure by the total number of non-
covered overdraft transactions attributable to those accounts occurring 
the previous 12 months. The CFPB proposes to use figures from the prior 
12 months because (1) reviewing annualized data would even out any 
seasonal variations that could occur with a shorter review period; (2) 
very large financial institutions likely already collect annualized 
cost and loss data; and (3) reviewing annualized data would require 
very large financial institutions to make average cost and loss 
calculations only once per year. When determining the total number of 
non-covered overdraft transactions occurring the previous 12 months, 
the financial institution may account for non-covered overdraft 
transactions that do not incur fees, including those that do not incur 
fees consistent with fee waiver policies, by excluding from its 
transaction total any non-covered overdraft transaction for which the 
financial institution either refunded or did not assess any fee or 
charge. The CFPB believes that allowing very large financial 
institutions to adjust their transaction totals to account for 
overdraft transactions that do not incur fees would give financial 
institutions flexibility to maintain or to implement fee waiver 
policies.
    Under the proposal, when a very large financial institution applies 
the breakeven standard either for the first time or after transitioning 
from the benchmark fee described at proposed Sec.  1026.62(d)(1)(ii), 
it may include direct costs and charge-off losses from any transaction 
that was a non-covered overdraft transaction during the prior 12-months 
even if, applying the breakeven standard, it would have been considered 
above breakeven overdraft credit during that period. When determining 
the total number of non-covered overdraft transactions occurring the 
previous 12 months, a very large financial institution applying the 
breakeven standard either for the first time or after transitioning 
from the benchmark fee described at proposed Sec.  1026.62(d)(1)(ii) 
also may exclude from its transaction total any non-covered overdraft 
transaction for which the financial institution either refunded or did 
not assess any fee or charge.
    To provide additional guidance regarding the types of costs and 
charge-off losses a very large financial institution could consider 
when calculating the breakeven standard, the CFPB also proposes to add 
a paragraph at Sec.  1026.62(d)(2). Proposed Sec.  1026.62(d)(2) would 
provide that, when calculating the breakeven standard, a very large 
financial institution could consider costs and charge-off losses that 
are specifically traceable to its provision of non-covered overdraft 
credit in the previous year. The CFPB proposes to allow very large 
financial institutions to consider only costs and charge-off losses 
that are specifically traceable to their provision of non-covered 
overdraft credit to prevent very large financial institutions from 
employing the breakeven standard in a manner that would circumvent 
Sec.  1026.62(b)(1). For example, without the specifically traceable 
restriction, very large financial institutions might include in their 
average cost and loss calculations costs and charge-off losses that are 
more appropriately attributable either to other segments of their 
deposit business or to their deposit business overhead.
    Based on its previous experience collecting overdraft cost data 
from financial institutions, the CFPB has preliminarily determined that 
specifically traceable costs and charge-off losses would include a very 
large financial institution's cost of funds for providing non-covered 
overdraft credit, its charge-off losses for non-covered overdraft 
credit, and any operational costs that are directly attributable to its 
non-covered overdraft program. For example, if a very large financial 
institution uses issue tagging in its call center to reasonably and 
accurately gauge the number of customer service calls it receives 
relating to non-covered overdraft credit, direct costs relating to 
those customer service calls would be specifically traceable and the 
very large financial institution could include the direct costs 
relating to those calls in its calculation of costs under the breakeven 
standard. Conversely, the CFPB preliminarily believes that both general 
overhead costs and charge-off losses resulting from unauthorized use, 
EFT errors, billing errors, returned deposit items, or rescinded 
provisional credit are not specifically traceable to a very large 
financial institution's provision of non-covered overdraft credit and 
must not be included in its calculation of costs under the breakeven 
standard. For example, if a very large financial institution purchases 
office equipment to support its depository business generally, such 
costs would not be specifically traceable to its provision of overdraft 
services and the very large financial institution could not include the 
cost of such office equipment in its calculation of costs under the 
breakeven standard.
    Under the benchmark fee approach outlined at proposed Sec.  
1026.62(d)(1)(ii), a very large financial institution may presume that 
any charge or combination of charges it imposes for paying a 
transaction that overdraws an account does not exceed its costs and 
charge-off losses for providing non-covered overdraft credit if the 
charge or combination of charges is less than or equal to any benchmark 
fee established by the CFPB. The CFPB is considering four alternatives 
for this benchmark fee--$3, $6, $7, and $14. The CFPB views each of 
these options as potentially viable because, as discussed in additional 
detail in the following paragraphs, they each apply the calculation 
method proposed by the breakeven standard to alternative data sets and/
or alternative approaches for calculating the total number of non-
covered overdraft transactions. (As highlighted at the end of this 
section, the CFPB seeks comment on each of these alternatives.)
    The CFPB requested data, information, and documents from eight 
financial institutions relating to, among other things, their costs and 
charge-off losses for providing non-covered overdraft credit in the 
2022 calendar year.\169\ Each of these eight financial institutions 
would qualify as very large financial institutions for purposes of

[[Page 13871]]

proposed Sec.  1026.62(b)(8) and, collectively, these eight 
institutions account for over 30 percent of the total assets of very 
large financial institutions and represent a diverse set of geographic 
footprints, asset sizes, and business models.\170\ The CFPB received 
data from all eight institutions, but some institutions were unable to 
provide all the requested data at the level of detail requested.\171\ 
As a result, the CFPB referenced data from five financial institutions 
to calculate the four alternatives for the proposed benchmark fee.
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    \169\ CFPB, Discretionary Overdraft and NSF Practices at Very 
Large Financial Institutions (Jan. 2024), https://files.consumerfinance.gov/f/documents/cfpb_overdraft-nsf-practices-very-large-financial-institutions_2024-01.pdf (CFPB 2024 Overdraft 
NSF Report).
    \170\ Id. at 4.
    \171\ Id.
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    The CFPB used the same general formula to calculate all four of the 
proposed alternative benchmark fees but relied on different datapoints 
to derive each fee amount. To calculate each benchmark fee, the CFPB 
first determined the total charge-off losses (excluding losses 
attributable to unauthorized use, billing errors, rescinded provisional 
credit, returned deposit items, and other sources not attributable to 
overdraft transactions) for the financial institutions included in its 
estimate calculation and then divided that figure by the total number 
of non-covered overdraft transactions (i.e., overdraft transactions 
currently excepted from Regulation Z) in the relevant dataset for each 
estimate. Next, the CFPB adjusted this charge-off loss per transaction 
figure by adding to it $1 per transaction to account for the CFPB's 
estimate of a financial institution's cost of funds and operational 
costs, which the CFPB estimates does not exceed $0.50 per transaction 
each.\172\ To calculate the $0.50 cost of funds figure, the CFPB 
estimated that financial institutions would pay interest of 5 percent 
per year to obtain funds and would lend an average of $120 to consumers 
per transaction for a period of one month. The CFPB preliminarily 
believes that this cost of funds estimate would cover most 
institutions' costs given that the median overdraft amount per 
transaction is $50 and that consumers typically repay overdraft 
transactions within three days.\173\ Based on its supervisory and 
enforcement experience, the CFPB preliminarily believes that call 
center expenses represent the bulk of the operational costs associated 
with providing non-covered overdraft programs at very large financial 
institutions. To calculate the figure for operational costs, the CFPB 
estimated that 10 percent of non-covered overdraft transactions would 
require 10 minutes of a customer service representative's time and that 
20 percent of these customer service contacts also would require 10 
minutes of a supervisor's time.\174\ Based on this estimate, the CFPB 
determined that at an average hourly wage of $21.07 and $30.81 for 
customer service representatives and supervisors in the financial 
sector, respectively, financial institutions would incur roughly $0.45 
per non-covered overdraft transaction on call center expenses.\175\ The 
CFPB then rounded this figure up to $0.50 to account for other 
potential operational costs.
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    \172\ Id. at 8-9.
    \173\ Id. at 8.
    \174\ Id. at 9.
    \175\ U.S. Bureau of Labor Stat., Occupational Employment and 
Wage Statistics: May 2022 National Industry-Specific Occupational 
Employment and Wage Estimates NAICS 5220A1--Credit Intermediation 
and Related Activities (5221 and 5223 only), https://www.bls.gov/oes/current/naics4_5220A1.htm (last modified Apr. 25, 2023).
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    To calculate the $3 benchmark fee figure, the CFPB first added 
together the charge-off losses for the five financial institutions in 
its sample that produced sufficient data to analyze. Next, the CFPB 
calculated a charge-off loss per transaction figure by dividing the 
total charge-off loss figure by the total number of non-covered 
overdraft transactions paid by those five financial institutions. When 
tallying the total number of non-covered overdraft transactions for the 
charge-off loss per transaction figure, the CFPB counted both non-
covered overdraft transactions that resulted in an overdraft fee and 
non-covered overdraft transactions that did not result in an overdraft 
fee. This approach yielded a charge-off loss per transaction figure of 
$2 per transaction after rounding to the nearest dollar. The CFPB then 
added $1 per transaction to this figure to account for the CFPB's 
estimate of a financial institution's cost of funds and operational 
costs.
    To calculate the $6 benchmark fee figure, the CFPB used the same 
approach it used to calculate the $3 benchmark fee figure, but changed 
how it tallied the total number of non-covered overdraft transactions 
for the charge-off loss per transaction figure. Instead of counting 
both non-covered overdraft transactions that resulted in an overdraft 
fee and non-covered overdraft transactions that did not result in an 
overdraft fee, the CFPB counted only non-covered overdraft transactions 
that resulted in an overdraft fee. This change increased the charge-off 
loss per transaction figure to $5 per transaction after rounding to the 
nearest dollar. The CFPB then added $1 dollar per transaction to this 
figure to account for the CFPB's estimate of a financial institution's 
cost of funds and operational costs.
    To calculate the $7 benchmark fee figure, the CFPB first identified 
the financial institution in its sample with the highest charge-off 
losses. Next, the CFPB calculated a charge-off loss per transaction 
figure by dividing total charge-off losses by the total number of non-
covered overdraft transactions paid by the financial institution. When 
tallying the total number of non-covered overdraft transactions for the 
charge-off loss per transaction figure, the CFPB counted both non-
covered overdraft transactions that resulted in an overdraft fee and 
non-covered overdraft transactions that did not result in an overdraft 
fee. This approach yielded a charge-off loss per transaction figure of 
$6 per transaction after rounding to the nearest dollar. The CFPB then 
added $1 dollar per transaction to this figure to account for the 
CFPB's estimate of a financial institution's cost of funds and 
operational costs.
    To calculate the $14 benchmark fee figure, the CFPB used the same 
approach it used to calculate the $7 benchmark fee figure (i.e., 
identifying the financial institution in its sample with the highest 
charge-off losses) but changed how it tallied the total number of non-
covered overdraft transactions for the charge-off loss per transaction 
figure. Instead of counting both non-covered overdraft transactions 
that resulted in an overdraft fee and non-covered overdraft 
transactions that did not result in an overdraft fee, the CFPB only 
counted non-covered overdraft transactions that resulted in an 
overdraft fee. This change increased the charge-off loss per 
transaction figure to approximately $13 per transaction after rounding 
to the nearest dollar. The CFPB then added $1 dollar per transaction to 
this figure to account for the CFPB's estimate of a financial 
institution's cost of funds and operational costs.
    In addition to amending Sec.  1026.4(c)(3), the proposed rule also 
would revise the commentary to Sec.  1026.4(c)(3) by adding proposed 
comment 4(c)(3)-3. Proposed comment 4(c)(3)-3 would direct readers to 
see proposed Sec.  1026.4(b)(12) for guidance on when fees imposed on a 
covered asset account as defined in Sec.  1026.62 are finance charges.
    The CFPB seeks comment on all aspects of the proposed amendments to 
Sec.  1026.4(c)(3) and its commentary and on its proposal to add Sec.  
1026.62(b)(1) and (d). In particular, the CFPB seeks comment on the 
following issues:

[[Page 13872]]

    1. Should the CFPB eliminate the Sec.  1026.4(c)(3) exception for 
very large financial institutions rather than amend its application to 
above breakeven overdraft credit?
    2. What alternative formulae, if any, should the CFPB consider for 
calculating costs and charge-off losses for the breakeven standard and 
the proposed alternative benchmark fee? For example, instead of 
requiring a very large financial institution to calculate its average 
costs and charge-off losses for non-covered overdraft across its entire 
depository account portfolio, should the breakeven standard allow a 
very large financial institution to make separate calculations of its 
average costs and charge-off losses for non-covered overdraft within 
subsets of its depository account portfolio, such as account 
relationship tiers or average account balance ranges?
    3. What are the pros and cons of permitting very large financial 
institutions to adjust their non-covered overdraft transaction totals 
to account for their fee waiver policies under the breakeven standard 
described at proposed Sec.  1026.62(d)(1)(i)?
    4. What alternative approaches, if any, should the CFPB consider 
for calculating the breakeven standard described at proposed Sec.  
1026.62(d)(1)(i)? For example, should the CFPB consider an approach 
that allows very large financial institutions to estimate their costs 
as a flat dollar amount per transaction, as a percentage of their total 
asset account costs, or as a percentage of losses?
    5. What alternative figures should the CFPB consider, if any, for 
its cost of funds and operational cost estimates?
    6. Which of its proposed benchmark fee figures--$3, $6, $7, and 
$14--should the CFPB adopt? What alternative figures should the CFPB 
consider, if any?
    7. Should the breakeven standard require the same calculation used 
to calculate the benchmark fee? For example, if the CFPB finalizes a 
benchmark fee based on all non-covered overdraft transactions, whether 
or not the very large financial institution collected a fee in 
connection with the transaction, should the breakeven standard also 
require the very large financial institution to calculate their costs 
based on all non-covered overdraft transactions, whether or not the 
very large financial institution collected a fee in connection with the 
transaction?

D. Changes to Covered Overdraft Credit Offered by Very Large Financial 
Institutions

    As discussed below, the CFPB is proposing to change requirements 
that apply to covered overdraft credit offered by a very large 
financial institution by: (1) requiring covered overdraft credit to be 
structured as a separate account; (2) applying additional credit card 
provisions to covered overdraft credit that can be accessed by a hybrid 
debit-credit card; and (3) applying Regulation E's compulsory-use 
prohibition to covered overdraft credit. For existing open-end covered 
overdraft credit products, the proposed new designation as covered 
overdraft credit accounts would not impose duplicative or additional 
account opening requirements.
1. Structure of Covered Overdraft Credit (Sec.  1026.62(c))
    The CFPB proposes in Sec.  1026.62(c) to prohibit a very large 
financial institution from structuring covered overdraft credit as a 
negative balance on a checking or other transaction account. 
Conversely, the CFPB proposes to require such institution to structure 
covered overdraft credit as a separate credit account.
    The CFPB has preliminarily determined that this structural 
prohibition and requirement will make it easier for creditors and 
consumers to implement and understand, respectively, covered overdraft 
credit. Regulation Z's open-end credit rules generally address 
independent credit products that do not have substantial positive 
(asset) funds associated with them. For example, existing Sec.  
1026.11(a) generally provides that creditors must refund any asset 
balances on a credit account to the consumer within six months.
    In contrast, overdraft credit, whether or not subject to Regulation 
Z's requirements, by its nature involves both consumer assets and 
consumer credit, the purpose of the latter being to cover shortfalls in 
the former. In the context of overdraft credit, the CFPB has 
preliminarily determined that requiring the separation of a consumer's 
asset balance, such as a checking or other transaction account that is 
a ``covered asset account'' as defined in proposed Sec.  1026.62(b)(2), 
from the consumer's credit balance, such as a credit account that is a 
``covered overdraft credit account'' as defined in proposed Sec.  
1026.62(b)(4), is an appropriate addition to Regulation Z under its 
TILA section 105(a) authority, as it is necessary or proper to 
facilitate creditor compliance and to effectuate the purposes of TILA 
by helping to avoid the uninformed use of credit and protecting 
consumers against inaccurate and unfair credit billing and credit card 
practices. Existing Sec.  1026.61(b), which was established by the 
Bureau's 2016 Prepaid Final Rule, similarly prohibits credit accounts 
tied to prepaid accounts from being structured as negative balances on 
the prepaid accounts and requires that the prepaid account and the tied 
credit account be separate.\176\ Further, commenters that addressed 
this aspect of the Bureau's 2014 prepaid accounts proposed rule 
universally supported the separate asset account and credit account 
structure that the 2016 rule adopted.\177\
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    \176\ See 12 CFR 1026.61(b).
    \177\ See 81 FR 83934, 84264 (Nov. 22, 2016).
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    In the context of overdraft credit that is not subject to 
Regulation Z's requirements, financial institutions today typically 
provide overdraft credit to consumers through negative balances on 
consumers' asset accounts. That is, institutions typically provide one 
account to a consumer, which is regulated as an asset account such as a 
checking or other transaction account, with an asset balance being a 
positive balance in the account and an overdraft credit balance being a 
negative balance in the account. Further, institutions typically obtain 
repayment of a consumer's negative overdraft credit balance by 
immediately taking any incoming deposit to the asset account, such as 
an electronic direct deposit, as repayment (or ``offset'') of the 
account's negative balance. For example, if a consumer's asset account 
balance is a negative $100 overdraft credit balance and an institution 
receives a $150 electronic direct deposit which is to be credited to 
the consumer's account, the institution immediately takes the first 
$100 of the electronic deposit to repay the consumer's overdraft credit 
balance, such that the consumer's account balance subsequent to the 
institution's receipt of the electronic direct deposit is a positive 
asset balance of $50.
    This practice by institutions of immediately taking incoming 
deposits as repayment of overdrafts is known as ``offset.'' Regulation 
Z generally prohibits offset in connection with covered overdraft 
credit, as defined in proposed 1026.62(b)(3), which can typically be 
accessed by a ``credit card'' as defined in 1026.2(a)(15).\178\ That 
is, the institution providing the covered overdraft credit is generally 
prohibited from immediately taking funds from

[[Page 13873]]

incoming deposits in repayment of consumers' outstanding overdraft 
credit balances. Thus, continuing the above example of an outstanding 
overdraft credit balance of $100, when Regulation Z applies and the 
institution receives a $150 deposit to be credited to the consumer's 
account, the institution is prohibited from immediately taking the 
funds of the incoming deposit, but must instead credit the funds to the 
consumer's asset account and give the consumer the use of the funds. In 
other words, when Regulation Z applies, the regulation's offset 
prohibition requires that the institution make it such that the 
consumer has both an overdraft credit balance of $100 (the money the 
consumer continues to owe the institution) and an asset balance of $150 
(the money from the incoming deposit) at the same time.\179\
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    \178\ See TILA section 169(a) (15 U.S.C. 1666h(a)) and 12 CFR 
1026.12(d)(1).
    \179\ While TILA and Regulation Z prohibit offset, the statute 
and regulation do permit periodic deductions pursuant to the 
consumer's written agreement. See 12 CFR 1026.12(d)(3). These 
periodic deductions must occur at regular intervals and therefore 
cannot occur immediately whenever deposit funds are received to be 
credited to the consumer's account. Thus, the permissibility of 
periodic deductions does not change the requirement that the 
institution make it such that the consumer has both an overdraft 
credit balance of $100 and an asset balance of $150 at the same 
time.
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    Accordingly, the CFPB has preliminarily determined that the 
proposed requirement in Sec.  1026.62(c) to structure covered overdraft 
credit as a separate credit account that is separate from the checking 
or other transaction account will enable institutions to comply with 
the TILA and Regulation Z offset prohibition. Specifically, the CFPB 
has preliminarily determined that that proposed requirement would 
facilitate compliance with the TILA and Regulation Z offset prohibition 
by requiring an institution to retain at the same time both an 
outstanding overdraft credit balance and an outstanding asset balance 
for a consumer. Conversely, the CFPB has preliminarily determined that 
it is difficult or impossible for an institution to maintain both an 
asset (positive) balance and a credit (negative) balance at the same 
time for a consumer within a single asset account and that it is 
therefore difficult or impossible for the institution to provide 
overdraft credit to the consumer in a manner that complies with 
Regulation Z without providing the consumer with an asset account and a 
credit account that are separate from each other.
    In addition, the CFPB has preliminarily determined that the 
proposed requirement to structure covered overdraft credit as a 
separate credit account would (1) protect consumers against inaccurate 
and unfair credit billing and credit card practices by enabling them to 
exercise control over their funds and (2) avoid the uninformed use of 
credit by enabling consumers to better understand their asset and 
credit balances. With respect to protecting consumers by enabling them 
to control their funds, the requirement will facilitate consumers' 
ability to control incoming deposits to their accounts and use them for 
purposes other than immediately repaying an overdraft balance, as the 
offset prohibition requires institutions to permit consumers to do. For 
example, continuing the example above, rather than the institution 
immediately using the incoming $150 electronic direct deposit to 
eliminate the $100 negative overdraft balance in the single account, 
under the proposed separate-account structure the consumer might use 
the electronically deposited funds to pay a phone or electric bill and 
to retain the unpaid $100 balance in the separate credit account (i.e., 
to repay the credit balance to the institution at a later time).
    With respect to avoiding the uninformed use of credit by enabling 
consumers to understand their asset and credit balances, the 
requirement for separate accounts will enable consumers to better 
monitor their account balances and trace how their funds are being used 
through the better disclosures (e.g., entries on periodic statements) 
that institutions will provide to consumers in compliance with 
Regulations E and DD for asset accounts and in compliance with 
Regulation Z, which effectuates the informed use of credit, for the 
credit accounts. Continuing the above example of a $150 incoming 
deposit and $100 overdraft balance, with a separate asset account and 
credit account (as would be required by proposed Sec.  1026.62(c)), the 
consumer whose asset account receives an electronic direct deposit 
would see disclosed on the periodic statements a $150 credit entry to 
the asset account and, at that time, a $150 balance in the asset 
account and a $100 balance in the credit account.
    Further, if the consumer were to subsequently choose to use the 
$150 asset funds to repay the overdraft, the consumer would at that 
later point in time see on the statements the following data points on 
the asset account and credit account: (1) a debit entry of $100 to the 
asset account for repayment of the overdraft credit balance, (2) a 
resulting balance in the asset account of $50, (3) a credit entry of 
$100 to the credit account, and (4) a resulting balance in the credit 
account of $0. In contrast, without the separate credit account, where 
overdrafts are represented as negative balances on the asset account, 
the same consumer would see disclosed only the following: a $150 credit 
to the asset account for the incoming electronic deposit and a 
resulting balance of $50 in the asset account. The CFPB has 
preliminarily determined that this latter approach may result in the 
uninformed use of credit by the consumer, because the consumer may not 
readily appreciate how the credit and asset aspects of their asset 
account have interacted. The CFPB has therefore also preliminarily 
determined that the former approach of requiring that the asset account 
and the credit account be separate from each other--and the better 
periodic-statement disclosures that necessarily accompany that 
approach--will help avoid the uninformed use of credit by the consumer.
    Credit account opening. Opening an open-end consumer credit plan, 
such as a covered overdraft credit account, that is subject to 
Regulation Z may trigger certain requirements and protections, 
including account opening disclosures pursuant to Sec. Sec.  1026.5 and 
1026.6 and, if a credit card is involved, ability to pay requirements 
in Sec.  1026.51 and fee limitations in Sec.  1026.52(a). Consistent 
with existing requirements, for purposes of determining compliance with 
provisions of Regulation Z that are tied to credit account opening, an 
account opening with respect to covered overdraft credit occurs on the 
date a consumer may first engage in a transaction for which covered 
overdraft credit can be extended under the account.
    If the CFPB finalizes the rule as proposed, very large financial 
institutions that offer overdraft services on existing accounts may 
need to take steps to come into compliance with Regulation Z. For 
example, assume that prior to the effective date of this proposed rule, 
a very large financial institution through negative balances on a 
deposit account provides above breakeven overdraft credit that is not 
subject to Regulation Z to a consumer, and assume further that the 
institution seeks to continue to provide above breakeven overdraft 
credit to the consumer subsequent to the effective date of the proposed 
rule. After the proposed rule's effective date, such above breakeven 
overdraft credit would be covered overdraft credit, and proposed Sec.  
1026.62(c) of the proposed rule (discussed in the preceding paragraphs) 
would require the institution to provide the covered overdraft credit 
to the consumer through a separate covered overdraft credit account. 
Therefore, to provide above

[[Page 13874]]

breakeven, covered overdraft credit to the consumer subsequent to the 
effective date of this proposed rule, the institution would need to 
open a covered overdraft credit account for the consumer. Further, the 
institution would be required by Sec.  1026.5(b)(1)(i) to provide to 
credit account opening disclosures to the consumer for the covered 
overdraft credit account before the consumer makes the first 
transaction under the covered overdraft credit plan. This is so 
regardless of whether there was any change in the terms or conditions 
of the previously existing deposit account under which the above 
breakeven non-covered overdraft credit was previously extended.\180\
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    \180\ The only change in the terms of the previously existing 
deposit account that would be required by the CFPB's proposed rule 
would be a reduction in the dollar amount of the overdraft fee the 
institution charges for negative-balance (non-covered) overdraft. 
Because that changed term would be a change in the consumer's favor, 
a change-in-terms notice would not be required in advance of the 
change. See Regulation E Sec.  1005.8(a)(1) and Regulation DD Sec.  
1030.5(a)(1).
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    Disclosure requirements. Subsequent to the effective date of the 
CFPB's proposed rule, when a very large financial institution seeks to 
provide above breakeven overdraft credit to a consumer through a 
covered overdraft credit account, the institution will need to comply 
with the existing disclosure requirements in Regulation Z. The CFPB 
seeks comment on whether any specific disclosure requirements should be 
clarified and on whether any adjustments should be made to existing 
disclosure requirements to help better promote the informed use of 
covered overdraft credit.
    Credit subaccounts. Like the CFPB's current proposal, section 
1026.61(b), established by the CFPB's 2016 Prepaid Final Rule, 
prohibits a covered separate credit feature from being structured as a 
negative balance on a prepaid account. Section 1026.61(b) requires that 
the covered credit feature be provided ``as a separate credit feature, 
either as a separate credit account, or as a credit subaccount of a 
prepaid account that is separate from the asset feature of the prepaid 
account.'' Further, comment 61(b)-1 requires that ``the credit feature 
[] be set up as a separate balance on the prepaid account such that 
there are at least two balances on the prepaid account--the asset 
account balance and the credit account balance.''
    In light of these requirements that the prepaid accounts rule 
attaches to covered credit subaccounts tied to prepaid asset accounts 
(i.e., the same requirements that it attaches to covered credit 
accounts tied to prepaid asset accounts) the CFPB has preliminarily 
determined that there would be no meaningful distinction between a 
covered overdraft credit account tied to a covered asset account and a 
covered overdraft credit subaccount tied to a covered asset account. 
For clarity in this regard, proposed Sec.  1026.62(b)(4) would 
establish that a credit subaccount is a type of covered overdraft 
credit account. Nonetheless, the CFPB seeks comment on whether any 
distinctions should be made between covered overdraft credit 
subaccounts and other types of covered overdraft credit accounts. The 
CFPB also seeks comment on whether any additional requirements should 
be adopted to specify how covered overdraft credit accounts should be 
disclosed to consumers.
    Existing overdraft lines of credit. Many very large financial 
institutions currently provide overdraft lines of credit subject to 
Regulation Z. Subsequent to the effective date of the CFPB's proposed 
rule, these lines of credit would be covered overdraft credit accounts, 
regardless of whether they are above or below breakeven pricing. 
However, under the proposed rule the institution would not be opening a 
new credit account (i.e., would not be newly opening an account that is 
subject to Regulation Z) because a credit account--the overdraft line 
of credit--already existed prior to the effective date of the proposed 
rule. Thus, Regulation Z requirements triggered by credit-account 
opening (such as Sec. Sec.  1026.5, 1026.6, 1026.51, and Sec.  
1026.52(a) mentioned above) would not apply to these previously 
existing overdraft lines of credit. However, other Regulation Z 
requirements such as change-in-terms requirements would continue to 
apply to them. Further, as discussed under proposed Sec.  1026.4(b)(2) 
and (12), fees for transferring funds from the overdraft line of credit 
to the tied deposit account, which are currently excepted from being 
finance charges under Regulation Z, would be finance charges under the 
CFPB's proposed changes to Sec.  1026.4(b)(2) and (12). Accordingly, 
very large financial institutions may need to provide change-in-terms 
notices in connection with many of the overdraft lines of credit that 
they currently provide. The CFPB seeks comment on whether additional 
guidance would be helpful for understanding the disclosure and other 
requirements that under the proposed rule would be applicable to very 
large financial institutions in these circumstances. If so, what 
examples should be addressed and added?
2. Credit Card Changes
    Credit cards and card issuers are generally subject to additional 
requirements in Regulation Z. The requirements that apply generally 
depend on whether the credit account can be accessed by a ``credit 
card,'' ``credit card account under an open-end (not home-secured) 
consumer credit plan,'' or ``charge card'' under Regulation Z. 
Currently, a covered overdraft credit account that can be accessed by a 
debit card or other device that qualifies as a credit card (including 
certain account numbers) is subject to some Regulation Z requirements 
that apply to ``credit cards.'' Such covered overdraft credit is not 
subject to requirements that apply to a ``credit card account under an 
open-end (not home-secured) consumer credit plan.'' It is also 
specifically excepted from some of the requirements that apply to 
``credit cards.'' As discussed in more detail below, the CFPB is 
proposing to apply all credit card provisions generally to covered 
overdraft credit accounts if the credit can be accessed by a hybrid 
debit-credit card, as defined in this proposal, such as a debit card 
offered by a very large financial institution.
i. Applying CARD Act Provisions of Regulation Z to Covered Overdraft 
Credit
    The CFPB is proposing to subject all covered overdraft credit to 
the CARD Act provisions of Regulation Z in subparts G and B (the CARD 
Act provisions) if that credit is (1) open-end credit; (2) accessible 
by a credit card; and (3) offered by a very large financial 
institution. Currently, covered overdraft credit accessible by a debit 
card is considered a credit card under Regulation Z and generally is 
subject to the Regulation Z provisions that apply to credit cards, but, 
because of two non-statutory exceptions, such overdraft credit is not 
subject to the CARD Act provisions.\181\ The proposal would

[[Page 13875]]

subject such credit to the CARD Act provisions when it is offered by 
very large financial institutions. To implement these changes, the 
proposal would add a new definition of ``hybrid debit-credit card,'' 
amend the definitions of ``credit card'' and ``credit card account 
under an open-end (not home-secured) consumer credit plan,'' and make 
other clarifying changes to the rule text and associated commentary.
---------------------------------------------------------------------------

    \181\ 12 CFR 1026.2(a)(15)(i), (iv) and comment 2(a)(15)-2.i.B. 
Non-covered overdraft credit is not subject to Regulation Z, which 
includes the provisions applicable generally to credit cards and the 
provisions implementing the CARD Act, because (1) it is not subject 
to a finance charge or repayable by a written agreement in more than 
four installments and (2) a debit card that can access non-covered 
overdraft credit is not considered a credit card because, as current 
comment 2(a)(15)-2.ii.A explains, a debit card with no credit 
feature or agreement is not a credit card even if the creditor 
occasionally honors an inadvertent overdraft. As discussed in the 
changes to the definition of finance charge section above, the CFPB 
is proposing to amend the definition of ``finance charge'' to expand 
the scope of covered overdraft credit, such that certain overdraft 
credit that is currently non-covered overdraft credit would be 
considered covered overdraft credit if this proposal is finalized as 
proposed. This newly covered overdraft credit generally would be 
subject to the Regulation Z provisions applicable to credit cards if 
the covered overdraft credit can be accessed by a credit card. 
However, without further changes, the non-statutory exceptions that 
exclude covered overdraft from being subject to the CARD Act 
provisions would prevent covered overdraft credit, including newly 
covered overdraft credit, from being subject to the CARD Act 
provisions. As discussed in this section, the CFPB is proposing to 
update these non-statutory exceptions, which would subject certain 
covered overdraft credit, including certain newly covered overdraft 
credit, to the CARD Act provisions.
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The CARD Act and Overdraft
    The CARD Act amended TILA to institute new substantive and 
disclosure requirements to establish fair and transparent practices for 
open-end consumer credit card plans. The CARD Act addressed multiple 
aspects of the credit card market, regulating, among other things, rate 
increases, the imposition of penalty fees, the timing of payments, the 
issuance of subprime credit cards, ability to pay assessments, the 
specifics of certain credit card disclosures, the marketing of credit 
reports, and the marketing of credit cards to young consumers.\182\ 
These provisions indicate that Congress was particularly concerned with 
protecting vulnerable populations of consumers--like students and 
individuals with subprime credit--and with regulating high-cost 
consumer credit card products subject to burdensome fees.\183\
---------------------------------------------------------------------------

    \182\ See CARD Act sections 101, 102, 105, 106, 109, 201, 301.
    \183\ See CARD Act sections 102, 105, 109, 301.
---------------------------------------------------------------------------

    The statutory language of the CARD Act applies the protections 
broadly to credit card products that can access open-end consumer 
credit. The CARD Act generally applies to any ``credit card account 
under an open-end consumer credit plan.'' Absent two non-statutory 
exceptions, this broad language generally would apply to open-end 
covered overdraft credit that is accessed by a credit card, including a 
debit card.
    The Board implemented this statutory language in Regulation Z in 
2010 through the term ``credit card account under an open-end (not 
home-secured) consumer credit plan.'' \184\ That term is defined in 
current Sec.  1026.2(a)(15)(ii) to generally mean an open-end credit 
account that is accessed by a credit card. The Board then used the term 
``credit card account under an open-end (not home-secured) consumer 
credit plan'' in provisions of Regulation Z in subpart G and subpart B 
that were promulgated or amended to implement the CARD Act. Like the 
statutory definition, absent non-statutory exceptions, this regulatory 
definition would be broad enough so that the CARD Act provisions 
generally would apply to covered overdraft credit that is accessed by a 
credit card, including a debit card.
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    \184\ See 75 FR 7658, 7663-65 (Feb. 22, 2010). The Board first 
implemented the statutory term ``credit card account under an open-
end consumer credit plan'' in its July 2009 interim final rule, 
which, in relevant part, exempted home equity lines of credit from 
certain requirements of the CARD Act. 74 FR 36077, 36083 (July 22, 
2009). The Board added the new term ``credit card account under an 
open-end (not home-secured) consumer credit plan'' in its 2010 final 
rule.
---------------------------------------------------------------------------

    However, overdraft lines of credit are not subject to the CARD Act 
provisions in subpart G and subpart B that apply to a ``credit card 
account under an open-end (not home-secured) consumer credit plan'' 
because the Board adopted two exceptions that exclude overdraft lines 
of credit from that definition. Current Sec.  1026.2(a)(15)(ii)(B) and 
(C), respectively, except from this definition (1) an overdraft line of 
credit that is accessed by a debit card; and (2) an overdraft line of 
credit that is accessed by an account number other than an account 
number that is a hybrid prepaid-credit card and that can access a 
covered separate credit feature as defined in Sec.  1026.61. Although 
Regulation Z does not define ``overdraft line of credit,'' the term is 
generally understood to refer to an open-end credit product tied to an 
asset account. Funds are advanced from the credit product to pay for a 
withdrawal when the consumer withdraws more money than they have in the 
asset account.
    Aside from the CARD Act provisions in subpart G and subpart B, 
currently these overdraft line of credit products are generally subject 
to Regulation Z's open-end credit rules when the fees and other charges 
imposed on this product are finance charges.\185\ To the extent these 
overdraft line of credit products can be accessed by a debit card or 
other single credit device, they are thus also a ``credit card'' and 
are generally subject to provisions in Regulation Z that apply to a 
``credit card.'' \186\
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    \185\ See 12 CFR 1026.4. The current overdraft-related exception 
in 12 CFR 1026.4(c)(3), which the CFPB is proposing to narrow in 
this rulemaking, does not apply to overdraft products where ``the 
payment of [overdrawing] items and the imposition of the charge were 
previously agreed upon in writing.''
    \186\ See Regulation Z comment 2(a)(15)-2.i.B.
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    The Board acknowledged in its February 2010 Rule that it believed 
that, as a general matter, Congress intended the CARD Act to apply 
broadly to products that meet the definition of a credit card.\187\ The 
Board also acknowledged that a debit card that accesses an overdraft 
line of credit is a ``credit card.'' \188\
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    \187\ See 75 FR 7658, 7664 (Feb. 22, 2010).
    \188\ Id.
---------------------------------------------------------------------------

    Nevertheless, the Board relied on its authority under TILA section 
105(a) and section 2 of the CARD Act to create two exceptions for 
overdraft lines of credit, including one for debit cards that can 
access an overdraft line of credit. As a result of the exceptions, such 
accounts are not subject to the various CARD Act provisions in subpart 
G and subpart B, as discussed below, that apply to a ``credit card 
account under an open-end (not home-secured) consumer credit plan.'' In 
creating the exceptions, the Board stated that, at the time, Regulation 
Z-covered overdraft lines of credit were not in wide use and that, as a 
general matter, creditors who offered overdraft lines of credit did not 
engage in some of the practices regulated by the CARD Act provisions 
with respect to those products.\189\ The Board cited three examples of 
practices regulated by the CARD Act that were not currently present in 
the market: (1) increasing annual percentage rates, (2) applying 
different rates to different balances, and (3) allowing grace periods 
before charging interest. The Board did not specifically address other 
provisions, such as limitations on penalty fees and the requirement to 
assess ability to pay, which may have had an impact on practices 
involving overdraft lines of credit. Because of its assessment that the 
small market for overdraft lines of credit did not present substantial 
consumer protection concerns similar to those addressed by the CARD 
Act, the Board concluded that ``alternative forms of regulation'' such 
as Regulation E were ``better suited'' to protect consumers from harm 
with respect to those products.\190\
---------------------------------------------------------------------------

    \189\ Id. at 7665.
    \190\ Id.
---------------------------------------------------------------------------

    The CFPB is proposing to amend the non-statutory overdraft-related 
exceptions so that a very large financial institution that offers open-
end covered overdraft credit that can be accessed by a ``credit card'' 
must comply with provisions that apply to a ``credit card account under 
an open-end (not home-secured) consumer credit plan.'' As a result, 
open-end covered overdraft credit that can be accessed by a ``credit 
card,'' including a debit card, would be

[[Page 13876]]

subject to the CARD Act provisions in subpart G and subpart B if it is 
offered by a very large financial institution. This would include 
existing covered overdraft credit (currently commonly referred to as 
``overdraft lines of credit'') and overdraft credit that would become 
covered overdraft credit, such as above breakeven overdraft credit, if 
the rule is finalized.
    The CFPB has preliminarily determined that the exceptions are no 
longer appropriate. While the Board created those exceptions based on 
the understanding that overdraft lines of credit were not in ``wide 
use'' at the time and did not include features common to other credit 
cards, the CFPB has preliminarily determined that the prevalence or 
nature of a particular type of credit card should not render it beyond 
the scope of the CARD Act. By its plain terms, the CARD Act applies to 
all ``credit card account[s] under an open-end consumer credit plan,'' 
which, as noted above, would include open-end overdraft credit 
accessible by a credit card. In any event, the CFPB anticipates that 
the market for covered overdraft credit could react to the proposed 
changes in this rulemaking, if finalized, in several ways, including by 
offering covered overdraft credit to many consumers who currently 
receive non-covered overdraft credit, including subprime consumers.
    Very large financial institutions could also react to the proposed 
changes by offering different terms on covered overdraft credit than 
those that have historically been offered. For example, financial 
institutions could start marketing covered overdraft credit as a long-
term credit solution and could begin imposing different rates on 
different balances. In addition, consistent with the current non-
covered overdraft credit market, financial institutions could allow for 
grace periods before imposing finance charges. Similarly, other 
protections, such as the requirement to assess ability to pay, the fee 
limitations provision, and the limits on penalty fees, may become even 
more important if covered overdraft credit is offered to more subprime 
consumers.
    The CFPB also has preliminarily determined that the CARD Act 
provisions would provide important consumer protections to those 
consumers most likely to use covered overdraft credit accounts. Today, 
a small subset of consumers (approximately 10 percent of consumers), 
whom the CFPB has in the past referred to as ``frequent overdrafters,'' 
incur most overdraft fees. In light of the CFPB's proposed treatment of 
the overdraft fee that a very large financial institution may charge 
for non-covered overdraft, the CFPB expects that some very large 
financial institutions will have reduced incentives to provide non-
covered overdraft credit to the subprime consumers who are frequent 
overdrafters and today incur the preponderance of overdraft fees. 
Instead of providing these consumers with non-covered overdraft credit, 
some very large financial institutions may provide these consumers with 
covered overdraft credit accounts--the accounts to which the CFPB is 
proposing to apply the CARD Act provisions--which would allow them the 
flexibility to charge more than the threshold that cannot be exceeded 
to remain non-covered overdraft credit.
    The CFPB also has preliminarily determined that applying the CARD 
Act provisions as proposed could provide important benefits to subprime 
consumers. Many of the provisions of the CARD Act target credit card 
practices affecting subprime consumers. To the extent that some 
financial institutions would offer covered overdraft credit to more 
subprime consumers if the proposed rule were adopted, these CARD Act 
provisions would offer additional protections to consumers with a debit 
card that accesses overdraft credit. This will result in a consumer who 
uses a debit card to access overdraft credit--who often is a subprime 
consumer--receiving the same protections that a subprime credit card 
consumer receives today, consistent with the broad statutory language 
in the CARD Act.
    To prevent the market for Regulation Z-covered overdraft from 
posing consumer risks after the rule goes into effect, and to carry out 
the purposes of TILA by promoting the informed use of credit and 
protecting consumers against unfair credit card practices pursuant to 
TILA section 105(a), and to carry out the CARD Act pursuant to section 
2 of the CARD Act, the CFPB is proposing to subject covered overdraft 
credit to the CARD Act provisions in subpart G and subpart B when such 
credit can be accessed by a credit card and is offered by a very large 
financial institution. This would revise non-statutory exceptions so 
that Regulation Z's coverage more closely aligns with the plain 
language of the CARD Act.
    The CFPB invites comment on the proposal to subject covered 
overdraft credit to the CARD Act provisions in subpart G and subpart B. 
In particular, the CFPB seeks comment on potential impacts of a 
finalized rule, if any, on the market for covered overdraft credit and 
the resulting effects of market changes on consumers. The CFPB also 
seeks comment on the costs and benefits to these consumers of the CARD 
Act protections in subpart G and subpart B. The CFPB also requests 
comment on whether clarification is needed or whether there are 
operational challenges regarding the application of specific CARD Act 
provisions to covered overdraft credit. The CFPB also seeks comment on 
what, if any, operational costs might arise as a result.
    The proposed rule would subject all covered overdraft credit to the 
CARD Act provisions in subparts G and B if that credit is (1) open-end 
credit; (2) accessible by a credit card; and (3) offered by a very 
large financial institution. The proposed rule would also add a new 
definition of ``hybrid debit-credit card,'' and amend the definitions 
of ``credit card,'' and ``credit card account under an open-end (not 
home-secured) consumer credit plan.'' The proposal would also make 
other clarifying changes to the rule text and associated commentary. 
These technical and clarifying changes are discussed in more detail 
below.
Hybrid Debit-Credit Card (Sec.  1026.62(b)(5))
    In proposed Sec.  1026.62(b)(5), the CFPB is proposing to define 
the new term ``hybrid debit-credit card'' for clarity and ease of 
reference. The CFPB proposes to define ``hybrid debit-credit card'' to 
mean any card, plate, or other single credit device that a consumer may 
use to obtain covered overdraft credit from a very large financial 
institution. This proposed definition describes a type of credit card 
that has two defining characteristics: (1) the credit card must be able 
to access covered overdraft credit; and (2) the covered overdraft 
credit must be offered by a very large financial institution. This 
definition would include, 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.
Credit Card (Sec.  1026.2(a)(15)(i))
    TILA defines ``credit card'' as ``any card, plate, coupon book or 
other credit device existing for the purpose of obtaining money, 
property, labor, or services on credit.'' \191\ Section 
1026.2(a)(15)(i) defines credit card as ``any card, plate, or other 
single credit device that may be used from time to time to obtain 
credit,'' which includes

[[Page 13877]]

``a hybrid prepaid-credit card as defined in Sec.  1026.61.'' The CFPB 
is proposing to amend the definition of ``credit card'' to clarify what 
is and is not a credit card when certain credit devices can access 
covered overdraft credit. These amendments would clarify that when a 
debit card can access covered overdraft credit, the debit card would be 
a credit card subject to the CARD Act provisions.
---------------------------------------------------------------------------

    \191\ 15 U.S.C. 1602(l).
---------------------------------------------------------------------------

    First, the CFPB is proposing various non-substantive wording 
revisions in Sec.  1026.2(a)(15)(i) to clarify that a debit card that 
can access a covered overdraft credit account is a credit card. These 
changes are non-substantive because, under Regulation Z today, a debit 
card that can access an overdraft line of credit is a credit card.\192\ 
Nonetheless, to make this fact--that a debit card that can access 
covered overdraft credit is a credit card--as clear as possible, the 
CFPB is proposing two textual changes for clarity. First, in Sec.  
1026.62, the CFPB proposes to define a ``hybrid debit-credit card'' as 
any card (including a debit card) that can access covered overdraft 
credit offered by a very large financial institution. Second, the CFPB 
proposes to amend Sec.  1026.2(a)(15)(i) to explain that the definition 
of ``credit card'' includes a hybrid debit-credit card. Thus, under the 
proposal, a debit card that can access a covered overdraft credit 
account is a hybrid debit-credit card, a hybrid debit-credit card is a 
credit card, and a debit card that can access a covered overdraft 
credit account is a credit card. This is not a substantive change from 
the extant regulation because, as noted, under the extant regulation a 
debit card that can access an overdraft line of credit is a credit 
card.
---------------------------------------------------------------------------

    \192\ See current Regulation Z comment 1026.2(a)(15)-2.i.B 
(stating that examples of credit cards include a debit card that 
also accesses a credit account).
---------------------------------------------------------------------------

    Similarly, the CFPB is proposing to revise comment 2(a)(15)-2.i.B 
to clarify that a hybrid debit-credit card is a type of debit card that 
also accesses a credit account, such as a covered overdraft credit 
account.
    To further clarify what is and is not a ``credit card'' in light of 
proposed definitions and proposed changes to the definition of 
``finance charge,'' the CFPB is also proposing to amend several 
examples in the commentary to Sec.  1026.2(a)(15)(i) and (ii). In 
comment 2(a)(15)-2.i.A, the CFPB is proposing to replace the undefined 
term ``overdraft line of credit'' with a new proposed term ``covered 
overdraft credit.'' In comment 2(a)(15)-2.ii.C, the CFPB is proposing 
amendments to clarify that an account number is a credit card when it 
can access covered overdraft credit if the account number can use the 
credit accessed to purchase goods and services.
    The CFPB is also proposing to amend comment 2(a)(15)-2.ii.A and add 
comment 2(a)(15)-2.ii.E to ensure that the examples of what is not a 
credit card clarify that allowing a card, plate, or other single credit 
device to access non-covered overdraft credit does not trigger 
Regulation Z's credit card requirements. As explained in current Sec.  
1026.1(c)(2), where a credit card is involved, certain provisions of 
Regulation Z apply even if the credit is not subject to a finance 
charge or is not payable by a written agreement in more than four 
installments. However, comment 2(a)(15)-2.ii.A clarifies that a check-
guarantee or debit card with no credit feature or agreement is not a 
credit card ``even if the creditor occasionally honors an inadvertent 
overdraft.'' In other words, a financial institution that allows a 
debit card or check-guarantee card to access non-covered overdraft--
including overdraft where the financial institution does not impose a 
``finance charge,'' either because it does not impose a fee or because 
any fee charged is not considered a finance charge under Sec.  
1026.4(c)(3)--does not have to comply with Regulation Z's credit card 
provisions, even though such cards would otherwise meet the definition 
of ``credit card.'' As discussed above, currently, Sec.  1026.4(c)(3) 
provides that overdraft charges are not finance charges if the payment 
of such items and the imposition of the charge were not previously 
agreed upon in writing. Thus, financial institutions may pay an 
inadvertent overdraft and charge for it without complying with 
Regulation Z as long as the payment of the overdraft and associated 
charges are consistent with the provision. The CFPB is proposing to 
modify the exception from the definition of finance charge in Sec.  
1026.4(c)(3) so that certain overdraft-related charges are finance 
charges even if the financial institution does not agree in advance to 
pay the items. If finalized, some charges for paying overdrafts that 
may otherwise be characterized as occasional or inadvertent would be 
considered finance charges. To ensure the commentary aligns with the 
exception in Sec.  1026.4(c)(3) and clarify that allowing a consumer to 
access non-covered overdraft credit using a debit card does not trigger 
credit card requirements in Regulation Z, the CFPB is proposing to: (1) 
amend comment 2(a)(15)-2.ii.A by deleting the phrase ``even if the 
creditor occasionally honors an inadvertent overdraft;'' and (2) add 
comment 2(a)(15)-2.ii.E to clarify that a check-guarantee or debit card 
that can only access non-covered overdraft credit is not a ``credit 
card''.
Credit Card Account Under an Open-End (Not Home-Secured) Consumer 
Credit Plan (Sec.  1026.2(a)(15)(ii))
    The CFPB is proposing to amend the definition of ``credit card 
account under an open-end (not home-secured) consumer credit plan'' in 
Sec.  1026.2(a)(15)(ii) by narrowing the two overdraft-related 
exceptions so that open-end covered overdraft credit offered by a very 
large financial institution would no longer be excepted from the 
definition of a ``credit card account under an open-end (not home-
secured) consumer credit plan.'' Such credit offered by a very large 
financial institution would be subject to the CARD Act provisions in 
subpart G and subpart B.
Discussion of the Effect of Applying Regulation Z's CARD Act Provisions 
to Covered Overdraft Credit Accounts Accessed by a Hybrid Debit-Credit 
Card
    These changes would subject all covered overdraft credit to the 
CARD Act provisions in subparts G and B if that credit is accessible by 
a credit card and offered by a very large financial institution.
    The CARD Act provisions that the CFPB is proposing to apply to 
hybrid debit-credit cards include the following:
    <bullet> The requirement in Sec.  1026.51 to assess the consumer's 
ability to pay the credit extended, such as covered overdraft credit, 
including special rules regarding the extension of credit to persons 
under the age of 21. This may provide an incentive for institutions to 
structure and price covered overdraft credit such that consumers are 
better able to repay it, relative to current non-covered overdraft 
credit.
    <bullet> The restriction in Sec.  1026.52(a) on the amount of 
certain fees, such as overdraft fees, that an issuer can charge during 
the first year after opening of a credit account, such as a covered 
overdraft credit account, to 25 percent of the credit limit. This 
restriction does not apply to charges assessed as periodic rates. This 
may provide an incentive for institutions to reduce or eliminate flat 
fees for overdraft and to instead apply periodic rates that must be 
disclosed as APRs. The CFPB has preliminarily determined that this 
change in the manner and disclosure of overdraft credit pricing would 
improve consumers' ability to understand the price of the credit, and 
to compare it to

[[Page 13878]]

the pricing of other forms of credit that consumers might wish to 
consider.
    <bullet> The limit in Sec.  1026.52(b)(1) on the amount card 
issuers can charge for ``back-end'' penalty fees, such as when a 
consumer makes a late payment or exceeds their credit limit. This may 
provide an incentive for institutions to rely more on non-penalty 
charges that are disclosed as part of the upfront price of the covered 
overdraft credit.
    <bullet> The prohibition in Sec.  1026.52(b)(2) on ``declined 
transaction fees'' and other penalty fees where there is no cost to the 
card issuer associated with the violation of the account agreement. As 
discussed below, applying this provision to a covered overdraft credit 
account accessed by a hybrid debit-credit card would prohibit declined 
debit card transaction fees on accounts with a covered overdraft credit 
account accessed by a hybrid debit-credit card. This provision would 
also prohibit declined ACH transaction fees where the card issuer 
declines an attempted ACH payment and would otherwise impose a fee on 
the cardholder for doing so. Consistent with comment 52(b)(2)(i)-4, 
this provision would permit a card issuer to impose a fee for declining 
a check that attempts to access a covered overdraft credit account 
because such a check is ``a check that accesses a credit card 
account.'' Such a fee would still be limited by Sec.  1026.52(b)(1). 
The CFPB has preliminarily determined that this prohibition on declined 
transaction fees limit could lead institutions to shift away from back-
end fees and toward upfront pricing in the form of periodic rates 
disclosed as APRs.
    <bullet> The provisions in Sec.  1026.53 regarding how a card 
issuer must allocate payments in excess of the minimum periodic 
payment.
    <bullet> The limitation in Sec.  1026.54 on card issuers imposing a 
finance charge as a result of the loss of a grace period.
    <bullet> The prohibition in Sec.  1026.55 on increases in any APR, 
fee, or finance charge applicable to any outstanding balance on a 
credit card account, with exceptions where advance notice is provided, 
with a requirement that the promotional rate generally cannot expire 
earlier than six months, and the requirement in Sec.  1026.59 that card 
issuers reevaluate rate increases.
    <bullet> The restriction in Sec.  1026.56 on fees for over-the-
limit transactions to one per billing cycle and the requirement that 
the consumer opt-in to payment of such transactions in order for the 
fee to be charged.
    <bullet> The requirement in Sec.  1026.57 that institutions of 
higher education publicly disclose agreements with card issuers and 
limit the marketing of credit cards on or near college campuses.
    <bullet> The requirement in Sec.  1026.58 that card issuers submit 
credit card agreements to the CFPB on a quarterly basis.
    This proposal would also require very large financial institutions 
to comply with the following CARD Act-derived disclosure-related 
requirements in subpart B with respect to covered overdraft credit 
accounts accessed by a hybrid debit-credit card:
    <bullet> The timing requirements in Sec.  1026.5(b)(2)(ii)(A) for 
disclosures sent with respect to a credit card account under an open-
end (not home-secured) consumer credit plan.
    <bullet> The rate-disclosure requirements in Sec.  
1026.6(b)(2)(i)(F) for account-opening statements specific to a credit 
card account under an open-end (not home-secured) consumer credit plan.
    <bullet> The due date disclosure, repayment disclosure, and format 
requirements for periodic statements specific to a credit card account 
under an open-end (not home-secured) consumer credit plan in Sec.  
1026.7(b)(11)(i), (b)(12)(i), (b)(13).
    <bullet> The subsequent disclosure requirements specific to a 
credit card account under an open-end (not home-secured) consumer 
credit plan in Sec.  1026.9(c)(2)(iv)(A)(8), (c)(2)(iv)(B)-(C), 
(g)(3)(i)(A)(6), (g)(3)(i)(B), (h).
    <bullet> The payments-related requirements specific to a credit 
card account under an open-end (not home secured) consumer credit plan 
in Sec.  1026.10(b)(3), (e).
    <bullet> The requirements in Sec.  1026.11(c)(1)(i) related to the 
timely settlement of estate debts for a credit card account under an 
open-end (not home-secured) consumer credit plan.
    In addition to the proposed amendments to the definition of 
``credit card'' and ``credit card account under an open-end (not home-
secured) consumer credit plan,'' the CFPB is also proposing conforming 
and clarifying changes to the commentary for Sec. Sec.  1026.55 and 
1026.57 to reflect the changes discussed in this section. In 
particular, the CFPB is proposing to add comment 55(a)-5 to clarify 
that the limitations on increasing annual percentage rates, fees, and 
charges apply to fees imposed in connection with covered overdraft 
credit whether those fees are imposed on the covered overdraft credit 
account or the associated covered asset account. Finally, the CFPB is 
proposing to amend comment 57(a)(1)-1 so that it would continue to 
accurately reflect the exceptions from the definition of credit card 
issued under a credit card account under an open-end (not home-secured) 
consumer credit plan if changes to that definition are finalized as 
proposed.
Limitations on Penalty Fees
    Among the CARD Act provisions discussed above, one of them, Sec.  
1026.52(b), raises complex policy considerations that the CFPB believes 
are important to address in more detail. Section 1026.52(b) regulates 
the imposition of penalty fees on a credit card account under an open-
end (not home secured) consumer credit plan. TILA refers to a ``penalty 
fee'' as a fee imposed ``in connection with any omission with respect 
to, or violation of, the cardholder agreement,'' and it permits only a 
penalty fee that is ``reasonable and proportional to the amount of such 
omission or violation.'' \193\ Consistent with this statutory language, 
Regulation Z defines a ``penalty fee'' as ``any charge imposed by a 
card issuer based on an act or omission that violates the terms of the 
account or any other requirements imposed by the card issuer with 
respect to the account, other than charges attributable to periodic 
interest rates.'' \194\ Section 1026.52(b)(1) permits a card issuer to 
impose a penalty fee as long as that fee represents a ``reasonable 
proportion of the total costs incurred by the card issuer as a result 
of that type of violation'' or complies with dollar amounts specified 
in a safe harbor provision.\195\ Section 1026.52(b)(2), meanwhile, 
prohibits a penalty fee that exceeds the dollar amount associated with 
the violation or where there is no dollar amount associated with the 
violation.\196\ In particular, Sec.  1026.52(b)(2)(i)(B)(1) prohibits 
any fee charged in connection with a ``transaction that a card issuer 
declines to authorize.''
---------------------------------------------------------------------------

    \193\ CARD Act section 102, TILA section 149, 15 U.S.C. 
1665d(a).
    \194\ Regulation Z comment 52(b)-1.
    \195\ 12 CFR 1026.52(b)(1)(i)-(ii).
    \196\ Section 1026.52(b)(2) also bans the imposition of multiple 
fees for the same violation. 12 CFR 1026.52(b)(2)(ii).
---------------------------------------------------------------------------

    When applied to a covered overdraft credit account accessed by a 
hybrid debit-credit card, Sec.  1026.52(b)(2)(B)(1) would prohibit most 
declined transaction fees imposed with respect to a declined 
transaction that, if paid, would have overdrawn a particular consumer's 
asset account. When covered overdraft credit is accessible by a hybrid 
debit-credit card, the CFPB has preliminarily determined that a fee 
imposed when a potentially overdrawing transaction is declined, such as 
an nonsufficient funds (NSF) fee, is a penalty fee. A potentially 
overdrawing transaction initiated on a

[[Page 13879]]

consumer's asset account, would, if authorized, result in the extension 
of overdraft credit. Declining such a transaction, and then imposing a 
fee for such an attempt, is a penalty fee because, under the statutory 
language, it is a fee that ``a card issuer may impose with respect to a 
credit card account . . . in connection with any omission with respect 
to, or in violation of, the cardholder agreement.'' \197\ Likewise, 
under Regulation Z, it is a fee ``imposed by a card issuer based on an 
act . . . that violates the terms'' of the covered overdraft credit 
account ``or any other requirements imposed by the card issuer with 
respect to'' that overdraft credit account, including any requirements 
relating to when overdraft credit can and cannot be accessed from an 
asset account.\198\ Because such a transaction has been declined, no 
credit has been extended and there is therefore no dollar amount 
associated with the violation.\199\ Finally, because the card issuer is 
the entity declining this transaction, any fee imposed with respect to 
this declined transaction is a fee for a ``transaction that the card 
issuer declines to authorize.'' \200\ This is true whether the penalty 
is charged to the covered overdraft credit account or the covered asset 
account.
---------------------------------------------------------------------------

    \197\ 15 U.S.C. 1665d(a).
    \198\ See Regulation Z comment 52(b)-1.
    \199\ See 12 CFR 1026.52(b)(2)(i)(B).
    \200\ See 12 CFR 1026.52(b)(2)(i)(B)(1).
---------------------------------------------------------------------------

    Thus, for a covered overdraft account accessed by a hybrid debit-
credit card, 15 U.S.C. 1665d(a) and Sec.  1026.52(b) would prohibit any 
fee for a potentially overdrawing transaction that the card issuer 
declines to authorize. This would include declined debit card 
transactions as well as declined ACH transactions. However, as 
explained in comment 52(b)(2)(i)-4, the prohibition on fees for 
transactions that a card issuer declines to authorize does not extend 
to fees imposed for declining a ``check that can access a credit card 
account.'' \201\ The CFPB has preliminarily determined that applying 
Sec.  1026.52(b) to a covered overdraft credit account accessed by a 
hybrid debit-credit card similarly would permit fees imposed when a 
card issuer declines a check on an asset account with an attached 
covered overdraft credit account as long as those fees satisfy the 
restrictions in Sec.  1026.52(b)(1).
---------------------------------------------------------------------------

    \201\ Regulation Z comment 52(b)(2)(i)-4.
---------------------------------------------------------------------------

    With respect to declined transactions other than declined check 
transactions, the CFPB has preliminarily determined that the Board's 
rationale in adopting Sec.  1026.52(b)(2) continues to apply. That is, 
it appears that there is no dollar amount associated with a declined 
transaction and the imposition of the fee does not appear to be related 
to costs incurred by the card issuer. The CFPB recognizes that it may 
be possible that such fees could have a deterrent effect or could 
affect the consumer's conduct in certain limited situations. However, 
there does not appear to be any need for the financial institution to 
attempt to deter or influence the consumer's conduct in this situation, 
particularly in light of minimal costs and risks to the card issuer. 
With respect to costs, because the mechanism for authorizing or 
declining a transaction is generally automated, the CFPB understands 
that declining transactions imposes very minimal or no costs, which 
would not support imposing a penalty fee. The CFPB understands this to 
be the case across several payment channels, including for payments 
initiated via debit card, payments occurring on an ACH network, and 
other online payments. To the extent there are certain minimal costs 
associated with the automated authorization and declination of 
transactions generally, card issuers can consider whether other sources 
of revenue might allow them to recoup those costs.
    The CFPB notes that these considerations may apply equally to 
declined checks. However, the CFPB is not proposing at this time to 
reconsider the Board's prior decision to permit some amount of a fee in 
connection with declining to pay a check that accesses a credit card 
account and would apply the same approach to checks issued in 
connection with a checking or other transaction account with a 
connected covered overdraft credit account accessible by a hybrid 
debit-credit card.
    Accordingly, after considering the factors in 15 U.S.C. 1665d, the 
CFPB is not proposing any amendments to Sec.  1026.52(b).
ii. Special Credit Card Provisions (Sec.  1026.12)
    Existing Sec.  1026.12 contains special rules applicable to credit 
cards and credit card accounts, including rules regarding the 
conditions under which a credit card may be issued, liability of 
cardholders for unauthorized use, cardholder rights to assert merchant 
claims and defenses against the card issuer, and the prohibition on 
offsets by issuers.
    The proposal would revise the commentary to Sec.  1026.12 to 
clarify how the special card provisions of Sec.  1026.12 apply to 
hybrid debit-credit cards. Specifically, the proposal would add a 
sentence to comment 12-1 clarifying that paragraphs (a) through (f) of 
Sec.  1026.12 apply to hybrid debit-credit cards notwithstanding 
paragraph (g). Paragraph (g) addresses whether Regulation Z or 
Regulation E controls in instances where a transaction involves both 
credit and electronic fund transfer aspects. The proposed revision to 
comment 12-1 is intended to clarify that the provisions of Sec.  
1026.12 relating to card issuance and liability apply to hybrid debit-
credit cards.
    As discussed in greater detail below, the proposal would provide 
additional guidance on unsolicited issuance in Sec.  1026.12(a) and the 
right of a cardholder to assert claims or defenses against a card 
issuer in Sec.  1026.12(c).
iii. Clarification to Issuance of Credit Cards (Sec.  1026.12(a))
    TILA section 132 generally prohibits creditors from issuing credit 
cards except in response to a request or an application. TILA section 
132 explicitly exempts credit cards issued as renewals of or 
substitutes for previously accepted credit cards from this 
prohibition.\202\
---------------------------------------------------------------------------

    \202\ 15 U.S.C. 1642.
---------------------------------------------------------------------------

    Section 1026.12(a) of Regulation Z implements TILA section 132 and 
provides that ``[r]egardless of the purpose for which a credit card is 
to be used, including business, commercial, or agricultural use, no 
credit card shall be issued to any person except: (1) In response to an 
oral or written request or application for the card; or (2) As a 
renewal of, or substitute for, an accepted credit card.'' The proposal 
would provide guidance on how the prohibition on issuing unsolicited 
credit cards applies to hybrid debit-credit cards.
Clarification to Explicit Request Requirement (Sec.  1026.12(a)(1))
    Comment 12(a)(1)-1 states that ``[a] request or application for a 
card must be explicit'' and that ``a request for an overdraft plan tied 
to a checking account does not constitute an application for a credit 
card with overdraft checking features.'' However, as discussed in 
greater detail in part [IV.E.2.i], under the proposal, a hybrid debit-
credit card would be a credit card that a consumer may use from time to 
time to obtain covered overdraft credit from a very large financial 
institution. Therefore, the prohibition on issuing unsolicited credit 
cards set forth in Sec.  1026.12(a)(1) would apply to hybrid debit-
credit cards. As a result, a request for covered overdraft credit from 
a very large financial institution would constitute an application for 
a credit card with overdraft features to the extent such credit would 
be accessible

[[Page 13880]]

through a hybrid debit-credit card. The proposal would revise comment 
12(a)(1)-1 to clarify that a very large financial institution cannot 
issue a hybrid debit-credit card to a person without first receiving an 
oral or written request or application from that person for the hybrid 
debit-credit card.
    The proposed rule also would amend comment 12(a)(1)-2. Comment 
12(a)(1)-2 explains that the addition of a credit feature or plan to a 
non-credit card that would turn that card into a credit card 
constitutes issuance of a credit card. The comment then provides two 
examples of scenarios that would constitute issuance of a credit card. 
The proposed rule would amend comment 12(a)(1)-2 by adding a third 
example relating to hybrid debit-credit cards as comment 12(a)(1)-
2.iii. Proposed comment 12(a)(1)-2.iii would state that extending 
covered overdraft credit through a hybrid debit-credit card as defined 
in Sec.  1026.62 would constitute issuance of a credit card. For 
example, if a very large financial institution initially allowed a 
consumer to use a debit card to access overdraft credit that is not 
``covered overdraft credit'' as defined in Sec.  1026.62, the very 
large financial institution would be issuing a credit card if it then 
allowed the consumer to use the same card to access covered overdraft 
credit. Under that scenario, the debit card would convert into a hybrid 
debit-credit card subject to the requirements of Sec.  1026.12(a).
Clarifications to Replacement Card Requirements (Sec.  1026.12(a)(2))
    Comment 12(a)(2)-5 (the so-called ``one for one'' rule) explains 
that an accepted card generally may be replaced by no more than one 
renewal or substitute card. For example, the card issuer may not 
replace a credit card permitting purchases and cash advances with two 
cards, one for the purchases and another for the cash advances. 
However, comment 12(a)(2)-6 provides three exceptions to this general 
``one for one'' rule. First, comment 12(a)(2)-6.i explains that the 
unsolicited issuance rule in Sec.  1026.12(a) does not prohibit the 
card issuer from replacing a debit/credit card with a credit card and 
another card with only debit functions (or debit functions plus an 
associated overdraft capability), since the latter card could be issued 
on an unsolicited basis under Regulation E. Second, comment 12(a)(2)-
6.ii explains that Sec.  1026.12(a) does not prohibit a card issuer 
from replacing a single card that is both a prepaid card and a credit 
card with a credit card and a separate prepaid card where the latter 
card is not a hybrid prepaid-credit card as defined in Sec.  1026.61. 
Finally, comment 12(a)(2)-6.iii explains that Sec.  1026.12(a) does not 
prohibit a card issuer from replacing an accepted card with more than 
one renewal or substitute card, provided that: ``(A) No replacement 
card accesses any account not accessed by the accepted card; (B) For 
terms and conditions required to be disclosed under Sec.  1026.6, all 
replacement cards are issued subject to the same terms and conditions, 
except that a creditor may vary terms for which no change in terms 
notice is required under Sec.  1026.9(c); and (3) Under the account's 
terms the consumer's total liability for unauthorized use with respect 
to the account does not increase.''
    The proposal would amend comment 12(a)(2)-6 by revising comment 
12(a)(2)-6.i in two respects. First, it would explain that a hybrid 
debit-credit card is an example of a single card that is both a debit 
card and a credit card. Second, it would remove the phrase ``an 
associated overdraft capability'' in the parenthetical and replace it 
with the phrase ``an associated capability to extend overdraft credit 
that is not covered overdraft credit as defined in Sec.  1026.62.'' The 
purpose of these proposed changes is to clarify that a very large 
financial institution may replace a hybrid debit-credit card with a 
credit card and a separate debit card so long as the separate debit 
card does not provide the capability to extend covered overdraft credit 
(i.e., overdraft that is subject to a finance charge or payable by 
written agreement in more than four installments). Replacing the phrase 
``an associated overdraft capability'' with the phrase ``an associated 
capability to extend overdraft credit that is not covered overdraft 
credit as defined in Sec.  1026.62'' in the parenthetical would not 
change how the provision applies to card issuers, but rather would 
align terminology relating to overdraft credit across Regulation Z.
iv. Right of Cardholder To Assert Claims or Defenses Against Card 
Issuer (Sec.  1026.12(c))
    When a cardholder has a dispute with a person honoring the credit 
card, TILA section 170 generally provides that the cardholder may 
assert against the card issuer all claims (other than tort claims) and 
defenses arising out of the transaction.\203\ The claim or defense 
applies only as to unpaid balances for the goods or services and any 
finance or other charges imposed on that amount if the merchant 
honoring the card fails to resolve the dispute. The right is further 
limited generally to disputes exceeding $50 for purchases made in the 
consumer's home State or within 100 miles of the cardholder's address. 
Regulation Z Sec.  1026.12(c), implements this section of TILA.
---------------------------------------------------------------------------

    \203\ 15 U.S.C. 1666i.
---------------------------------------------------------------------------

    TILA does not except overdraft credit from the scope of 
cardholders' right to assert claims or defenses against card issuers. 
However, in 1981 the Board created a non-statutory exception for the 
use of a debit card in connection with an overdraft credit plan.\204\ 
In doing so, the Board noted ``serious operational problems cited by 
commenters as arising from applying the claims and defenses provisions 
to check guarantee and debit card transactions.'' \205\ This exception 
is in current comment 12(c)-3.
---------------------------------------------------------------------------

    \204\ 46 FR 20848, 20865 (Apr. 7, 1981).
    \205\ Id.
---------------------------------------------------------------------------

    As discussed above, the CFPB has preliminarily determined that it 
would be appropriate to update exceptions in Regulation Z and thus 
increase consumer protections that apply to covered overdraft credit 
offered by very large financial institutions. The proposed rule would 
not change the current overdraft exceptions for financial institutions 
with total assets of $10 billion or less.
    Accordingly, the CFPB proposes to narrow the overdraft exception in 
comment 12(c)-3 by adding the phrase ``other than a hybrid debit-credit 
card.'' As discussed above, under proposed Sec.  1026.62(b)(5) a 
``hybrid debit-credit card'' would include a debit card that a consumer 
may use from time to time to obtain covered overdraft credit from a 
very large financial institution. Such cards would be covered by the 
consumer protections in Sec.  1026.12(c). The CFPB has preliminarily 
determined that operational concerns alluded to by the Board in 1981 
may no longer justify the overdraft exception in comment 12(c)-3, 
particularly for very large financial institutions, given advances in 
information technology systems over the last 40 years. The current 
exception would not change for financial institutions with total assets 
of $10 billion or less.
    The CFPB further proposes conforming revisions to the commentary 
for Sec.  1026.12(c)(1). First, the CFPB would revise comment 12(c)(1)-
1. The current comment explains that the scope of cardholders' right to 
assert claims or defenses against card issuers only includes situations 
where the goods or services are ``purchased with the credit card.'' The 
comment provides examples of situations that are included and excluded. 
To facilitate compliance with the proposed rule, the CFPB would

[[Page 13881]]

revise comment 12(c)(1)-1 to provide an example illustrating that the 
phrase ``purchased with the credit card'' includes a purchase using a 
hybrid debit-credit card to access a covered overdraft credit account 
as defined in Sec.  1026.62.
    Second, the CFPB would revise comment 12(c)(1)-1.ii. The current 
comment explains that credit card protections in Sec.  1026.12(c) do 
not apply to the purchase of goods or services by use of a check 
accessing an overdraft account and a credit card used solely for 
identification of the consumer. The current comment further illustrates 
that, if the credit card is used to make partial payment for the 
purchase and not merely for identification, the right to assert claims 
or defenses would apply to credit extended via the credit card 
(although not to credit extended by the overdraft line). The current 
comment also provides that the right would apply to credit extended 
through a covered separate credit feature accessible by a hybrid 
prepaid-credit card. To facilitate compliance with the proposed rule, 
the CFPB would revise comment 12(c)(1)-1.ii to provide an example 
illustrating that if partial payment for the purchase is made with a 
hybrid prepaid-credit card or a hybrid debit-credit card, the right to 
assert claims or defenses would apply to credit accessed from a covered 
separate credit feature or covered overdraft credit account, 
respectively.
    Third, the CFPB would revise comment 12(c)(1)-1.iv. Current comment 
12(c)(1)-1.iv cross-references comment 12(c)-3 and explains that credit 
card protections in Sec.  1026.12(c) do not apply to purchases effected 
by use of either a check guarantee card or a debit card when used to 
draw on overdraft credit plans. The current comment further illustrates 
that, if a card serves both as an ordinary credit card and also as a 
check guarantee or debit card, a transaction will be subject to the 
provisions on asserting claims and defenses when used as an ordinary 
credit card, but not when used as a check guarantee or debit card. As 
discussed above, the CFPB proposes to narrow the overdraft exception in 
comment 12(c)-3. To reflect that proposed change, CFPB also proposes 
conforming revisions to comment 12(c)(1)-1.iv, which would provide that 
the right to assert claims or defenses would apply to purchases 
effected by use of a hybrid debit-credit card to access a covered 
overdraft credit account. The CFPB would also revise comment 12(c)(1)-
1.iv to provide an example illustrating that for purchases effected by 
use of a hybrid debit-credit card where the transaction is partially 
paid with funds from the asset account, and partially paid with covered 
overdraft credit, the provisions of Sec.  1026.12(c) apply only to the 
credit portion of the purchase transaction. The CFPB would also correct 
a typographical error in comment 12(c)(1)-1.iv by inserting the article 
``a'' that is currently missing before ``check guarantee or debit 
card.''
    The CFPB seeks comment on the proposed narrowing of the overdraft 
exception in comment 12(c)-3, including what, if any, operational 
issues might arise as a result. The CFPB also seeks comment on the 
proposed conforming revisions to the commentary for Sec.  
1026.12(c)(1).
v. Credit Card Applications and Solicitations (Sec.  1026.60)
    Existing Sec.  1026.60 includes certain requirements related to 
applications and solicitations for credit cards. Among other things, it 
requires certain disclosures in connection with credit card 
applications and solicitations and prescribes content and format of the 
application or solicitation. Existing Sec.  1026.60(a)(5) excepts 
certain types of credit from the requirements of Sec.  1026.60, 
including Sec.  1026.60(a)(5)(ii), which excepts overdraft lines of 
credit tied to asset accounts accessed by check-guarantee cards or by 
debit cards; Sec.  1026.60(a)(5)(iii), which excepts lines of credit 
accessed by check-guarantee cards or by debit cards that can be used 
only at automated teller machines; and Sec.  1026.60(a)(5)(iv), which 
excepts lines of credit accessed solely by account numbers except for a 
covered separate credit feature solely accessible by an account number 
that is a hybrid prepaid-debit card as defined in Sec.  1026.61.
    The requirements in Sec.  1026.60 implement provisions of the Fair 
Credit and Charge Card Disclosure Act of 1988.\206\ The purpose of the 
law was to provide for more detailed and uniform disclosures of rates 
and other cost information in applications and in solicitations to open 
credit and charge card accounts. The statute applies the disclosure 
requirements broadly to any application to open a credit card account 
for any person under an open-end consumer credit plan or to a 
solicitation to open such an account without requiring an application. 
In implementing the statutory requirements, the Board narrowed the 
scope of coverage by adopting the exceptions in what is now Sec.  
1026.60(a)(5), determining that the requirements should apply only to 
``traditional'' credit or charge accounts that are used primarily to 
purchase goods and services.\207\
---------------------------------------------------------------------------

    \206\ Public Law 100-583, 102 Stat. 2960 (Nov. 3, 1988).
    \207\ 54 FR 13855, 13856-57 (Apr. 6, 1989).
---------------------------------------------------------------------------

    The CFPB has preliminarily determined that, as with the CARD Act 
provisions, covered overdraft offered by a very large financial 
institution that is accessible by a card, including a debit card, 
should be subject to the requirements of Sec.  1026.60. In excepting 
certain types of credit from those requirements, the Board noted only 
that the requirements should apply only to ``traditional'' credit cards 
that are used to purchase goods and services. However, given the 
expanded use of debit cards to purchase goods and services, many of 
which are linked to accounts that offer overdraft credit, the 
distinction between ``traditional'' credit cards and debit cards that 
can access overdraft credit appears far less clear. The CFPB has 
preliminarily determined that the requirements of Sec.  1026.60 should 
be applied consistent with the broad statutory language to cards that 
can access covered overdraft credit, and that doing so will carry out 
the purposes of TILA by assuring a meaningful disclosure of credit 
terms and avoiding the uninformed use of credit.
    Accordingly, the CFPB is proposing to amend Sec.  1026.60 to narrow 
the exception for overdraft lines of credit. Specifically, the proposal 
would amend Sec.  1026.60(a)(5)(ii), (iii), and (iv) so that those 
exceptions would not apply to covered overdraft credit accessed by a 
hybrid debit-credit card. As explained above, the CFPB is proposing to 
define a ``hybrid debit-credit card'' as any card (including a debit 
card) that can access covered overdraft credit offered by a very large 
financial institution. Accordingly, the proposed amendments to Sec.  
1026.60(a)(5)(ii), (iii), and (iv) would narrow the exception so that 
the requirements of Sec.  1026.60 would apply to covered overdraft 
credit offered by a very large financial institution when that credit 
can be accessed by any card, including a debit card.
vi. Charge Card (Sec.  1026.2(a)(15)(iii))
    The CFPB proposes to amend the definition of ``charge card'' in 
Sec.  1026.2(a)(15)(iii) to exclude a hybrid debit-credit card from the 
definition. Under the proposed amendment, a hybrid debit-credit card 
would be subject to the same disclosure and other rules as other credit 
cards, rather than certain special rules for charge cards. The CFPB has 
preliminarily determined that consumers using hybrid debit-credit cards 
would benefit from the

[[Page 13882]]

TILA and Regulation Z provisions that apply to credit cards generally.
    TILA defines ``charge card'' as ``a card, plate, or other single 
credit device that may be used from time to time to obtain credit which 
is not subject to a finance charge.'' \208\ Because hybrid debit-credit 
cards would generally access credit that is subject to a finance 
charge, they do not fit within the statutory definition of charge card. 
The term ``charge card'' was introduced into TILA with the Fair Credit 
and Charge Card Disclosure Act of 1988, which amended TILA to define 
``charge card'' as ``a card, plate, or other single credit device that 
may be used from time to time to obtain credit which is not subject to 
a finance charge'' (emphasis added).\209\ In its rule implementing the 
1988 act, the Board expanded the definition of ``charge card'' such 
that, in Regulation Z, the definition includes any card on which there 
is no periodic rate.\210\ In other words, a card with a finance charge 
that is not a periodic rate is excluded from the statutory charge card 
definition but is included within the Regulation Z definition of that 
term. The Board sought to address a perceived inconsistency between 
that statutory definition and the fact that some disclosure provisions 
that apply to charge cards reference finance charges.
---------------------------------------------------------------------------

    \208\ 15 U.S.C. 1637(c)(4)(E).
    \209\ See Public Law 100-583, section 2, 102 Stat. 2960 (Nov. 3, 
1988).
    \210\ 54 FR 13855, 13856 (Apr. 4, 1989).
---------------------------------------------------------------------------

    Under both the statutory and regulatory definitions, a charge card 
is a type of credit card. Thus, where Regulation Z provisions apply to 
credit cards, the provisions also apply to charge cards. However, in 
specific provisions, which are listed in comment 2(a)(15)-3.i, the term 
charge card is distinguished from credit card such that different 
requirements apply. One example of such a provision is Sec.  
1026.7(b)(11), which, in accordance with TILA, requires on credit card 
periodic statements the disclosure of a payment due date and requires 
that that date be the same day of the month for each billing cycle. The 
Board in Regulation Z excluded charge cards from these 
requirements.\211\ The CFPB has preliminarily determined, however, that 
these requirements should apply to a debit card that can access a 
covered overdraft credit account (i.e., a hybrid debit-credit card). 
The CFPB accordingly is proposing to exclude hybrid debit-credit cards 
from the Regulation Z definition of charge card. This approach is 
consistent with TILA; in proposing to apply the TILA and Regulation Z 
credit card provisions to debit cards that can access covered 
overdraft, the CFPB is merely declining to exercise its regulatory 
authority to implement TILA with respect to hybrid debit-credit cards 
in the ways that the Board previously did with respect to charge cards.
---------------------------------------------------------------------------

    \211\ See Sec.  1026.7(b)(11)(ii)(A); 75 FR 7658, 7672-73 (Feb. 
22, 2010).
---------------------------------------------------------------------------

    The proposed definition of hybrid debit-credit card would encompass 
devices that can access overdraft credit and are subject to finance 
charges, including devices that are subject to fees but not a periodic 
interest rate. Hybrid debit-credit cards would therefore not fit the 
statutory definition of a ``charge card,'' because they are subject to 
finance charges. Further, the CFPB preliminarily determines that 
consumers using hybrid debit-credit cards would benefit from the TILA 
and Regulation Z provisions that apply to credit cards generally, such 
as Sec.  1026.7(b)(11).
    The CFPB understands that charge cards are typically offered to 
higher income individuals with prime or super-prime credit, and they 
often have no set credit limit.\212\ In contrast, current users of non-
covered overdraft credit often are lower-income consumers with lower 
credit scores.\213\ Subsequent to the CFPB's proposal, many of these 
consumers may be offered hybrid debit-credit cards. Accordingly, 
consistent with TILA, and to ensure that consumers who use covered 
overdraft credit may benefit from the full protection of the Regulation 
Z credit card rules, the CFPB is proposing to amend the regulatory 
definition of ``charge card'' such that a `hybrid debit-credit card' 
would not be within the credit card subset ``charge card'' but would 
nonetheless remain in the larger set ``credit card.'' This would ensure 
that a hybrid debit-credit card that accesses covered overdraft credit 
offered by a very large financial institution would be subject to the 
same disclosure and other rules as other credit cards.
---------------------------------------------------------------------------

    \212\ See Fed. Trade Comm'n, Comparing Credit, Charge, Secured 
Credit, Debit, or Prepaid Cards (Dec. 2021), https://consumer.ftc.gov/articles/comparing-credit-charge-secured-credit-debit-or-prepaid-cards.
    \213\ See CFPB 2017 Data Point at 6.
---------------------------------------------------------------------------

3. Compulsory Use of Preauthorized Transfers (Sec.  1005.10(e)(1))
    The CFPB proposes to apply the Regulation E compulsory-use 
prohibition to covered overdraft credit extended by very large 
financial institutions--i.e., when a very large financial institution 
provides overdraft credit that is subject to Regulation Z. Under this 
proposal, a very large financial institution that provides covered 
overdraft credit to a consumer could not condition the extension of 
such covered overdraft credit on the consumer's agreement to repay it 
solely by preauthorized electronic fund transfer (EFT). In other words, 
the proposal would require a very large financial institution that 
provides covered overdraft credit to a consumer to offer the consumer 
at least one alternative repayment option in addition to a 
preauthorized EFT.
    EFTA section 903(10) defines the term ``preauthorized electronic 
fund transfer'' as ``an [EFT] authorized in advance to recur at 
substantially regular intervals.'' \214\ Regulation E Sec.  1005.2(k) 
restates the statutory definition. EFTA's compulsory-use prohibition, 
EFTA section 913(1), prohibits any person from conditioning the 
extension of credit to a consumer on the consumer's repayment by means 
of preauthorized EFTs.\215\ However, Regulation E Sec.  1005.10(e)(1) 
currently includes a non-statutory exception. Specifically, that 
section states that ``[n]o financial institution or other person may 
condition an extension of credit to a consumer on the consumer's 
repayment by preauthorized electronic fund transfers, except for credit 
extended under an overdraft credit plan or extended to maintain a 
specified minimum balance in the consumer's account'' (emphasis 
added).\216\ The commentary explains that, as a result of the 
exception, a financial institution may require the automatic repayment 
of an overdraft credit plan.\217\
---------------------------------------------------------------------------

    \214\ 15 U.S.C. 1693a(10).
    \215\ 15 U.S.C. 1693k(1).
    \216\ 12 CFR 1005.10(e)(1).
    \217\ Regulation E comment 10(e)(1)-2.
---------------------------------------------------------------------------

    Regulation Z section 1026.12(d)(3) permits a card issuer, who 
obtains written authorization from the cardholder, to deduct 
periodically a cardholder's credit card debt from a deposit account 
held with the card issuer. Therefore, under the current rules, if a 
financial instution were to provide a consumer with overdraft credit 
accessible by a credit card, the financial institution could, with the 
consumer's written authorization, make automatic periodic deductions 
from the consumer's deposit account. Because periodic deductions by a 
creditor to obtain repayment of an overdraft credit balance occur at 
regular intervals, they are a form of preauthorized EFT and would be 
subject to the Regulation E compulsory-use prohibition, absent the 
extant exception for an overdraft credit plan provided by current

[[Page 13883]]

Sec.  1005.10(e)(1).\218\ It is this exception that the CFPB is 
proposing to eliminate for covered overdraft credit provided by a very 
large financial institution.
---------------------------------------------------------------------------

    \218\ See Sec.  1005.3(c)(5)(iii), which excludes from the 
Regulation E EFT definition a transfer of funds between a consumer's 
account and an account of the consumer's financial institution, but 
which also states that these transfers remain subject to the Sec.  
1005.10(e) compulsory-use prohibition.
---------------------------------------------------------------------------

    In adopting the exception from the compulsory-use prohibition in 
1981, the Board used its EFTA exception authority to exclude 
``overdraft credit plans'' (i.e., covered overdraft credit) from the 
general EFTA compulsory-use prohibition.\219\ The CFPB's proposal would 
revise Sec.  1005.10(e)(1) and associated commentary to update that 
non-statutory exception. Under the CFPB's proposal, the exception in 
Sec.  1005.10(e)(1) for overdraft credit plans would no longer apply to 
covered overdraft credit provided by a very large financial 
institution, as those terms would be defined in proposed Sec.  1026.62.
---------------------------------------------------------------------------

    \219\ See 46 FR 2972, 2973 (Jan. 13, 1981).
---------------------------------------------------------------------------

    Because under the proposal the exception would no longer apply to 
covered overdraft credit provided by a very large financial 
institution, the institution would be required to offer a consumer at 
least one method of repaying an overdraft credit balance other than 
automatic repayment by preauthorized EFT. For example, in addition to 
the automatic repayment option, the institution could offer consumers 
an option to repay their outstanding overdraft credit balances by 
expressly authorizing (e.g., on the institution's website or smartphone 
application) a one-time transfer of funds from the consumer's asset 
account.
    Under the CFPB's proposal, this requirement to offer additional 
repayment methods would apply to any existing covered overdraft credit 
offered by a very large financial institution, including products that 
often are referred to as Regulation Z overdraft lines of credit. In 
other words, where such an institution today provides a consumer with 
an overdraft line of credit subject to Regulation Z, the institution, 
upon the compliance date of the CFPB's proposal (if finalized), would 
need to begin to offer the consumer a way for the consumer to repay the 
consumer's overdraft credit balances other than by preauthorized EFT. 
While the institution would be required to offer a repayment option 
other than automatic repayment, the institution (as today) may offer a 
reduced APR or other cost-related incentive for the consumer to choose 
the option of automatic repayment.\220\
---------------------------------------------------------------------------

    \220\ See Regulation E comment 10(e)(1)-4.
---------------------------------------------------------------------------

    Congress enacted the compulsory-use prohibition to prevent 
financial institutions and other persons that are creditors from 
mandating repayment of credit by preauthorized EFTs, such as automatic 
periodic deductions from consumers' accounts. In turn, in adopting an 
exception to that prohibition for overdraft in the early 1980s, the 
Board stated its belief that overdraft credit plans were popular with 
those consumers who had them and that those plans almost universally 
involved an automatic payment feature.\221\ The Board also stated that 
it believed that the cost to institutions of providing and maintaining 
a nonautomatic payment option was substantial and that requiring 
institutions to incur that cost could have an adverse impact on 
consumers, such as through reduced service levels or the termination of 
the overdraft service altogether.\222\
---------------------------------------------------------------------------

    \221\ 46 FR 2972, 2973 (Jan. 13, 1981).
    \222\ Id.
---------------------------------------------------------------------------

    Covered overdraft credit plans are currently relatively rare.\223\ 
The CFPB has no reason to believe that these plans were available to a 
wider set of consumers in 1981 than they are now. Accordingly, the CFPB 
generally understands the Board's 1981 preamble to indicate that 
covered overdraft credit plans were well liked at that time by those 
consumers who had access to them. In addition, the CFPB has 
preliminarily determined that advances in information technology since 
the early 1980s (when the Board adopted the compulsory-use exception 
for overdraft) have reduced institutions' costs of obtaining repayment 
by means other than automatic repayment by preauthorized EFT. For 
example, an institution can establish at reasonable cost an internet 
computer or smartphone interface through which consumers may easily 
initiate--such as by tapping a ``button'' on a smartphone screen--
monthly repayment of credit balances. Further, because applying the 
compulsory-use prohibition should not substantially increase 
institutions' costs, applying the prohibition would not necessarily 
reduce consumers' access to covered overdraft credit plans. At the same 
time, applying the compulsory-use prohibition to covered overdraft 
credit may allow consumers at very large financial institutions to 
retain better control over the funds in their asset accounts at those 
institutions. Specifically, applying the prohibition would better 
enable consumers to prioritize which of their obligations to pay. For 
example, when funds are deposited into the consumer's asset account 
(such as electronic direct deposit of the consumer's paycheck), the 
consumer would be able to choose to use those funds to pay their rent 
before subsequently repaying the consumer's overdraft balance at the 
institution (using additional funds from the electronic direct deposit 
or subsequently deposited funds). Giving the consumer this choice could 
also help to reduce the consumer's costs if the consumer is charged for 
each overdraft transaction and delaying repayment of the overdrawn 
amounts would allow the consumer to avoid a subsequent overdraft 
transaction and its associated charge.
---------------------------------------------------------------------------

    \223\ 75 FR 7657, 7664 (Feb. 22, 2010). See also 79 FR 77102, 
77208 (Dec. 23, 2014).
---------------------------------------------------------------------------

    For these reasons, the CFPB has preliminarily determined that 
applying the compulsory-use prohibition to covered overdraft credit 
provided by a very large financial institution will carry out the 
purposes of EFTA by safeguarding consumers' rights in electronic fund 
transfer systems. This preliminary determination to apply the 
compulsory-use prohibition is consistent with Congress's original 
intent. Congress passed a broad compulsory-use prohibition, which the 
Board then narrowed due to concerns about costs, and which the CFPB is 
now proposing to restore in light of changed market circumstances 
(i.e., substantially reduced costs of alternative means of repayment).
Non-Covered Overdraft Credit
    As noted, the Regulation E compulsory-use prohibition prohibits 
conditioning credit extensions on consumers' repayment by preauthorized 
EFT. As discussed in this proposal, all overdraft is credit, 
irrespective of whether the overdraft is or is not subject to 
Regulation Z. Nonetheless, the compulsory-use prohibition has 
historically been interpreted as not applying to overdraft credit that 
is not subject to the requirements of Regulation Z (notwithstanding 
that non-covered overdraft credit is credit). Specifically, in 1980 the 
Board stated its belief that the compulsory-use prohibition does not 
apply to overdraft credit that is not covered by Regulation Z because, 
with respect to that overdraft, banks take consumers' repayments 
through immediate offset (which does not occur at regular intervals), 
rather than through preauthorized EFTs that consumers authorize in 
advance to recur at

[[Page 13884]]

substantially regular intervals.\224\ Under the Board's historical 
reasoning, a financial institution providing non-covered overdraft 
credit does not need access to the above-described exception for 
overdraft credit plans from the compulsory-use prohibition, because the 
institution's non-covered overdraft credit is not subject to the 
compulsory-use prohibition in the first place (because the institution 
takes repayment at irregular intervals, whenever the next deposit is 
received, rather than at regular intervals).
---------------------------------------------------------------------------

    \224\ See 45 FR 66348, 66348 (Oct. 6, 1980) (``Other [i.e., non-
covered] plans have automatic debiting whenever funds are deposited 
into the consumer's account, and do not have a fixed periodic or 
recurring payment schedule. It is the Board's opinion that these 
[non-covered] plans are already in compliance with section 913, 
because they do not require the consumer to agree to repayment by 
preauthorized transfers, which are defined in the act and regulation 
as transfers `authorized in advance to recur at substantially 
regular intervals.''').
---------------------------------------------------------------------------

    The CFPB is not proposing to revisit this longstanding 
interpretation. That is, under the CFPB's proposal, it will remain the 
case that non-covered overdraft credit that obtains repayment through 
offset, such as the typical overdraft service as defined in Sec.  
1005.17(a), is not subject to the compulsory-use prohibition. 
Therefore, a very large institution providing non-covered overdraft at 
or below breakeven pricing may continue to take repayment of a 
consumer's overdraft balance immediately upon the institution's receipt 
of the next deposit to the consumer's account, just as institutions 
typically do today, if done in compliance with applicable law.
    Under the CFPB's proposal, however, overdraft credit, including an 
overdraft service as that term is defined in Regulation E, that is 
provided by a very large financial institution, would only remain not 
covered by Regulation Z's requirements--and thus outside the Regulation 
E compulsory-use prohibition--if the institution provides its overdraft 
credit to consumers for a price that is at or below the institution's 
breakeven price for providing the credit. In other words, if the price 
of such institution's overdraft credit is above its costs and losses, 
then, under the CFPB's proposal, the credit is covered overdraft credit 
that is not excepted from Regulation Z and is therefore subject to the 
Regulation Z offset prohibition. Accordingly, under the CFPB's 
proposal, the institution would be required to obtain repayment only 
periodically (pursuant to the offset prohibition) and to comply with 
the Regulation E compulsory-use prohibition (in addition to complying 
with Regulation Z). As previously noted, the CFPB's proposal does not 
apply to non-covered or covered overdraft credit provided by an 
institution other than a very large financial institution. As now, 
where such an institution provides non-covered overdraft credit, 
including an overdraft service, the overdraft credit is not subject to 
the Regulation E compulsory-use prohibition. Further, as now, where 
such an institution provides an overdraft credit plan that is subject 
to Regulation Z, the institution's overdraft credit plan retains access 
to the current Sec.  1005.10(e)(1) exception from the compulsory-use 
prohibition for overdraft credit plans.
i. The Offset Prohibition in 12 CFR 1026.12(d)(1)
    While the CFPB is not proposing to amend the Regulation Z 
prohibition against offset, it is closely related to the Regulation E 
compulsory-use prohibition discussed above; thus, the CFPB briefly 
discusses it here for clarity.
    ``Offset'' is a term used to describe a practice whereby a 
depository institution uses funds from an incoming deposit to a 
consumer's asset account at the institution to immediately obtain 
repayment of the consumer's debt to the institution, such as an 
overdraft.\225\ ``Offset'' is a permitted practice in the context of 
non-covered overdraft that is not subject to Regulation Z. In that 
context, as described above, an institution may use deposited funds 
immediately upon receipt to obtain repayment of, or ``offset'' against, 
the consumer's overdraft balance owed to the institution.
---------------------------------------------------------------------------

    \225\ See Regulation Z comment 12(d)(1)-2 (describing offset as 
when ``the consumer tenders funds as a deposit . . . [and] the card 
issuer . . . appl[ies] the funds to repay indebtedness on the 
consumer's credit card account'').
---------------------------------------------------------------------------

    Offset is prohibited by TILA section 169(a) (15 U.S.C. 1666h(a)) 
and 12 CFR 1026.12(d)(1). The statutory and regulatory offset 
prohibition applies to a ``card issuer,'' \226\ which is a person that 
issues a ``credit card.'' \227\ When an institution offers an overdraft 
credit plan subject to Regulation Z, that plan is covered overdraft 
credit. If the covered overdraft credit is accessible by a debit card, 
the debit card is a credit card, the institution that provides the card 
is a card issuer, and the covered overdraft credit is subject to the 
Regulation Z prohibition against offset.
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    \226\ The term ``card issuer'' is defined in 12 CFR 1026.2(a)(7) 
as ``a person that issues a credit card or that person's agent with 
respect to the card.''
    \227\ The term ``credit card'' is defined in 12 CFR 
1026.2(a)(15)(i) as ``any card, plate, or other single credit device 
that may be used from time to time to obtain credit.''
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    The CFPB is not proposing to amend the offset prohibition in 
Regulation Z. Thus, when a very large financial institution provides a 
covered overdraft credit account that is accessible by a card (i.e., a 
hybrid debit-credit card), the institution must comply with the offset 
prohibition. In particular, 12 CFR 1026.12(d)(1) prohibits the 
institution (as a card issuer) from taking any action, either before or 
after termination of credit card privileges, to offset a consumer's 
indebtedness (such as an overdraft balance) that arises from a credit 
card plan (such as a covered overdraft credit account) against the 
consumer's funds (such as funds in a covered asset account) held on 
deposit with the institution.
    Further, per comment 12(d)(1)-3, the offset prohibition applies to 
any indebtedness arising from transactions under a credit card plan 
(such as a covered overdraft credit account accessible by a hybrid 
debit-credit card), including accrued finance charges and other charges 
on the account. The prohibition also applies to balances arising from 
transactions not using the card itself but taking place under plans 
that involve a credit card. For example, if the consumer writes a check 
that accesses an overdraft line of credit (which is a type of covered 
overdraft credit account), the resulting indebtedness is subject to the 
offset prohibition since it is incurred through a credit card 
plan.\228\
---------------------------------------------------------------------------

    \228\ See Regulation Z comment 12(d)(1)-3.
---------------------------------------------------------------------------

ii. Periodic Deductions Permitted by 12 CFR 1026.12(d)(3)
    Periodic deductions are a different practice than offset. TILA 
section 169(a)(1) (15 U.S.C. 1666h(a)(1)) permits a card issuer to 
periodically deduct all or part of a consumer's credit card debt from 
the consumer's asset account if the periodic deductions are in 
accordance with the consumer's preauthorized written agreement. This 
TILA provision is implemented in 12 CFR 1026.12(d)(3).
    The CFPB is not proposing to amend 12 CFR 1026.12(d)(3). Thus, when 
a very large financial institution provides covered overdraft credit 
that is accessible by a card, the institution (as a card issuer) must 
comply with the offset prohibition (Sec.  1026.12(d)(1), discussed 
above), but may obtain a consumer's preauthorized written agreement to 
periodic deductions of the consumer's overdraft balances from the 
consumer's asset balances held at the institution. These deductions 
must be ``periodic'' to be permitted under

[[Page 13885]]

Sec.  1026.12(d)(3); that is, the deductions must occur at regular 
intervals. Because the deductions must occur at regular intervals, they 
are, as discussed above, a form of preauthorized EFT and are subject to 
the Regulation E compulsory-use prohibition. Further, because the 
deductions are subject to that prohibition, under the CFPB's proposal, 
as discussed, a very large financial institution providing covered 
overdraft credit must offer consumers a means of repayment other than 
periodic deduction. In other words, even when a very large institution 
(as a card issuer) obtains a consumer's written agreement to periodic 
deductions as permitted by Sec.  1026.12(d)(3), the institution may not 
adopt a practice of immediately taking funds from any incoming deposit 
in repayment of the consumer's overdraft balance, because doing so 
would run afoul of the offset prohibition in Sec.  1026.12(d)(1). 
Moreover, when obtaining written agreement for periodic deductions, the 
very large financial institution must offer the consumer another 
repayment option, consistent with the prohibition against compulsory 
use discussed earlier in this section.
iii. Summary of Compliance With the Compulsory-Use Prohibition, Offset 
Prohibition, and Permitted Periodic Deduction Under the CFPB's Proposal
    As discussed above, the CFPB is proposing to apply the Regulation E 
compulsory-use prohibition to covered overdraft credit provided by a 
very large financial institution. Further, the CFPB is not proposing to 
amend the Regulation Z prohibition against offset, nor is the CFPB 
proposing to amend the Regulation Z provision permitting periodic 
deductions. Therefore, when such an institution provides covered 
overdraft credit that is accessible by a card, the institution must 
comply with the Regulation E compulsory-use prohibition and the 
Regulation Z offset prohibition, and may obtain the consumer's 
voluntary agreement to repayment by periodic deduction from the 
consumer's asset account at the institution.
    Pursuant to the Regulation Z offset prohibition, the institution 
may not adopt a practice of immediately taking funds from any incoming 
deposit in repayment of the consumer's overdraft balance. Pursuant to 
the Regulation Z provision permitting periodic deductions, the 
institution may obtain the consumer's written agreement to the 
institution's obtaining repayment of the consumer's overdraft balance 
through automatic periodic deductions from the consumer's covered asset 
account. However, pursuant to the Regulation E compulsory-use 
prohibition, the institution must provide the consumer with a repayment 
option other than automatic periodic deduction. For example, the 
institution could provide the repayment option of permitting the 
consumer to authorize one-time EFTs to make payments against their 
overdraft balance. Also pursuant to the compulsory-use prohibition, the 
institution may provide a reduced APR or other cost-related incentive 
for the consumer to choose the option of repayment by periodic 
deduction.
Request for Comment--Defining ``Periodic''
    In its 2016 Prepaid Final Rule, the CFPB defined ``periodically'' 
in Sec.  1026.12(d)(3) for purposes of a credit feature accessible by a 
hybrid prepaid-credit card to mean no more frequently than once per 
calendar month. The CFPB stated that it was concerned that some issuers 
of hybrid prepaid-credit cards would attempt to circumvent the offset 
prohibition in Sec.  1026.12(d)(1) by obtaining a consumer's written 
authorization to deduct all or part of the cardholder's credit card 
debt on a daily or weekly basis from the prepaid account to help ensure 
that the debt is repaid.\229\ The CFPB stated that issuers of hybrid 
prepaid-credit cards might obtain a consumer's written authorization to 
daily or weekly debits given the overall creditworthiness of prepaid 
accountholders who rely on covered separate credit features. In 
addition, the CFPB believed that prepaid consumers might grant the 
authorization more readily than other credit cardholders because these 
consumers may believe that providing such authorization is required. 
While the CFPB acknowledged that an appropriate interval for periodic 
deductions may depend on the facts and circumstances, the CFPB 
determined that Sec.  1026.12(d)(3)--defining periodically as no more 
frequently than once per calendar month--would fully effectuate the 
intent of the compulsory-use and offset prohibitions and would allow 
consumers to retain control over the funds in their prepaid accounts 
even when a covered separate credit feature accessible by a hybrid 
prepaid-credit card becomes associated with that account.
---------------------------------------------------------------------------

    \229\ 81 FR 83934, 84213 (Nov. 22, 2016).
---------------------------------------------------------------------------

    The CFPB believes that similar issues are also present in the 
context of covered overdraft credit accounts tied to covered asset 
accounts. In particular, the CFPB believes that institutions providing 
such accounts might attempt to circumvent the offset prohibition by 
obtaining a consumer's written authorization to deduct all or part of 
the consumer's debt on a daily or weekly basis to help ensure that the 
debt is repaid. Further, the CFPB believes that consumers using these 
accounts, such as frequent overdrafters, would generally be more 
vulnerable than other consumers and that, in light of their 
vulnerability, these consumers might grant such authorization more 
readily than other consumers, because they believe that the 
authorization is required to obtain the accounts. At the same time, the 
CFPB acknowledges that it is possible that a periodic deduction period 
shorter than one month might be appropriate in some circumstances. 
Specifically, it is possible that some consumers might have difficulty 
managing repayment of credit balances and that these consumers might 
benefit from periodic deductions that occur more frequently than once 
per month.
    The CFPB requests comment on whether in its final rule it should 
define ``periodically'' to mean no more frequently than once per 
calendar month or some other interval for covered overdraft credit 
accounts tied to covered asset accounts.
4. Definition of Overdraft Services in Regulation E (Sec.  1005.17(a))
    Section 1005.17(a) currently defines ``overdraft service'' to mean 
a service under which a financial institution assesses a fee or charge 
on a consumer's account held by the institution for paying a 
transaction (including a check or other item) when the consumer has 
insufficient or unavailable funds in the account. Section 1005.17(a)(1) 
also provides that the term ``overdraft service'' does not include any 
payment of overdrafts pursuant to a line of credit subject to 
Regulation Z, including transfers from a credit card account, home 
equity line of credit, or overdraft line of credit. The CFPB is 
proposing to add comment 17(a)-2 to clarify that the newly defined 
terms under this proposal do not change the scope of the definition of 
overdraft services under Sec.  1005.17(a). Specifically, the proposed 
comment would clarify that covered overdraft credit, which includes 
above breakeven overdraft credit, is not an overdraft service under 
Sec.  1005.17(a) because it is a line of credit subject to Regulation 
Z. When consumers at very large financial institutions are offered 
covered overdraft credit, that covered overdraft credit would not be 
subject to the Regulation E opt-in requirement for non-covered debit 
card overdraft.

[[Page 13886]]

VI. Proposed Effective Date

    Consistent with TILA section 105(d), the CFPB proposes that a final 
rule relating to this proposal would have an effective date of the 
October 1 which follows by at least six months the date it is published 
in the Federal Register.\230\ The Bureau seeks comment on the proposed 
effective date including whether it should be at a different time, and 
if so, when and why.
---------------------------------------------------------------------------

    \230\ 15 U.S.C. 1604(d).
---------------------------------------------------------------------------

    As discussed above, the CFPB's proposed rule would, if finalized, 
apply only to very large financial institutions. Accordingly, financial 
institutions that are not very large institutions would not need to 
make any changes in response to the proposed rule were it to be 
finalized.
    With respect to very large financial institutions, the changes that 
the proposed rule would require, if finalized, would vary depending on 
the very large financial institution's activities. If a very large 
financial institution currently offered non-covered overdraft services 
in compliance with existing regulations and, in response to the rule, 
it chose to provide those services at or below its breakeven price, it 
could continue to provide such services without making any operational 
changes in response to the rule apart from developing a process to 
confirm that its pricing for such services complied with either the 
rule's benchmark fee or breakeven standard provisions.
    If a very large financial institution currently offered non-covered 
overdraft services in compliance with existing regulations and, in 
response to the rule, chose to provide above-breakeven overdraft 
credit, it would need to ensure that such credit complied with 
Regulation Z. However, if the very large financial institution were 
unable to bring a Regulation Z compliant above-breakeven overdraft 
credit program to market before the effective date of a final rule, the 
institution still could comply with the rule by delaying, for as long 
as it wishes, the point in time at which it began to offer above-
breakeven overdraft credit to consumers. Finally, if a very large 
financial institution currently offered covered overdraft credit in 
compliance with Regulation Z and, in response to the rule, chose to 
continue offering such credit, the very large financial institution 
would need to comply with the rule by: (1) treating transfer fees as 
finance charges, or eliminating those fees, (2) offering consumers a 
means of repaying their overdrafts other than by preauthorized EFTs, 
and (3) beginning to comply with the regulatory provisions in 
Regulation Z that apply to credit cards that would newly apply to 
certain types of covered overdraft credit.
    The CFPB believes that the proposed effective date should be 
sufficient for a very large financial institution to make these 
changes.

VII. Severability

    The CFPB preliminarily intends that, if any provision of the 
proposed rule, if adopted as final, or any application of a provision, 
is stayed or determined to be invalid, the remaining provisions or 
applications are severable and shall continue in effect.

VIII. CFPA Section 1022(b) Analysis

A. Overview

    In developing this proposed rule, the CFPB has considered the 
proposed rule's potential benefits, costs, and impacts per section 
1022(b)(2)(A) of the Consumer Financial Protection Act of 2010 (CFPA). 
The CFPB requests comment on the preliminary analysis presented below 
and submissions of more data that could inform the CFPB's analysis of 
the potential benefits, costs, and impacts. In developing the proposed 
rule, the CFPB has consulted or offered to consult with the appropriate 
prudential regulators and other Federal agencies, including about the 
consistency of this proposed rule with any prudential, market, or 
systemic objectives administered by those agencies, in accordance with 
section 1022(b)(2)(B) of the CFPA. The CFPB also consulted with 
agencies described in TILA section 149.
    The goal of this proposed rule is to allow more consumers to better 
compare certain overdraft credit to other types of credit and to 
provide consumers with several substantive protections that already 
apply to other consumer credit, while still encouraging the 
availability of overdraft coverage. The section proceeds as follows. 
First, it describes data limitations and the quantification of 
benefits, costs, and impacts. Second, it presents the baseline for its 
analysis. Third, it goes through the potential benefits and costs, 
first to consumers and then to covered persons, of the proposed changes 
that affect charges for non-covered and covered overdraft. Fourth, the 
section turns to the benefits, costs, and impacts of further provisions 
of the proposed rule. Fifth and sixth, it summarizes specific impacts 
on financial institutions with $10 billion in assets or less and on 
consumers in rural areas, respectively.

B. Data Limitations and Quantification of Benefits, Costs, and Impacts

    The discussion below relies on information that the CFPB has 
obtained from industry, other regulatory agencies, and publicly 
available sources, including reports published by the CFPB. These 
sources form the basis for the CFPB's consideration of the likely 
impacts of the proposed rule. The CFPB provides estimates, to the 
extent possible, of the potential benefits and costs to consumers and 
covered persons of this proposal given available data.
    Specifically, this discussion is based on the CFPB's analysis of 
public Call Reports and other publicly available data sources, internal 
data from multiple supervisory information requests, as described in 
part II above, as well as research reports published by the CFPB. The 
CFPB also consulted the academic literature and policy analyses of 
United Kingdom and State regulators.
    The CFPB acknowledges several important limitations that prevent a 
full determination of benefits, costs, and impacts. Quantifying the 
benefits, costs, and impacts requires quantifying consumer and 
depository institution responses to the proposed changes, and the CFPB 
finds the body of knowledge on relevant behavioral responses and 
elasticities incomplete. In particular, the CFPB is not aware of 
evidence that could be used to predict how changes to overdraft pricing 
would affect negative balance periods or the expected substitution 
effects across asset accounts and between deposit accounts with 
overdraft coverage and other forms of credit, including the consumer 
harm from delaying or forgoing some transactions. Similarly, the CFPB 
believes there is little reliable quantitative evidence available on 
the cost and effectiveness of steps financial institutions might take 
to facilitate clients' money management or timely repayment on 
overdrawn accounts; reprice any of their services; remunerate their 
staff, suppliers, or sources of capital differently; or enter or exit 
any or all segments of the checking account market. Thus, while the 
data and research available to the CFPB provide an important basis for 
understanding the likely effects of the proposal, the data and research 
are insufficient to fully quantify the potential effects of the 
proposal for consumers and very large financial institutions. This 
reflects, in part, the fact that the effects of the proposal would 
depend on choices made by independent actors in response to the 
proposal, and the data and research available to the CFPB do not

[[Page 13887]]

allow reliable predictions of those choices.
    In light of these data limitations, the analysis below provides 
quantitative estimates where possible and a qualitative discussion of 
the proposed rule's benefits, costs, and impacts. General economic 
principles and the CFPB's expertise, together with the available data, 
provide insight into these benefits, costs, and impacts. The CFPB 
requests additional data or studies that could help quantify the 
benefits and costs to consumers and covered persons of the proposed 
rule.

C. Baseline for Analysis

    To evaluate the proposal's benefits, costs, and impacts, the CFPB 
measures the proposal's benefits, costs, and impacts against a baseline 
in which the CFPB would take no action. This baseline assumes existing 
regulations remain in place and that market conditions in the overdraft 
market do not change from their current state.
    The discussion below assumes that, without action, both the 
overdraft credit market and the broader consumer checking market would 
function in the manner understood through past CFPB research, external 
academic literature, and supervisory activity. The CFPB bases its 
prediction for the baseline on market conditions and market data from 
the 2022 calendar year. As a result, its baseline reflects changes to 
the overdraft market through 2022, including changes to checking 
account pricing (both fee and net interest revenue) and changes to the 
speed, cost, availability, and prevalence of payment systems. The CFPB 
sees that the market is changing rapidly and might continue to do so 
absent the rule, but for purposes of the baseline the CFPB generally 
uses data from the most recent full calendar year to characterize the 
status quo.

D. Potential Benefits and Costs to Consumers and Covered Persons of the 
Proposed Changes That Affect Charges for Non-Covered and Covered 
Overdraft Credit

1. Potential Benefits and Costs to Consumers
    In addition to other changes discussed later in this section and to 
the further changes discussed in the following section, the proposal 
would apply Regulation Z to above breakeven overdraft credit that is 
currently excepted from the regulation (i.e., it is currently non-
covered overdraft credit). Overdraft credit is above breakeven 
overdraft credit when a very large financial institution imposes a 
charge or combination of charges for such credit that exceeds the 
greater of either the average of the institution's costs and losses for 
providing non-covered overdraft credit (as defined in the proposal) or 
the benchmark fee published by the CFPB. The CFPB anticipates that its 
proposal generally would benefit consumers in two ways. First, some 
very large financial institutions may reduce their fees so that they 
can continue offering non-covered overdraft credit. In general, lower 
overdraft fees for non-covered overdraft credit would benefit consumers 
by reducing the amount they pay through these fees. Second, some 
financial institutions may continue offering above breakeven overdraft 
credit and apply the Regulation Z regulatory framework. In general, 
applying the Regulation Z regulatory framework to above breakeven 
overdraft credit would benefit consumers by promoting their informed 
use of such credit and by applying TILA's substantive protections. The 
CFPB's analysis may underestimate or overestimate the proposal's 
benefits to consumers depending on how various market participants, 
such as financial institutions covered by the proposal, entities not 
covered by the proposal, and consumers, respond to the proposal. The 
discussion below begins with an analysis of the proposal's direct 
benefits to consumers assuming that very large financial institutions 
comply with the proposal by lowering their fees for non-covered 
overdraft credit. The discussion then considers how other potential 
responses by very large financial institutions could impact the 
proposal's direct benefits to consumers. Next, the discussion considers 
how the proposal might impact consumer behavior, including demand for 
both covered and non-covered overdraft credit, demand for alternative 
credit products, and deposit behavior. Finally, the discussion briefly 
considers how institutions not covered by the proposal may respond to 
the proposal.
i. Estimated Savings to Consumers if Very Large Financial Institutions 
All Use the CFPB's Proposed Benchmark Fee or Breakeven Standard
    Under the proposal, overdraft credit offered by very large 
financial institutions that currently is non-covered overdraft credit 
could remain non-covered overdraft credit if the per-transaction price 
for such credit were less than or equal to the benchmark fee 
established by the CFPB. Consequently, if all very large financial 
institutions were to use the benchmark fee to comply with the rule, the 
proposal's direct benefits to consumers, assuming no change in 
overdraft frequency, could be as high as the difference between the 
total fees currently paid by consumers for non-covered overdraft credit 
and the total fees they would pay if non-covered overdraft credit were 
priced at the benchmark fee.
    Today, fees for non-covered overdraft credit are generally greater 
than $30 per transaction.\231\ Under the proposal, fees for any non-
covered overdraft product provided by a very large financial 
institution would be substantially lower. From Call Report data, the 
CFPB estimates that consumers paid $5.98 billion in overdraft fees to 
very large banks and thrifts in 2022. For this estimate, the CFPB 
started with CFPB-supervised banks' total reported consumer overdraft-
related service charges levied on those transaction account and non-
transaction savings account deposit products intended primarily for 
individuals for personal, household, or family use.\232\ This amount 
was $6.42 billion in 2022, including fee revenue from both overdraft 
and NSF transactions. In prior work, the CFPB has estimated that, 
between January 2011 through June 2012, 18.9 percent of such revenue at 
several very large financial institutions was NSF fee revenue.\233\ 
However, most of the largest banks eliminated NSF fees during 2022; the 
CFPB estimates that nearly two-thirds of supervised banks had 
eliminated NSF fees by mid-2023, representing an estimated 97 percent 
of annual NSF fee revenue earned by those institutions.\234\ For 
purposes of this analysis, the CFPB estimates that the NSF fee share in 
2022 was half as large as the earlier 18.9 percent share, so supervised 
banks' overdraft fees would be 90.55 percent of the 2022 fee total, or 
$5.81 billion. This total does not include fee revenue from credit 
unions that are very large financial institutions, since credit union 
call reports do not include data on overdraft fee

[[Page 13888]]

revenue.\235\ To estimate overdraft revenue earned by CFPB-supervised 
(very large) credit unions, the CFPB estimates the overdraft revenue 
earned by all credit unions and distributes that estimated revenue to 
credit unions above and below $10 billion in assets based on those 
groups' relative share of member shares and deposits. The CFPB has 
estimated that overdraft revenue reported by banks with over $1 billion 
in assets comprises approximately 77 percent of the total overdraft/NSF 
revenue earned by banks and credit unions combined, while credit union 
overdraft/NSF revenue comprises approximately 15 percent of such 
revenue (overdraft/NSF revenue of banks under $1 billion in assets 
comprises approximately 7 percent of such revenue).\236\ Banks with 
more than $1 billion in assets reported $7.72 billion in overdraft/NSF 
revenue in 2022, 90.55 percent or $7.00 billion of which the CFPB 
estimates is overdraft revenue for reasons explained above. Assuming 
this $7.00 billion represents 77 percent of the market total overdraft 
revenue, the CFPB estimates that credit unions earned 15 percent of the 
total, or $1.43 billion in overdraft revenue in 2022. At the end of 
2022, very large credit unions held 24.1 percent of all member shares 
and deposits held by federally insured credit unions. Applying this 
24.1 percent to $1.43 billion, the CFPB estimates that very large 
credit unions earned $0.34 billion in overdraft fees in 2022, and that 
very large financial institutions collectively earned $6.16 billion.
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    \231\ In narrative responses to supervisory information 
requests, financial institutions generally stated that discretionary 
overdraft fees are set using factors such as: (1) the direct and 
indirect cost of offering OD services, (2) deterrence effects, (3) 
positioning with respect to other competitors, (4) customer 
feedback, experiences, and utility, (5) regulatory requirements and 
(6) safety and soundness concerns. CFPB 2024 Overdraft NSF Report at 
11.
    \232\ This information is reported in Schedule RI, Memorandum 
item 15.a on the FFIEC 031 and 041 forms, as of September 2023. For 
most institutions, this definition also includes fees associated 
with sustained negative balances. Few charges related to overdraft 
transactions are reported as net interest revenue, if any.
    \233\ CFPB 2014 Data Point at 10 tbl.2.
    \234\ CFPB October 2023 Data Spotlight.
    \235\ Some state-charted credit unions reported substantial 
overdraft revenue under California's Financial Code Section 521. See 
Dep't of Fin. Prot. & Innovation, Annual Report of Income from Fees 
on Nonsufficient Funds and Overdraft Charges (Mar. 2023), https://dfpi.ca.gov/wp-content/uploads/sites/337/2023/04/Annual-Report-of-Income-from-Fees-on-Nonsufficient-Funds-and-Overdraft-Charges_2023.pdf (DFPI 2023 Report).
    \236\ See CFPB 2021 Data Point at 7 (estimating combined 
overdraft/NSF revenue for credit unions and for banks with less than 
$1 billion in assets using 2014 data collected from core processors 
for the number of accounts by asset size and the overdraft/NSF 
revenue per account, and from 2014 call report data for distribution 
of institutions by asset size, and then assuming that overdraft/NSF 
revenue at small institutions saw the same growth from 2014 to 2019 
as at large banks to arrive at the 2019 estimates). For purposes of 
this analysis, we assume that banks with assets over $1 billion, 
banks with assets below $1 billion, and all credit unions represent 
the same relative portions of total marketwide overdraft/NSF revenue 
in 2022 as they did in 2019.
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    From information requests by the CFPB, it estimates the average 
overdraft fee amount to be $32.50.\237\ The CFPB initially assumes that 
a reduction in the fee for non-covered overdraft credit would affect 
neither the quantity of credit demanded nor the quantity supplied, 
meaning that the application of the benchmark fee across the entire 
market would imply mechanical savings for consumers, unaffected by 
behavioral responses.\238\ As discussed in part V(D)(2)(v), the CFPB 
has proposed four alternative values for the benchmark fee--$3, $6, $7, 
and $14. Assuming each proposed value would effectively be the new 
average fee across the market, the decline of the market total revenue 
would be proportional to the decline in the average fee amount. Thus, 
using a 2022 baseline, a $3 fee would have saved consumers $5.6 billion 
(90.8 percent of the 2022 total) annually, a $6 fee $5.0 billion (81.5 
percent of the total), a $7 fee $4.8 billion (78.5 percent of the 
total), and a $14 fee $3.5 billion (56.9 percent of the total) in a 
calendar year.
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    \237\ The CFPB requested information about some very large 
financial institutions' 2022 overdraft practices. For those 
institutions with available data on the number of instances of non-
covered overdraft when the institution charged a fee, the reported 
weighted average fee amount was $32.50. CFPB 2024 Overdraft NSF 
Report. Based on the CFPB's review of publicly available information 
between December 2022 and July 2023, the unweighted median non-
covered overdraft fee amount across all very large financial 
institutions was $35. Past CFPB research publications have reported 
the median non-covered overdraft fee as $35; this median was also 
based on data from very large financial institutions. A $35 fee is 
higher than the $25.77 fee recently reported by the New York State 
Department of Financial Services for 2022 based on a surveyed 
entities, most of which would not be subject to this proposal. See 
N.Y. State Dep't of Fin. Servs., Consumer Fee Practices in New York 
(July 14, 2023), https://www.dfs.ny.gov/system/files/documents/2023/07/rpt_20230714_consumer_fee_practices_nys.pdf. The Department of 
Financial Protection and Innovation of the State of California 
annually tabulates State-chartered banks' and credit unions' revenue 
from overdraft charges but not the fee amounts. See DFPI 2023 Report 
Note that to the extent market revenue or fees for very large 
financial institutions were lower by the effective date of the 
proposed rule, the proportional drop from a smaller market total 
would amount to less than these extrapolations from 2022 market 
revenue totals and fees. Bankrate's 2023 checking account and ATM 
fee survey reports that the average overdraft fee was 11 percent 
lower than a year before, https://www.bankrate.com/banking/checking/checking-account-survey/ (last visited Jan. 7, 2024).
    \238\ This assumption approximates the situation where overdraft 
transactions are inadvertent (a fixed quantity demanded) and always 
met at the prevailing price, even after the supply curve shifts 
downward with the benchmark fee. As discussed elsewhere, this 
outcome is unlikely to hold exactly. Consumers might be less 
attentive to avoid overdraft when it is cheaper, though many might 
have larger buffers if earlier fees have depleted their account 
balances less than they would under the baseline. Financial 
institutions might also meet demand only at higher prices, applying 
the breakeven standard approach or offering covered overdraft credit 
instead.
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    Savings from lower fees would be particularly valuable in cases 
when they protect liquidity at times when the consumer needs it most. 
Consumers with low balances may deplete their asset account less 
frequently if they have paid less in overdraft fees in the past, and 
thus their asset account recovered to a higher balance after a 
sufficiently large deposit. Moreover, if fees, in particular multiple 
or cascading fees, deplete less of the buffer the depository 
institution is willing to lend to the consumer (i.e., the shadow line 
of their non-covered overdraft credit), the consumer might be able to 
cover more or larger transactions with it when they have depleted their 
asset account. The same shadow line would permit more consumption. 
Current users of non-covered overdraft credit would enjoy similar 
benefits even if they end up with substitute products like covered 
overdraft credit, or linked asset or credit accounts, as long as the 
new source of liquidity is cheaper than non-covered overdraft is 
currently.
    A large reduction in fees for non-covered overdraft could reduce 
some operating costs associated with complaints, collections, and 
account closures. Such benefits to covered persons do not need to 
reflect an equal but opposite pecuniary cost to consumers. Fewer 
complaints, collections, or account closures can save money for both 
the accountholder and the depository institution, who somehow split the 
value that would have been spent otherwise. These gains would mitigate 
some losses covered persons suffer from lower fee revenue, so they lose 
less on net, in total. The CFPB understands from its general monitoring 
activities that complaints fell by 70 percent or more at depository 
institutions that radically decreased overdraft fees recently. With 
lower fees and charges, the CFPB expects more non-covered or covered 
overdraft credit accounts to recover from negative balance episodes.
    Very large financial institutions with per-incident costs and 
losses traceable to overdrawing transactions above the benchmark fee 
would have an incentive to set fees for non-covered overdraft using the 
breakeven standard described at proposed Sec.  1026.62(d)(1)(i). 
Consumer gains when very large financial institutions with per-incident 
costs and losses above the benchmark fee use the breakeven standard 
would be less as their fee would not drop all the way to the benchmark 
fee. The gains for consumers would be even smaller if the application 
of the breakeven standard imposes additional administrative costs on 
the institutions who use it, and, in turn, those institutions shift 
some of these costs to their customers. However, the CFPB expects these 
administrative costs to be small compared to revenue.

[[Page 13889]]

    Data produced in response to the CFPB's supervisory information 
requests on 2022 overdraft practices suggest that, for benchmark fee 
levels less than $14, at least some very large financial institutions 
would have traceable costs and losses per overdraft fee charged greater 
than the benchmark fee level, such that they could find it more 
advantageous to use the breakeven standard. The CFPB has less data on 
the costs and losses of other very large financial institutions, whose 
costs and losses (mostly their charge-off losses) may be higher than 
for some institutions in its supervisory information request 
collection. However, because the costs and losses of providing non-
covered overdraft are driven largely by credit losses, and because 
these losses depend on underwriting policies, which, as discussed 
below, very large financial institutions likely would change in 
response to the proposed rule, current cost and loss levels may not be 
a reliable indicator of future cost and loss levels assuming the 
proposed rule were finalized.
    Overdraft fees are incurred by consumers in an estimated 17 percent 
of households annually.\239\ Among these, the consumers who would 
benefit most from the proposal are those that incur the largest number 
of overdraft fees. Thus, a change in fee amounts would have an outsized 
impact on specific groups of consumers. The CFPB collected 2022 
calendar year information from entities it supervises (the group that 
would be affected by the proposed rule), which reinforced patterns of 
disparity that prior research of the CFPB and others established: \240\ 
Overdraft and NSF fees comprised 53 percent of all fees that the 
institutions charged to consumer checking accounts, nearly three 
quarters of all fees charged to accounts with an average balance below 
$500 (lower balance accounts), and nearly three quarters of all fees 
charged to accounts where accountholders opted to authorize overdraft 
fees on debit card and ATM overdraft transactions (opted-in accounts). 
While overdraft-related fees averaged approximately $65 per year over 
all accounts, accountholders of opted-in accounts and accountholders of 
lower-balance accounts paid over $165 and $220, respectively, in total 
of overdraft fees per year on average. Therefore, the benefits of any 
fee changes driven by the proposal would be predominantly experienced 
by the small fraction of accountholders who had either opted-in 
accounts or lower-balance accounts because those accountholders paid 
the majority of overdraft fees. Indeed, in aggregate, across all 
institutions represented in the CFPB's Supervisory Information 
collection, one-fifth of accounts were lower-balance accounts, but 
these accounts paid 68 percent of per-item overdraft fees assessed. In 
fact, at least one institution charged over half of per-item overdraft 
fees to accounts that were both lower-balance accounts and opted-in 
accounts, even though only five percent of accounts fell into this 
category. Furthermore, accounts that paid for overdraft most often 
(twelve or more overdraft fees per year) were nearly five times as 
prevalent among opted-in accounts than not-opted-in accounts.
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    \239\ FinHealth Spend Research Reports from 2021, 2022 and 2023 
have estimated that 17 percent of responding households have paid an 
overdraft fee in the prior twelve months between November 2021 and 
January 2023. See generally, FHN, Market Analysis: FinHealth Spend 
Research--Latest Research, https://finhealthnetwork.org/finhealth-spend-research/ (last visited Jan. 7, 2024).
    \240\ See CFPB Fall 2023 Highlight; see also CFPB 2014 Data; 
CFPB 2017 Data Point.
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    Overdraft use, and therefore the potential benefit from reduced 
fees, is also correlated with other consumer characteristics. As lower-
income accountholders pay more fees, and minorities pay more fees even 
after controlling for income, these groups are more likely to benefit 
from the proposed changes.\241\
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    \241\ Oz Shy & Joanna Stavins, Who Is Paying All These Fees? An 
Empirical Analysis of Bank Account and Credit Card Fees (Fed. Rsrv. 
Bank of Bos., Working Paper No. 22-18, 2022), https://www.bostonfed.org/-/media/Documents/Workingpapers/PDF/2022/wp2218.pdf.
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ii. Responses by the Depository Institutions Covered by the Proposal
    Consumer gains would likely differ from the mechanical effect of 
lower fees on non-covered overdraft as described in the section above 
if some depository institutions would tailor their offering to the new 
environment as the proposed rule allows. The discussion in this 
subsection starts with the possibility that institutions might adjust 
underwriting standards or overdraft coverage limits for non-covered 
overdraft credit when the marginal profit on each non-covered overdraft 
transaction falls. Then the text turns to the decision of whether to 
waive the fees on some overdraft transactions. Next is the analysis of 
decisions about whether to instead extend products that substitute for 
non-covered overdraft, primarily covered overdraft credit but also 
transfers from linked asset accounts. Finally, the subsection discusses 
repricing of financial products, like maintenance fees on the 
underlying checking account.
The Availability of Non-Covered Overdraft Credit
    Assuming that very large financial institutions comply with the 
proposal by lowering their fees for non-covered overdraft credit, these 
lower fees may change very large financial institutions' decisions 
about whether to extend non-covered overdraft credit for a given 
transaction on a given account. Financial institutions generally have 
discretion in setting overdraft policies.\242\ When a financial 
institution decides whether to cover an overdraft transaction, it 
generally trades off the revenue from charging a fee against expected 
marginal costs and charge-off losses, although decisions about 
extending credit and charging or waiving a fee may also take into 
account their impact on the lifetime value of the customer as well as 
its reputation.\243\ Lower potential fee revenue could impact the 
decision to extend non-covered overdraft credit. In addition, very 
large financial institutions often offer services that are substitutes 
for non-covered overdraft credit, including covered overdraft credit 
and the option of linking other asset accounts to a checking account 
such that those other accounts can, sometimes for a fee, be accessed in 
the event of a shortfall. If fees for non-covered overdraft credit were 
limited for very large financial institutions, they could have 
incentives to limit access to non-covered overdraft credit but 
encourage consumers to take advantage of these substitute services. 
Having said that, firms that use the breakeven standard and not the 
benchmark fee could be disincentivized from reducing overdraft 
transactions because to do so would necessarily reduce the firms' cost 
and loss basis for the next year's fee calculation for remaining 
overdraft customers but not yield profits over the long run.
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    \242\ Institutions authorize and pay transactions that they are 
contractually obligated to, such as ``authorize positive, settle 
negative'' (APSN) transactions, since under applicable payment 
system rules, once a transaction is authorized, the financial 
institution must pay the transaction. Pursuant to the CFPA, charging 
an overdraft fee on such transactions can be unfair.
    \243\ In response to supervisory information requests, financial 
institutions said that when setting limits for discretionary 
overdraft they consider factors that could be relevant both to the 
risk of charge off and to the lifetime value of the customer, 
including (1) age of the account, (2) available balance, (3) account 
transaction activity and history, (4) standing of the account, and 
(5) existence of direct deposits. CFPB 2024 Overdraft NSF Report at 
8.
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    In principle, very large financial institutions could respond to 
the

[[Page 13890]]

proposed rule's changes by underwriting non-covered overdraft credit 
more conservatively, by reducing credit limits (whether or not 
disclosed to the accountholder) for accountholders with higher expected 
credit losses, or even by eliminating access to non-covered overdraft 
credit for some consumers who currently qualify for such credit, though 
as discussed later, the firms may offer other products instead. Limited 
access to non-covered overdraft could be beneficial to consumers with 
access to cheaper credit options they mistakenly forgo or to consumers 
who would have preferred that a transaction was declined rather than 
incurring an overdraft fee. Consumers often overdraw their account when 
they have liquid funds or available cheaper credit. In these cases, 
consumers might benefit from using those options instead of overdraft 
credit. However, there are scenarios, even when there are other credit 
options available and overdraft is more expensive, that the prompt 
completion of the transaction would be more valuable to consumers than 
the fee charged.
    The CFPB is aware of an empirical study finding that relaxing 
restrictions to overdraft fees may result in increased access to 
deposit accounts with overdraft coverage.\244\ The work, not yet peer-
reviewed, analyzed an episode in 2001 in which national banks' sudden 
exemption from State fee caps permitted some banks to increase their 
fees for non-covered overdraft. The study attempts to identify the 
effect of the regulatory change by comparing national banks (which 
became exempt from State fee restrictions) to State banks (which did 
not), and also comparing banks in States that had such restrictions to 
States that did not.
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    \244\ Jennifer L. Dlugosz et al.,Who Pays the Price? Overdraft 
Fee Ceilings and the Unbanked (Fed. Rsrv. Bank of N.Y., Staff Rep. 
No. 9073, June 2021), https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr973.pdf (revised July 2023).
---------------------------------------------------------------------------

    The authors find that the analyzed change to fee caps seems to have 
led to higher overdraft fees at national banks in these States, 
expanded overdraft coverage at these banks, and more low-income 
households opening deposit accounts. In the setting studied, about 56 
percent of consumers in the lowest income quartile did not have 
checking accounts before the regulatory change, and the authors 
estimate that this share fell by about five percentage points after the 
change. The findings are consistent with the regulatory change making 
it more profitable, in those States affected, for national banks to 
provide accounts to consumers who maintain low balances. The authors do 
not find evidence that the newly banked consumers regretted (or at 
least reverted) their choice or that they suffered worse financial 
health.
    As with most modern empirical research in economics, the study 
focuses attention on the internal validity of the findings, i.e., the 
measurement of the causal effect of the policy change at the time and 
place that it took effect. The study design relies on relatively strong 
assumptions to establish causation. The study's methodology requires 
establishing that differential trends at national and State 
institutions in affected States would have continued to diverge (or 
converge) at the same linear rate in the absence of the rule, and 
establishing this is made more difficult by the relatively short five-
year window that the study uses from its data source.
    Even assuming the internal validity of the findings, several 
differences in both the economic context and the nature of the 
regulatory change make it unlikely that the study's findings would 
apply directly if the proposed rule were finalized. The authors report 
that for the households in their data from 2001, 34 percent of 
households did not have a checking account,\245\ whereas the FDIC 
reports that the share of households without a checking or savings 
account has fallen steadily over the last decade and that in 2021 only 
4.5 percent of households are unbanked.\246\ Even if new opportunities 
to earn overdraft revenue gave banks meaningful incentives to expand 
the types of checking accounts they offered in 2001, that does not 
necessarily mean that reductions in overdraft revenue in the current 
market would lead to similar reductions in overall bank account access. 
The study authors concluded that while their research suggested 
relaxing caps was beneficial to consumers without bank accounts in 
2001, they did not reach the conclusion that relaxing the caps was 
beneficial to consumers who already had bank accounts, which, as noted 
above, since the time studied, has since become an even greater 
proportion of the population. Moreover, the proposal would not impose 
limits on all overdraft fees but rather would require very large 
financial institutions to comply with Regulation Z when offering 
covered overdraft credit.
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    \245\ Id. at 40 tbl.7.
    \246\ FDIC Tables at 3 tbl.A.2.
---------------------------------------------------------------------------

    A prominent precedent for a U.S. policy change affecting overdraft 
fee revenue was the implementation of the opt-in rule of Regulation E 
in August 2010. The CFPB is not aware of a careful empirical study that 
isolates the effect of this change in the market. That said, there was 
a substantial decrease in marketwide overdraft revenue following the 
introduction of the opt-in rule and a smaller decrease in total service 
charges, which suggests less than fully offsetting price 
responses.\247\ However, isolating the effect of the opt-in rule is 
made more difficult by the fact that the implementation of the cap on 
very large financial institutions' interchange fees on debit cards came 
a mere three months later, and the Great Recession might also confound 
the effects of the opt-in rule alone. The CFPB's market monitoring 
activities also indicate that some institutions ceased to offer ``free 
checking'' after the 2010 changes.\248\ The downward trend in the share 
of American adults without a bank account does not seem to have broken 
around the time of these changes in the long-running series of the 
Survey of Consumer Finances, and the FDIC's Survey of Household Use of 
Banking and Financial Services, which started in 2009, shows a small 
increase in the unbanked share in 2011 before steady declines 
thereafter.\249\
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    \247\ As discussed in part II above, marketwide overdraft 
revenue (for both banks and credit unions) is estimated at 
approximately $25 billion in 2009, and fell to an estimated $12 
billion in 2011. According to bank call report data, total bank 
deposit service charges fell from $41.7 billion in 2009 to $33.1 
billion in 2011 and remained at a similar level in following years. 
While other factors may explain part of the reduction in deposit 
service charges, the large and persistent decrease suggests that 
banks did not make up all of the lost overdraft revenue from the 
2009 opt-in rule by increasing other prices.
    \248\ See, e.g., E. Scott Reckord, At many big banks, no more 
free checking, L.A. Times (Feb. 4, 2011), https://www.latimes.com/archives/la-xpm-2011-feb-04-la-fi-free-checking-20110204-story.html.
    \249\ Paola Boel & and Peter Zimmerman. Unbanked in America: A 
Review of the Literature. Econ. Comment. 2022-07 (Fed. Rsrv. Bank of 
Clev.), May 26, 2002, https://www.clevelandfed.org/publications/economic-commentary/2022/ec-202207-unbanked-in-america-a-review-of-the-literature. Note that the increase in the FDIC measure may have 
been impacted by the Financial Crisis.
---------------------------------------------------------------------------

    According to the CFPB's market monitoring, recent voluntary 
decreases in overdraft revenue at many large American depository 
institutions have not coincided with conspicuous restrictions of 
checking offerings or increases in other fees, though this period 
corresponded to increases in net interest revenue on deposits resulting 
from a changing interest rate environment.\250\
---------------------------------------------------------------------------

    \250\ See CFPB May 2023 Data Spotlight.
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    In some cases, in response to the proposed rule, the above 
referenced more conservative underwriting may lead lenders to reject 
transactions they

[[Page 13891]]

would not have rejected under the baseline where consumers do not have 
other viable options. In such cases, some consumers would no longer 
have the option to use non-covered overdraft as credit, which means 
transactions would be declined, but also, the consumers would not incur 
its high cost and potential risks of account closure.
    Overdraft use can also decrease due to financial institution 
responses that cause no consumer harm. With smaller profits on each 
transaction, very large financial institutions could have more of an 
incentive to educate their depositors and help them avoid negative 
balance episodes.\251\ Financial institutions would also have less of 
an incentive to inflate the number of overdraft transactions with 
transaction posting orders designed to increase the number of overdraft 
fees.
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    \251\ Various pieces of evidence have bolstered the view that 
overdraft is a mistake for many. Stango and Zinman document that 
surveying consumers about overdraft makes them use it less, strongly 
suggesting that they overuse the service when they are paying less 
attention. See Victor Stango & Jonathan Zinman, Limited and Varying 
Consumer Attention: Evidence from Shocks to the Salience of Bank 
Overdraft Fees, 27 Rev. Fin. Stud. 990-1030 (2014), https://academic.oup.com/rfs/article/27/4/990/1603971). Alan et al. ran an 
experiment in Turkey, where overdraft fee discounts lowered use 
while messages about availability raised it, suggesting that 
consumers are overdrawing their account without regard to the actual 
fees and even a discounted price is too high for them when it draws 
their attention. Sule Alan et al., Unshrouding: Evidence from Bank 
Overdrafts in Turkey, 73 J. Fin. 481-522 (2018), https://onlinelibrary.wiley.com/doi/full/10.1111/jofi.12593). Grubb modeled 
the direct and indirect consequences of just-in time ``bill-shock 
alerts'' (e.g., for debit card transactions) on consumers and finds 
that the overdraft market is ripe for such reminders, as people 
differ in how much attention they pay to their available balance. 
Michael D. Grubb, Consumer Inattention and Bill-Shock Regulation, 82 
Rev. Econ. Stud. 219-57 (2015), https://academic.oup.com/restud/article/82/1/219/1543467). Grubb et al. indeed report on field 
experiments in the UK where timely text message alerts saved 
consumers 11 to 27 percent of overdraft fees, which also shows that 
many had available funds elsewhere. Michael D. Grubb et al., Sending 
Out an SOS: Automatic Enrollment Experiments for Overdraft Alerts 
(forthcoming in the Journal of Finance), https://sites.google.com/bc.edu/michael-grubb/research. Heidhues and Koszegi use overdraft as 
their prime example of markets where providers exploit the mistakes 
of some consumers. Paul Heidhues & Botond Koszegi, 
Na[iuml]vet[eacute]-Based Discrimination, 132 The Q. J. of Econ. 
1019, 1019-1054 (May 2017), https://academic.oup.com/qje/article/132/2/1019/2724551?searchresult=1. Gathergood and Olafsson find in 
granular administrative data some overdraft behaviors impossible to 
rationalize. John Gathergood & Arna Olafsson, The Co-holding Puzzle: 
New Evidence from Transaction-Level Data (Oct 10, 2023), https://ssrn.com/abstract=3607560.
---------------------------------------------------------------------------

Waiver Policies
    Currently, a substantial fraction of overdraft fees is waived by 
financial institutions, either because regulation does not allow fees 
on transactions that are payed per contractual obligations (such as 
debit APSN transactions without opt-in), pursuant to an automatic 
policy like a daily maximum, or at the discretion of a customer service 
representative or manager, often called a discretionary waiver or a 
reversal after the fact. Lower fee amounts would change institutions' 
incentives related to whether to waive the fee by policy or discretion, 
which is a subset of overall waivers. For this decision, the depository 
institution trades off the net revenue from charging the fee against 
the expected value of a marginally better relationship with the 
customer. Lower fee amounts would affect both parts of this tradeoff. 
Lower potential fee revenue would mean that depository institutions 
would have less to lose by waiving a fee, while they also imply that 
there is less at stake for the consumer, likely making fee waivers less 
important to maintaining good customer relationships.
    As discussed in part V(D)(2)(v), the $3 benchmark fee, in 
particular, would not have covered charge-off losses for the 
institution with the lowest credit losses in the CFPB's data for 2022 
had they applied their current waiver policy so that they charged $3 
only in instances where they actually charged their current higher fee 
in 2022. This suggests that institutions that currently waive or 
reverse fees might reconsider their policies if a benchmark fee did not 
allow them to recoup their costs and losses on their non-covered 
overdraft credit product, if product-specific profit targets were more 
important in practice than the marginal incentives for individual 
waivers. Were an institution to adopt the breakeven standard, it would 
charge higher fees but could waive the fee on fewer or more instances 
than in the baseline without any impact on its profit. Institutions 
adopting the breakeven standard would have an incentive to tailor their 
waiver policies to foster customer goodwill and retention according to 
the accountholder's lifetime value to the institution.
    A decrease in the chance of a waiver would shift the consumer 
experience from higher overdraft fees (as much as $35) that might be 
waived discretionarily, to lower overdraft fees (as low as $3) that are 
more predictable. On net, the CFPB expects that shift to lower costs 
and create more predictability for consumers. In addition, the 
discretionary nature of some fee waivers can lead to the potential for 
disparate treatment of customers, as some customers may be more likely 
to get an overdraft fee waived than others. This disparate treatment 
would amount to what has been called ``contractual inequality.'' \252\ 
A substantial decrease in discretionary waivers is likely to move 
towards more equality of waiver rates across underprivileged and more 
privileged groups.
---------------------------------------------------------------------------

    \252\ Manisha Padi, Contractual Inequality, 120 Mich. L. Rev. 
825, at 834-40 (2021).
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Expanding Covered Overdraft Credit or Other Substitutes for Non-Covered 
Overdraft
    Financial institutions may choose to offer covered overdraft credit 
in addition to or instead of non-covered overdraft credit. Whether 
consumers would choose to apply for and use covered overdraft products, 
and whether very large financial institutions would find it profitable 
to offer them, depends on a number of factors, and available evidence 
does not permit the CFPB to confidently predict whether or how such 
products would develop. In particular, it would depend on the price 
that the market will bear for these products in new segments, as well 
as the cost and time required to develop reliable underwriting and 
consumer acquisition systems to support such products.
    Lines of credit on any such new covered overdraft product might be 
smaller than on existing covered overdraft lines of credit, which 
generally focus on premium market segments.
    If underwriting these covered overdraft credit lines on the new 
accounts would require extensions of existing systems or new 
installations at many institutions, transitioning a new customer base 
to covered overdraft credit would take time and experimentation, even 
at institutions with experience underwriting credit cards or extant 
overdraft lines of credit. The frequent overdrafter population might be 
profitable to underwrite with small lines, but few financial 
institutions would have experience underwriting such small lines of 
credit for this population (either for a credit card or extant 
overdraft lines of credit). The effective date proposed would leave 
time for very large financial institutions to experiment before 
implementation, which could facilitate development of new covered 
overdraft credit offerings.
    If frictions slowed the transition of consumers from non-covered to 
covered overdraft credit, fewer consumers would receive the new 
coverage at institutions that try to move some of their overdraft 
customers into a covered product.
    Past experience offers little guidance on the extent to which very 
large

[[Page 13892]]

financial institutions would attempt to transition current non-covered 
overdraft transactions into a covered product. As depository 
institutions generally target existing covered overdraft credit as a 
premium product at customers with low charge-off risks and high 
expected lifetime value to the institution, inertia might imply that 
customers who are more likely to struggle to recover from a negative 
balance episode continue to access a non-covered overdraft product 
subject to the new breakeven or benchmark limits, keeping non-covered 
overdraft fees higher under the breakeven standard than otherwise.\253\ 
When overdraft credit is covered overdraft credit, institutions may 
find it harder to quickly adjust credit limits, an advantage to 
institutions of non-covered overdraft credit that is more important for 
institutions when extending overdraft credit that is less likely to be 
repaid.
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    \253\ Interest rates are similar on arranged and unarranged 
overdrafts in the United Kingdom, following recent regulation 
setting a comparable pricing structure on both. See Danail Vasilev 
et al., Fin. Conduct Auth., Evaluation Paper 23/1: An evaluation of 
our 2019 overdrafts intervention (Apr. 2023), https://www.fca.org.uk/publications/corporate-documents/evaluation-paper-23-1-evaluation-our-2019-overdrafts-intervention (FCA 2023)). This 
could suggest similar pricing for covered overdraft credit as for 
current non-covered overdraft credit, even if it becomes better 
disclosed and the credit limits are clearer than current shadow 
lines. However, the same British reform also resulted in expanding 
arranged overdraft lines and smaller unarranged lines in addition, 
which suggests that covered overdraft credit could also become 
competitive or even prevalent in the United States.
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    The disclosure provisions of Regulation Z might result in more 
competitive pressure on the pricing of covered overdraft credit 
products than currently exists for non-covered overdraft credit. An 
increase in competitive pressure could mean that new covered overdraft 
products would be less expensive than existing non-covered overdraft 
products for the same consumers and coverage.\254\
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    \254\ Regulatory constraints may also affect the fees charged 
for covered overdraft credit. For example, for open-end covered 
overdraft credit accounts accessible with a hybrid debit credit 
card, the fee-harvesting provisions in Sec.  1026.52(a) would limit 
some fees that very large financial institutions can charge in the 
first year of a new account to 25 percent of the approved credit 
line. Section 1026.52(a) does not, however, limit charges that are 
assessed as periodic rates.
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    Consumers would also stand to gain from the availability of covered 
overdraft credit because meeting periodic minimum payments, which are 
generally lower than the full balance, would allow them to revolve 
their overdraft debt and cover more extended needs for liquidity. They 
could also pay less in per-transaction fees if their asset account, not 
depleted by full repayment of prior overdrafts, would cover more 
transactions while the credit account carries a balance. Periodic 
repayment saves consumers some per-transaction finance charges at the 
cost of somewhat higher periodic charges resulting from a credit 
balance remaining outstanding for longer. Furthermore, consumers who 
cannot repay the overdrawn amount within 60 days, when non-covered 
overdraft credit balances are typically charged off, might benefit from 
revolving their covered overdraft credit balance for a longer period of 
time.
    Consumers who go delinquent on new covered overdraft credit 
accounts would have their credit negatively impacted if the delinquency 
is reported to consumer reporting agencies, though not necessarily with 
more dire consequences than with a negative report to checking account 
reporting companies after involuntary account closure due to a negative 
balance on the original asset account that would have resulted from 
similar behavior with non-covered overdraft credit in the absence of 
the proposed rule.
    When consumers at very large financial institutions are offered 
covered overdraft credit, that covered overdraft credit would not be 
subject to the Regulation E opt-in requirement for non-covered debit 
card overdraft. However, it would be subject to Regulation Z's 
application and solicitation requirements and limitations on the 
issuance of credit cards if it can be accessed by a hybrid debit-credit 
card. Consumers would not separately consent, the same way as 
Regulation E currently requires, to overdraft charges on one-time debit 
card and ATM transactions. A very large financial institution would be 
permitted, instead, to simply give the consumer the choice to apply for 
covered overdraft credit that would be extended to cover any 
overdrawing transaction (whether it be check, ACH, debit card, ATM, or 
any other form). Once the account is established, the CFPB expects 
those covered overdraft accounts to be presented to consumers as a 
credit account on phone applications, accounts on websites, and 
periodic statements, which would call attention to the fact that 
covered overdraft credit is a credit product.
    Consumers who choose to have covered overdraft credit that is 
accessible by a hybrid debit-credit card might be better off than those 
who are opted into non-covered overdraft credit on one-time debit card 
and ATM transactions today if the same amount of credit for the same 
transactions costs less, as discussed above, or because of the other 
protections included in this proposed rule. Where a financial 
institution only offers covered overdraft credit bundled for all 
transaction types, consumers who are not opted in today would gain the 
right to, effectively, refrain from opting into overdraft on 
transactions other than one-time debit and ATMs. They would lose, 
however, the ability to refrain from opting into overdraft for one-time 
debit and ATMs while intentionally keeping overdraft for other 
transactions. It is unclear how many consumers would prefer the default 
of Regulation E, particularly given evidence that consumer 
understanding of the Reg E opt-in right is low.\255\ Loss of this 
choice would be an issue where the financial institution is offering 
covered overdraft credit and does not give consumers a choice on which 
transactions can access the covered overdraft.
---------------------------------------------------------------------------

    \255\ Pew Charitable Tr., Overdraft Does Not Meet the Needs of 
Most Consumers (Dec. 2017), https://www.pewtrusts.org/-/media/assets/2017/12/cb_overdraft_does_not_meet_the_needs_of_most_consumers.pdf (3 of 4 
consumers do not understand they have a right to not opt in to 
overdraft on debit card transactions).
---------------------------------------------------------------------------

    If very large financial institutions chose to offer closed-end 
covered overdraft credit, such closed-end covered overdraft credit 
would not be subject to the substantive protections discussed above. 
Instead, it would be subject to the disclosure requirements that apply 
to closed-end credit. The CFPB believes it is unlikely that this 
product would be provided.
    With non-covered overdraft credit less profitable for financial 
institutions and available to fewer consumers, both institutions and 
consumers would have greater incentive to take advantage of linked 
accounts. Institutions might offer and promote more of these 
opportunities. Transfer fees on linked asset accounts to cover 
overdrawing checking account debits can result in costs for consumers 
but protect them from unnecessary borrowing if they indeed have liquid 
assets elsewhere. Links to existing credit lines like credit cards 
would not have this benefit but give more control to consumers to shop 
for rates and decide on repayment, with potentially still lower 
transfer fees than fees on non-covered overdraft credit under the 
proposal. Transfer fees for transfers from both savings accounts and 
credit accounts have been less common among the largest banks in recent 
years than they were prior.\256\
---------------------------------------------------------------------------

    \256\ Based on the CFPB's review of publicly available 
information in June 2023, of the 20 banks reporting the most in 
overdraft/NSF revenue in 2021, 18 were not charging a transfer fee 
to transfer funds from a savings account to cover an overdraft, and 
16 were not charging a fee to transfer funds from a credit account.

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[[Page 13893]]

Offsetting Changes to Other Deposit Account Prices
    As discussed above, the proposed rule would lead to reductions in 
non-covered overdraft revenue at many financial institutions, and it is 
uncertain whether that revenue would be replaced, potentially by 
revenue from covered overdraft or other substitute products. Overdraft 
provider responses to this lost revenue would affect both the sum of 
consumer gains and their distribution across market segments and 
populations. Total consumer gains will be lower if very large financial 
institutions make up for lost overdraft fee revenue and any potential 
increase in costs by raising revenue by increasing other checking 
account prices or decreasing rates paid on deposit accounts. Whether 
financial institutions would offset lost overdraft fee revenue in this 
way for some or all deposit accounts would depend on a number of 
factors, including overall profitability of deposit accounts and the 
nature of competition among financial institutions.
    To give an upper bound on how much lost revenue might be offset on 
a per-account basis, the CFPB estimates the mechanically lost revenue 
per account from non-covered overdraft fees without any behavioral 
responses. While full offset of the revenue loss is not a likely 
scenario, calculating this upper bound provides some quantitative 
context for understanding the limits of potential lost revenue and 
corresponding changes that might result. The CFPB does not have current 
information on the number of active checking accounts at all very large 
financial institutions but requested such information for 2022 from 
eight very large financial institutions in a supervisory capacity. For 
these institutions, the overall average overdraft fee revenue from any 
active account-month was $3.77. Of course, the proposed rule would not 
eliminate all overdraft fee revenue. Were the CFPB to finalize with a 
$3 benchmark (and again, assuming for analytical purposes full adoption 
of the benchmark), financial institutions would lose approximately 90.8 
percent in weighted average fee revenue (from $32.50 average fees to 
the $3 benchmark proposal), totalling a revenue loss of $3.42 per 
account per month. An 81.5 percent drop in average fee revenue 
(assuming a $6 benchmark) would be result in $3 of lost revenue per 
account per month. For a $7 benchmark, that figure is $2.96. For the 
$14 benchmark, that figure is $2.15.
    The magnitude of these extreme upper bounds on lost revenue per 
account reassures the CFPB that any potential losses to banking access 
can remain limited. In fact, there are large financial institutions for 
which this proposed rule is unlikely to result in substantial 
reductions in revenue.\257\ Furthermore, this decrease in overdraft 
revenue is likely to be on-par with, if not lower than, the voluntary 
decrease in revenue many large financial institutions already absorbed 
between 2019 and 2022, without apparent disruptions to checking and 
overdraft access.\258\ The proposed fee reductions are in some ways 
similar to new regulations of the overdraft market in the United 
Kingdom in 2019, whose impacts the Financial Conduct Authority 
evaluated ex-post with a careful causal analysis. Their findings are 
generally consistent with the CFPB's expectations about limited 
disruption to checking and credit access and no complete offset of lost 
overdraft revenue.\259\
---------------------------------------------------------------------------

    \257\ See CFPB, Chart of Overdraft/NSF metrics for Top 20 banks 
based on overdraft/NSF revenue reported (Feb. 2022), https://files.consumerfinance.gov/f/documents/cfpb_overdraft-chart_2022-02.pdf. At least one of these banks charges overdraft fees that are 
already less than fee benchmarks under consideration in this 
proposed rule.
    \258\ CFPB May 2023 Data Spotlight.
    \259\ See FCA 2023.
---------------------------------------------------------------------------

    Offsetting changes in prices, if any, would limit the benefits 
consumers gain from the proposal (as well as the corresponding costs to 
covered persons), but also redistribute the burden of paying for 
consumer checking services in the United States. Those consumers who 
are currently frequent users of high-cost non-covered overdraft credit 
would benefit substantially from lower fees even if checking account 
APY or maintenance fees adjust, as those adjustments are unlikely to be 
similarly concentrated. Consumers who currently receive cross-subsidies 
from frequent (or just occasional) overdrafters, but might now receive 
lower net interest or pay higher maintenance fees to their checking 
provider, would incur only modest losses under the proposal relative to 
the baseline.
    Under the baseline scenario for this analysis, very large financial 
institutions generally do not charge nonsufficient fund fees for 
transactions that consumers attempt to authorize in close to real time, 
which could include non-recurring debit card transactions or certain 
person-to-person transactions. Consumers with less access to overdraft 
credit due to this proposal would not pay fees on these types of 
transactions that they attempted but that were not authorized. However, 
the CFPB recognizes that financial institutions under the baseline 
could start to charge such fees in the future if they are not subject 
to the penalty fees limitation in Sec.  1026.52(b). Other types of 
transactions can and might continue to trigger NSF fees when declined, 
although, as noted earlier, the significant majority of supervised 
entities subject to the proposal eliminated such fees during 2022 and 
early 2023.
iii. Responses by Consumers
    A lower price for non-covered overdraft credit would lead some 
consumers to use the product more on the margin, assuming it remains 
available to them. For those who are attentive to the price of the 
product, who are also likely to use the product deliberately and 
experience liquidity and convenience benefits outweighing the cost, any 
additional utilization would likely provide net benefits. Inattentive 
consumers, for whom overdraft has already often been a mistake, would 
continue to be unlikely to pay attention to and rationally consider the 
lower cost of overdrawing their balance, and would thus be unlikely to 
use overdraft more even at a lower price.
    Some consumers might keep a lower deposit balance as long as their 
overdraft protection seems sufficient but is now cheaper. As consumers 
with checking account balances forgo a net interest margin of 250 basis 
points \260\ relative to short-term Treasury bill yields, on average, 
every $500 in deposits shifted from a checking account to an account 
with short-term Treasury bill yields would earn each consumer an 
additional average $12.50 over a year. Others might keep higher 
balances in their checking accounts if the proposed rule were to reduce 
their access to overdraft credit or if more salient use of overdraft 
credit made them try harder to avoid it. The cost-of-credit disclosures 
required for covered overdraft credit make its use more salient for the 
switchers than non-covered overdraft used to be. Consumers

[[Page 13894]]

who keep more in their checking account may forgo more interest on 
their savings if they would have otherwise kept it in higher-yielding 
accounts.
---------------------------------------------------------------------------

    \260\ The FDIC has been reporting national average interest 
rates on checking accounts since 2009, separately for non-jumbo and 
jumbo accounts until 2021. For much of this history, nominal 
interest rates hit the zero lower bound. For months with four-week 
Treasury yields below one hundred basis points, the national average 
(non-jumbo) checking account paid 8.3 basis points less. In other 
times, partly because checking account APYs have not risen as fast 
as short-term nominal interest rates, checking accounts paid 251.7 
basis points below the four-week Treasury bill yield, on average.
---------------------------------------------------------------------------

    Some consumers may also choose different depository institutions, 
as account terms change as a result of the proposed rule. The ability 
to do so will generally increase consumer benefits and reduce consumer 
costs. For example, consumers who frequently overdraft at banks that 
are not very large financial institutions could switch to an account at 
a very large financial institution if non-covered overdraft credit is 
available there at lower cost. Conversely, a consumer at a very large 
financial institution that loses access to non-covered overdraft credit 
as a result of the rule could switch their account to another 
institution that is not covered by the proposed rule.
    To the extent that marginal consumers could expect to pay a 
predictable and lower amount for checking overall, the proposal would 
encourage unbanked or underbanked customers to return to the banking 
system and gain access to FDIC insurance and the low cost payments 
system banks provide.
    Overdraft use might also change because very large financial 
institutions would need to better disclose newly covered overdraft 
credit to consumers, which can only help them. For consumers who would 
use overdraft more because of this, their increased use may suggest 
that they would be deliberately taking advantage of a product worth its 
price for them. For consumers who would use overdraft less after these 
changes, better information might correct prior misunderstandings and 
prevent further mistakes.
    Better disclosure would also help consumers compare the costs of 
different forms of credit (or other options to delay or forgo 
transactions), which provides direct benefits to those who are able to 
make more informed choices, and also provides indirect benefits to 
other potential users as more intensive comparison shopping would bring 
down prices among competitors.
    Consumers currently not opting into one-time debit card transaction 
coverage by their non-covered overdraft service under Regulation E may 
be more likely to opt into such coverage under lower prices. To the 
extent these consumers pay particular attention to the fee and how it 
might affect them, they are less likely to regret when they use non-
covered overdraft credit than others and are thus more likely to 
benefit from the proposed rule.
iv. Responses by Financial Institutions Not Covered by the Proposal
    The proposal would only apply to very large financial institutions, 
and if finalized, would not lead to any new compliance costs for 
financial institutions not covered by the proposal.
    The CFPB recognizes that a bank or credit union's demand for 
deposits (including demand and time deposits) derives from a multitude 
of factors, including, but not limited to, meeting expected loan demand 
and liquidity needs. In addition, when consumers select a deposit 
product, they rely on many factors unrelated to the overdraft pricing, 
including ATM and branch availability, interest rate, and expected 
customer service.
    As the proposal outlines, many large financial institutions have 
already substantially reduced overdraft fees. During this time, there 
was no major shift in the total share of deposits from small financial 
institutions to very large financial institutions.
    The CFPB acknowledges that is difficult to predict with certainty 
as to how very large financial institutions would evolve their business 
models over time. Of course, as with any change in business strategies 
by market participants with substantial market shares, this may 
ultimately lead to evolving industry dynamics with uncertain benefits 
and costs.
2. Potential Benefits and Costs to Covered Persons
    This proposed rulemaking would affect the consumer business of 
certain depository institutions with more than $10 billion in assets. 
At the end of calendar year 2022, used for some tabulations here, this 
list included 176 depository institutions.
    For covered persons, costs and benefits mostly mirror the existence 
and extent of each respective pecuniary benefit or cost to their 
customers, as detailed above, net of offsetting changes. By the very 
nature of this relationship, the CFPB has considered the various 
causes, mediating channels and modulating responses affecting costs and 
benefits to covered persons as carefully as for consumers, and much of 
the discussion of the factors and mechanisms affecting potential 
consumer pecuniary benefits and costs in the previous section also 
applies to the potential costs and benefits, respectively, of the 
proposed rule for covered persons.
    In particular, the proposed rule would reduce the revenue of very 
large financial institutions from non-covered overdraft credit, and 
these institutions may be able to offset this lost revenue in various 
ways, including expanding their offerings of covered overdraft or other 
services that substitute for non-covered overdraft credit. The extent 
to which depository institutions will be able to pass the price changes 
of checking accounts under the proposed rule onto input prices depends 
on the pricing pressures on capital, labor, and intermediary goods, and 
services that very large financial institutions pay for. Due to their 
complexity, the CFPB has not modeled them in detail.
    The operating cost of offering covered overdraft may be higher than 
the cost of providing similar non-covered overdraft credit. This arises 
from the costs of complying with Regulations Z and E, and potentially 
other laws. The covered persons might bear these costs if market forces 
do not let them pass some of them on to the consumer.
    Very large financial institutions already have to provide 
disclosures per Regulations DD and E for non-covered overdraft credit. 
If they chose to continue offering non-covered overdraft credit, they 
would need to update these systems to make sure they accurately 
disclose and charge the new lower fees. If they decided to offer 
covered overdraft credit instead to any customer, then the disclosures 
would follow Regulation Z. The one-time cost of setting up a new 
covered overdraft program or transitioning consumers to existing 
covered overdraft programs could be substantial. The compulsory use 
prohibition would impose an administrative burden on the institution to 
offer another form of payment to the covered overdraft credit customer, 
as well as the operating cost of collecting the payment.
    As discussed in the previous section, mechanical application of the 
benchmark fee amount to existing non-covered overdraft could reduce 
revenue of very large financial institutions by $3.5 billion to $5.6 
billion, depending on the benchmark fee amount. This revenue impact on 
covered persons is limited by the proposal's design, which allows 
depository institutions to collect their costs and losses in overdraft 
fees. Part V.C.3.ii details why the CFPB believes that the benchmark 
fee number would allow some very large financial institutions to cover 
their costs and losses. Where the benchmark fee number would not allow 
this, fees set based on the breakeven standard would allow institutions 
to recover their costs and losses over time. This mechanism ensures 
that even entities that would see less revenue due to this proposal 
need not take losses on overdraft credit, unless they charge lower fees 
than the

[[Page 13895]]

proposal would allow. And financial institutions whose per-transaction 
traceable costs and losses are lower than the benchmark fee could 
charge that fee and thereby make a profit on overdraft.
    The CFPB finds it plausible that a different revenue model for 
checking in the U.S. that may result from the proposed rule will have 
broader implications on counterparties, competitors, or new entrants, 
or elsewhere in the economy. Such considerations would be too 
speculative for this impact analysis.

E. Potential Benefits and Costs to Consumers and Covered Persons of 
Further Provisions of the Proposed Rule

    The CFPB is also proposing to apply the Regulation E compulsory-use 
prohibition to covered overdraft credit provided by a very large 
financial institution. The CFPB is not proposing to amend the 
Regulation Z prohibition against offset, nor is the CFPB proposing to 
amend the Regulation Z provision permitting periodic deductions. The 
proposal's approach to these provisions would affect the costs and 
benefits for consumers and covered persons of consumers potentially 
switching from non-covered overdraft to covered overdraft. Consumers 
who have access to covered overdraft credit but consciously avoid pre-
authorized EFTs to repay covered overdraft credit are likely to benefit 
from the compulsory use prohibition, which would give them additional 
control over their finances, though they might be overoptimistic about 
their future repayment discipline, and mistakenly turn down automatic 
payments, to their detriment. Consumers who forget to repay can incur 
additional costs, including late fees, default interest rates or 
negative credit reporting after a period of delinquency. Some consumers 
might not be able to switch to covered overdraft credit if their 
depository institution was on the margin of offering it and they deem 
the consumer too prone to delinquency without a pre-authorized EFT for 
repayment. It is less likely that existing users of covered overdraft 
credit would be impacted for the same reason, as they are typically 
premium customers not on the margin of profitability.
    Covered persons should not incur substantial cost from establishing 
repayment options in addition to a preauthorized EFTs. They can 
feasibly establish processes for consumers to have the repayment option 
of authorizing individual EFTs. Covered overdraft credit accounts that 
are not accessible via a hybrid debit-credit card would not be subject 
to the no-offset provision of Regulation Z.
    Consumers with covered overdraft who do not repay their balance 
with frequent preauthorized EFTs pay either more interest from debt 
held longer or the hassle cost of making unscheduled repayments more 
often.
    On covered overdraft credit accounts accessible via a debit card (a 
hybrid debit-credit card), financial institutions cannot automatically 
offset the credit balance against a positive balance on the associated 
asset account after a deposit. Therefore, consumers would be able to 
pay new debit transactions from the asset account before they repay the 
credit account. As discussed above, this flexibility in when to repay 
debt will generally give consumers better opportunities to manage their 
finances, although in practice the extent of any benefit to consumers 
from being able to delay repayment depends on finance charges for the 
credit and whether delaying repayment out of the asset account allows 
them to avoid higher additional credit charges for new transactions.
    Consumers making purchases by using hybrid debit-credit cards that 
access covered overdraft credit would also benefit from the proposed 
rule's effect on dispute resolution for such purchases. The CFPB 
expects the burden on covered persons from this occasional service to 
be minimal.
    The CFPB is also proposing to require very large financial 
institutions that provide covered overdraft credit to do so through a 
credit account that is separate from the associated asset account. 
These provisions would clarify that a very large financial institution 
must treat existing deposit accounts with overdraft credit that is 
currently non-covered overdraft credit, but that the institution 
chooses to provide as above breakeven covered overdraft credit 
subsequent to the rule, as a new credit account for purposes of 
Regulation Z. Consumers with hybrid debit-credit cards able to access a 
covered overdraft credit account, and the very large financial 
institutions that provide these accounts, would then be subject to the 
CARD Act protections in subpart G of Regulation Z.
    Section 1026.51 would require card issuers to consider consumers' 
ability to make the required minimum periodic payments under the terms 
of the account. This could generally reduce the amount of credit 
available to some consumers, and some consumers may benefit from this 
requirement if it makes it less likely that they are burdened with 
covered overdraft debt for which they are unlikely to be able to make 
required minimum periodic payments. Because the safe harbor requires 
lenders to estimate whether consumers can repay the minimum payment and 
all fees assuming full use of the credit line, this could result in 
firms setting more concrete and less fluid credit limits, could result 
in lower credit limits, and firms might institute minimum payment 
formulas that do not require full payment of overdrafted amounts every 
month.
    Section 1026.52(a) would limit fees charged in the first year a 
covered overdraft credit account is open to 25 percent of the account's 
credit limit. (Section 1026.52(a) does not restrict charges 
attributable to periodic interest rates; see comment 1026.52(a)(2)-1.) 
This could benefit consumers with hybrid debit-credit cards able to 
access a covered overdraft credit account in the first year the account 
is open. Any reduction in fees paid by consumers as a result of 
1026.52(a) would result in a corresponding cost to covered persons from 
decreased fee revenue. Developing and implementing pricing strategies 
for covered overdraft products that comply with these requirements 
could impose costs on the covered persons providing these products, 
though the CFPB does not expect these costs to impose a substantial 
direct burden.
    Penalty fees, like declined transaction fees, for violating the 
terms of the covered overdraft credit account would be subject to 
limitations under Sec.  1026.52(b), providing further benefits to 
consumers who would have paid such fees. For example, Sec.  1026.52(b) 
would restrict NSF fees from being charged on ACH transactions on 
accounts that have covered overdraft credit that is accessible by a 
hybrid debit-credit card. Consumers that would have been charged 
penalty fees, including NSF fees on debit card or ACH transactions, 
would benefit by not being charged these fees. Similarly, financial 
institutions that would have received NSF fee revenue from these 
transactions would see a decrease in revenue. Yet, the CFPB understands 
that NSF fees are currently rarely charged on debit card transactions 
and, as discussed above, most of the largest banks have already 
eliminated all NSF fees. This suggests that the benefits to consumers 
and costs to covered persons from this restriction are likely to be 
limited.
    Very large financial institutions would be required to provide 
credit account opening disclosures and comply with other requirements 
of credit account opening in connection with tying covered overdraft 
credit to deposit accounts that already exist.

[[Page 13896]]

Applying new credit account opening requirements in connection with 
deposit accounts of consumers who already have existing non-covered 
overdraft credit that the institution chooses to replace with covered 
overdraft credit under the proposal will impose some costs on the 
depository institution.
    Under the proposed rule, above breakeven overdraft credit would no 
longer qualify as ``incidental credit'' under Sec.  1002.3 and thus 
would be newly subject to certain requirements under Regulation B, 
including with respect to providing notice and record-keeping. These 
obligations would have costs to covered persons.
    The proposed changes, including proposed changes to the definition 
of finance charge, may affect other legal requirements under various 
Federal and State laws, including the Military Lending Act, usury 
limits, capital requirements, and interchange fees. The CFPB 
acknowledges that some or all of these legal requirements might also 
affect charges for non-covered and covered overdraft credit indirectly. 
However, the CFPB has not attempted to quantify the effects of such 
changes because it is not responsible for interpreting those laws and 
regulations and therefore cannot provide the detailed predictions about 
their effects that would be required for quantification; moreover, the 
CFPB does not predict the extent to which very large financial 
institutions will choose to offer covered overdraft credit that is 
subject to those rules. The CFPB seeks comment on the extent to which 
these considerations should affect its analysis.

F. Potential Specific Impacts of the Proposed Rule on Depository 
Institutions and Credit Unions With $10 Billion or Less in Total 
Assets, as Described in CFPA Section 1026

    As this proposed rule applies only to financial institutions with 
more than $10 billion in total assets, the CFPB expects no specific 
impact on small entities directly. Subsection VIII.D.1.iv above 
discusses how the CFPB understands the proposed rule's indirect impact 
on these entities.

G. Potential Specific Impacts of the Proposed Rule on Consumer Access 
to Credit and on Consumers in Rural Areas

    As discussed above, the proposed rule would likely lead to an 
increase in overdraft credit regulated by TILA and Regulation Z, and 
for remaining non-covered overdraft credit, a decrease in the fee.
    To the extent that consumers in rural areas bank with institutions 
other than very large financial institutions, the impact of the 
proposed rule on these areas will be limited.
    The CFPB has limited insight into overdraft practices in rural 
areas specifically. It is not aware of reasons to suggest more adverse 
or particular impacts in rural areas.
    The CFPB has tabulated the share of the unbanked in lowest fifth of 
the income distribution in ZIP codes that the Census classified as 
urban, rural, or with a fraction rural.\261\ With this precise 
measurement, both fully urban or fully rural areas see 74 percent of 
those with lowest incomes with a bank account, with slight variations 
in the ratio for the mixed ZIP codes in between. This makes the CFPB 
expect that urban and rural areas have similar exposure to overdraft 
fees, and would likely experience similar impacts from the proposed 
rule.
---------------------------------------------------------------------------

    \261\ Cox et al. (2022) identified the unbanked in the universe 
of tax records as those not listing an account for rebates or 
payment over a ten-year period, focusing on the 50-59 age group in 
2019 (Cox et al., Financial Inclusion Across the United States, 
available for download at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3934498 (last revised Apr. 24, 2023)). The 
Census links ZCTAs to an urban area (or none).
---------------------------------------------------------------------------

    The CFPB has also tabulated the average credit score in each ZIP 
code, in the latest year available in a public dataset released by 
researchers at the Federal Reserve Board.\262\ Fully rural ZIP codes 
have higher credit scores (719.6 on average) than fully urban ZIP codes 
(713.7), though with even higher averages scores in mostly urban areas 
and the lowest averages for fairly rural areas. This again suggests 
that on average, rural areas would have as much access to newly 
underwritten covered overdraft credit as the rest of the United States.
---------------------------------------------------------------------------

    \262\ See Jesse Bricker & Geng Li, FRS, Finance and Economics 
Discussion Series, 2023-048, Your Friends Your Credit: Social 
Capital Measures Derived From Social Media and the Credit Market 
(2023), https://www.federalreserve.gov/econres/feds/files/2023048pap.pdf.
---------------------------------------------------------------------------

IX. Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (RFA) generally requires an agency 
to conduct an initial regulatory flexibility analysis (IRFA) and a 
final regulatory flexibility analysis of any rule subject to notice-
and-comment rulemaking requirements unless the agency certifies that 
the rule will not have a significant economic impact on a substantial 
number of small entities (SISNOSE). The CFPB is also subject to 
specific additional procedures under the RFA involving convening a 
panel to consult with small business representatives before proposing a 
rule for which an IRFA is required. An IRFA is not required for this 
proposal because the proposal, if adopted, would not have a SISNOSE.
    Small institutions, for the purposes of the Small Business 
Regulatory Enforcement Fairness Act (SBREFA) of 1996, are defined by 
the Small Business Administration. Effective March 17, 2023, financial 
institutions with less than $850 million in total assets are determined 
to be small.\263\
---------------------------------------------------------------------------

    \263\ See U.S. Small Bus. Admin., Table of size standards, 
https://www.sba.gov/document/support-table-size-standards (last 
updated Oct. 25, 2023).
---------------------------------------------------------------------------

    As this proposed rule only applies to financial institutions with 
more than $10 billion in total assets, it affects no small entities.
    Accordingly, the Director hereby certifies that this proposal, if 
adopted, would not have a significant economic impact on a substantial 
number of small entities. Thus, neither an IRFA nor a small business 
review panel is required for this proposal. The CFPB requests comment 
on the analysis above.

X. Paperwork Reduction Act

    Under the Paperwork Reduction Act of 1995 (PRA), Federal agencies 
are generally required to seek the Office of Management and Budget's 
(OMB's) approval for information collection requirements prior to 
implementation.
    Under the PRA, the CFPB may not conduct or sponsor and, 
notwithstanding any other provision of law, a person is not required to 
respond to an information collection unless the information collection 
displays a valid control number assigned by OMB.
    The proposed rule amends 12 CFR 1005 (Regulation E), which 
implements the Electronic Funds Transfer Act, which is assigned OMB 
control number 3170-0014, which expires 5/31/2025, as well as 12 CFR 
1026 (Regulation Z), which implements the Truth in Lending Act and is 
assigned OMB Control number 3170-0015, which expires 05/31/2025. 
However, this proposed rule may, in addition to the information 
collection requirements of Regulation Z, affect the information 
collection requirements contained in 12 CFR part 1002 (Regulation B), 
which implements ECOA, which is assigned OMB Control number 3170-0013 
which expires 08/31/2026. A full description of those changes and the 
estimated burdens thereof can be found in the Supporting Statements for 
each affected regulation that have been filed with OMB in connection 
with this proposed rule and are available as part of its public docket.
    The CFPB has a continuing interest in the public's opinions 
regarding this determination. At any time, comments regarding this 
determination may be

[[Page 13897]]

sent to: The Consumer Financial Protection Bureau (Attention: PRA 
Office), 1700 G Street NW, Washington, DC 20552, or by email to 
<a href="/cdn-cgi/l/email-protection#53101503110c0326313f3a300c03011213303523317d343c25"><span class="__cf_email__" data-cfemail="acefeafceef3fcd9cec0c5cff3fcfeedeccfcadcce82cbc3da">[email protected]</span></a>.

List of Subjects

12 CFR Part 1005

    Banks, Banking, Consumer protection, Credit unions, Electronic fund 
transfers, National banks, Reporting and recordkeeping requirements, 
Savings associations.

12 CFR Part 1026

    Advertising, Banks, Banking, Consumer protection, Credit, Credit 
unions, Mortgages, National banks, Reporting and recordkeeping 
requirements, Savings associations, Truth-in-lending.

Authority and Issuance

    For the reasons set forth in the preamble, the CFPB proposes to 
amend Regulation E, 12 CFR part 1005, and Regulation Z, 12 CFR part 
1026, as set forth below:

PART 1005--ELECTRONIC FUND TRANSFER ACT (REGULATION E)

0
1. The authority citation for part 1005 continues to read as follows:

    Authority:  12 U.S.C. 5512, 5581; 15 U.S.C. 1693b. Subpart B is 
also issued under 12 U.S.C. 5601 and 15 U.S.C. 1693o-1.

Subpart A--General

0
2. Section 1005.10 is amended by revising paragraph (e)(1) to read as 
follows:


Sec.  1005.10  Preauthorized transfers.

* * * * *
    (e) Compulsory use--(1) Credit. No financial institution or other 
person may condition an extension of credit to a consumer on the 
consumer's repayment by preauthorized electronic fund transfers, except 
for credit extended under an overdraft credit plan or extended to 
maintain a specified minimum balance in the consumer's account. This 
exception does not apply to a covered separate credit feature 
accessible by a hybrid prepaid-credit card as defined in Regulation Z, 
12 CFR 1026.61. This exception also does not apply to covered overdraft 
credit extended by very large financial institutions as those terms are 
defined in Regulation Z, 12 CFR 1026.62.
* * * * *
0
3. In Supplement I to Part 1005--Official Interpretations:
0
a. Under Section 1005.10--Preauthorized Transfers, 10(e)(1) Credit is 
revised.
0
b. Under Section 1005.17--Requirements for Overdraft Services, 17(a) 
Definition is revised.
    The revisions read as follows:

Supplement I to Part 1005--Official Interpretations

* * * * *

Section 1005.10--Preauthorized Transfers

* * * * *

10(e) Compulsory Use

10(e)(1) Credit

    1. General rule for loan payments. Creditors may not require 
repayment of loans by electronic means on a preauthorized, recurring 
basis.
    2. Overdraft credit plans not accessible by hybrid prepaid-credit 
cards and covered overdraft credit extended by very large financial 
institutions.
    i. Section 1005.10(e)(1) provides an exception from the general 
rule for an overdraft credit plan other than for a covered separate 
credit feature accessible by a hybrid prepaid-credit card as defined in 
Regulation Z, 12 CFR 1026.61 and for covered overdraft credit extended 
by very large financial institutions as those terms are defined in 
Regulation Z, 12 CFR 1026.62. A financial institution may therefore 
require the automatic repayment of an overdraft credit plan, other than 
a covered separate credit feature accessible by a hybrid prepaid-credit 
card or covered overdraft credit extended by very large financial 
institutions, even if the overdraft extension is charged to an open-end 
account that may be accessed by the consumer in ways other than by 
overdrafts.
    ii. Credit extended through a negative balance on the asset feature 
of a prepaid account that meets the conditions of Regulation Z, 12 CFR 
1026.61(a)(4), is considered credit extended pursuant to an overdraft 
credit plan for purposes of Sec.  1005.10(e)(1). Thus, the exception 
for overdraft credit plans in Sec.  1005.10(e)(1) applies to this 
credit.
    3. Applicability to covered separate credit features accessible by 
hybrid prepaid-credit cards.
    i. Under Sec.  1005.10(e)(1), creditors may not require by 
electronic means on a preauthorized, recurring basis repayment of 
credit extended under a covered separate credit feature accessible by a 
hybrid prepaid-credit card as defined in Regulation Z, 12 CFR 1026.61. 
The prohibition in Sec.  1005.10(e)(1) applies to any credit extended 
under such a credit feature, including preauthorized checks. See 
Regulation Z, 12 CFR 1026.61, and comment 61(a)(1)-3.
    ii. Under Regulation Z, 12 CFR 1026.12(d)(1), a card issuer may not 
take any action, either before or after termination of credit card 
privileges, to offset a cardholder's indebtedness arising from a 
consumer credit transaction under the relevant credit card plan against 
funds of the cardholder held on deposit with the card issuer. Under 
Regulation Z, 12 CFR 1026.12(d)(3), with respect to covered separate 
credit features accessible by hybrid prepaid-credit cards as defined in 
12 CFR 1026.61, a card issuer generally is not prohibited from 
periodically deducting all or part of the cardholder's credit card debt 
from a deposit account (such as a prepaid account) held with the card 
issuer under a plan that is authorized in writing by the cardholder, so 
long as the card issuer does not make such deductions to the plan more 
frequently than once per calendar month. A card issuer is prohibited 
under Regulation Z, 12 CFR 1026.12(d), from automatically deducting all 
or part of the cardholder's credit card debt under a covered separate 
credit feature from a deposit account (such as a prepaid account) held 
with the card issuer on a daily or weekly basis, or whenever deposits 
are made to the deposit account. Section 1005.10(e)(1) further 
restricts the card issuer from requiring payment from a deposit account 
(such as a prepaid account) of credit card balances of a covered 
separate credit feature accessible by a hybrid prepaid-credit card by 
electronic means on a preauthorized, recurring basis.
    4. Incentives. A creditor may offer a program with a reduced annual 
percentage rate or other cost-related incentive for an automatic 
repayment feature, provided the program with the automatic payment 
feature is not the only loan program offered by the creditor for the 
type of credit involved. Examples include:
    i. Mortgages with graduated payments in which a pledged savings 
account is automatically debited during an initial period to supplement 
the monthly payments made by the borrower.
    ii. Mortgage plans calling for preauthorized biweekly payments that 
are debited electronically to the consumer's account and produce a 
lower total finance charge.
* * * * *

[[Page 13898]]

Section 1005.17--Requirements for Overdraft Services

17(a) Definition

    1. Exempt securities- and commodities-related lines of credit. The 
definition of ``overdraft service'' does not include the payment of 
transactions in a securities or commodities account pursuant to which 
credit is extended by a broker-dealer registered with the Securities 
and Exchange Commission or the Commodity Futures Trading Commission.
    2. Covered overdraft credit. Under Sec.  1005.17(a)(1), a line of 
credit subject to Regulation Z (12 CFR 1026) is not an overdraft 
service. Covered overdraft credit as that term is defined in 12 CFR 
1026.62, is a line of credit subject to Regulation Z and is therefore 
not an overdraft service. Covered overdraft credit includes above 
breakeven overdraft credit extended by a very large financial 
institution as those terms are defined in 12 CFR 1026.62. Above 
breakeven overdraft credit extended by a very large financial 
institution is therefore not an overdraft service under Sec.  
1005.17(a).
* * * * *

PART 1026--TRUTH IN LENDING (REGULATION Z)

0
4. The authority citation for part 1026 continues to read as follows:

    Authority:  12 U.S.C. 2601, 2603-2605, 2607, 2609, 2617, 3353, 
5511, 5512, 5532, 5581; 15 U.S.C. 1601 et seq.

Subpart A--General

0
5. Section 1026.2 is amended by revising paragraph (a)(15) to read as 
follows:


Sec.  1026.2  Definitions and rules of construction.

    (a) * * *
    (15)(i) Credit card means any card, plate, or other single credit 
device that may be used from time to time to obtain credit. The term 
credit card includes both a hybrid prepaid-credit card as defined in 
Sec.  1026.61 and a hybrid debit-credit card as defined in Sec.  
1026.62.
    (ii) Credit card account under an open-end (not home-secured) 
consumer credit plan means any open-end credit account that is accessed 
by a credit card, except:
    (A) A home-equity plan subject to the requirements of Sec.  1026.40 
that is accessed by a credit card; or
    (B) A covered overdraft credit account as defined in Sec.  1026.62 
offered by a creditor other than a very large financial institution as 
defined in Sec.  1026.62 that is accessed by a debit card or account 
number.
    (iii) Charge card means a credit card on an account for which no 
periodic rate is used to compute a finance charge. The term does not 
include a hybrid debit-credit card as defined in Sec.  1026.62.
    (iv) Debit card means any card, plate, or other single device that 
may be used from time to time to access an asset account other than a 
prepaid account as defined in Sec.  1026.61. The term debit card does 
not include a prepaid card as defined in Sec.  1026.61.
* * * * *
0
6. Section 1026.4 is amended by revising paragraph (b)(2), adding 
paragraph (b)(12), and revising paragraph (c)(3) to read as follows:


Sec.  1026.4  Finance charge.

* * * * *
    (b) * * *
    (2) Service, transaction, activity, and carrying charges, including 
any charge imposed on a checking or other transaction account (except a 
prepaid account as defined in Sec.  1026.61 or a covered asset account 
as that term is defined in Sec.  1026.62) to the extent that the charge 
exceeds the charge for a similar account without a credit feature.
* * * * *
    (12) With regard to a covered asset account as that term is defined 
in Sec.  1026.62(b)(2):
    (i) Any service, transaction, activity, or carrying charge imposed 
on the separate credit account required by Sec.  1026.62(c); and
    (ii) Any service, transaction, activity, or carrying charge imposed 
on the covered asset account to the extent that the charge exceeds a 
comparable charge imposed on a checking or other transaction account 
that does not have overdraft credit.
    (iii) For purposes of paragraph (b)(12)(ii) of this section, the 
following charges imposed on a checking or other transaction account 
without covered overdraft credit are not comparable to charges imposed 
on a covered asset account. Thus, to determine pursuant to paragraph 
(b)(12)(ii) of this section the amount of a charge on a covered asset 
account that is a finance charge, the following fees and charges on a 
checking or other transaction account that does not have covered 
overdraft credit may not be subtracted from the amount of the charge on 
the covered asset account.
    (A) A charge for authorizing or paying a transaction that overdraws 
the checking or other transaction account.
    (B) A charge for declining to authorize or pay a transaction.
    (C) A charge for returning a transaction unpaid.
    (D) A charge for transferring funds into the checking or other 
transaction account from any credit account.
    (E) A charge for transferring funds into the checking or other 
transaction account from any other asset account.
* * * * *
    (c) * * *
    (3) Charges imposed by a financial institution for paying items 
that overdraw an account, unless the payment of such items and the 
imposition of the charge were previously agreed upon in writing. This 
paragraph (c)(3) does not apply to credit offered in connection with a 
prepaid account as defined in Sec.  1026.61. This paragraph (c)(3) also 
does not apply to above breakeven overdraft credit as defined in Sec.  
1026.62.
* * * * *

Subpart G--Special Rules Applicable to Credit Card Accounts and 
Open-End Credit Offered to College Students

* * * * *
0
7. Section 1026.60 is amended by revising paragraph (a)(5) to read as 
follows:


Sec.  1026.60  Credit and charge card applications and solicitations.

    (a) * * *
    (5) Exceptions. This section does not apply to:
    (i) Home-equity plans accessible by a credit or charge card that 
are subject to the requirements of Sec.  1026.40;
    (ii) Covered overdraft credit as defined in Sec.  1026.62 tied to 
asset accounts accessed by check-guarantee cards or by debit cards 
other than hybrid debit-credit cards as defined in Sec.  1026.62;
    (iii) Lines of credit accessed by check-guarantee cards or by debit 
cards, other than covered overdraft credit accessed by hybrid debit-
credit cards, that can be used only at automated teller machines;
    (iv) Lines of credit accessed solely by account numbers except for 
a covered separate credit feature solely accessible by an account 
number that is a hybrid prepaid-credit card as defined in Sec.  1026.61 
or covered overdraft credit accessible by an account number that is a 
hybrid debit-credit card;
    (v) Additions of a credit or charge card to an existing open-end 
plan;
    (vi) General purpose applications unless the application, or 
material accompanying it, indicates that it can be used to open a 
credit or charge card account; or
    (vii) Consumer-initiated requests for applications.
* * * * *

[[Page 13899]]

0
8. Section 1026.62 is added to read as follows:


Sec.  1026.62  Overdraft Credit.

    (a) In general--(1) Overdraft credit is subject to this section and 
this part as specified below.
    (2) Overdraft credit is any consumer credit extended by a financial 
institution to pay a transaction from a checking or other transaction 
account (other than a prepaid account as defined in Sec.  1026.61) held 
at the financial institution when the consumer has insufficient or 
unavailable funds in that account. The term overdraft credit includes, 
but is not limited to, any such consumer credit extended through a 
transfer from a credit card account or overdraft line of credit. The 
term does not include credit exempt from this part pursuant to Sec.  
1026.3.
    (b) Definitions. For purposes of this section and this part, the 
following definitions apply:
    (1) Above Breakeven Overdraft Credit means overdraft credit 
extended by a very large financial institution to pay a transaction on 
which, as an incident to or a condition of the overdraft credit, the 
very large financial institution imposes a charge or combination of 
charges exceeding the average of its costs and charge-off losses for 
providing non-covered overdraft credit as described in Sec.  
1026.62(d).
    (2) Covered Asset Account means a checking or other transaction 
account (other than a prepaid account as defined in Sec.  1026.61) 
provided by a very large financial institution that is tied to 
overdraft credit provided by the very large financial institution.
    (3) Covered Overdraft Credit means overdraft credit that is subject 
to a finance charge or is payable by written agreement in more than 
four installments.
    (4) Covered Overdraft Credit Account means a credit account through 
which a financial institution extends or can extend covered overdraft 
credit. For example, the term includes any line of credit, credit card 
account, credit feature, credit plan, or credit subaccount through 
which the financial institution extends or can extend covered overdraft 
credit.
    (5) Hybrid Debit-Credit Card means 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.
    (6) Non-Covered Overdraft Credit means overdraft credit that is not 
subject to a finance charge and is not payable by written agreement in 
more than four installments.
    (7) Overdraft credit has the meaning set out in Sec.  
1026.62(a)(2).
    (8) Very Large Financial Institution means an insured depository 
institution or an insured credit union that has total assets of more 
than $10,000,000,000 and any affiliate thereof, as determined under 12 
U.S.C. 5515(a).
    (c) Structure of covered overdraft credit. A very large financial 
institution shall not structure covered overdraft credit as a negative 
balance on a checking or other transaction account. The very large 
financial institution shall structure covered overdraft credit as a 
separate credit account. The separate credit account is a covered 
overdraft credit account. The tied checking or other transaction 
account is a covered asset account.
    (d) Charges exceeding the average of its costs and charge-off 
losses for providing non-covered overdraft credit--(1) General rule. 
For purposes of paragraph 62(b)(1) of this section, any charge or 
combination of charges to pay a transaction exceeds the average of a 
very large financial institution's costs and charge-off losses for 
providing non-covered overdraft credit if the charge or combination of 
charges exceeds the greater of:
    (i) The pro rata share of the very large financial institution's 
total direct costs and charge-off losses for providing non-covered 
overdraft credit in the previous year, calculated in accordance with 
this paragraph; or
    (ii) [$3/$6/$7/$14].
    (2) Cost and loss calculation. When calculating the pro rata share 
of the very large financial institution's total direct costs and 
charge-off losses for providing non-covered overdraft credit in the 
previous year, a very large financial institution may consider only 
those costs and charge-off losses specifically traceable to its 
provision of non-covered overdraft credit in the previous year. Such 
costs and charge-off losses include, but are not limited to, its cost 
of funds, its net charge-off losses, and operating expenses for its 
non-covered overdraft credit program. Such costs and charge-off losses 
do not include general overhead costs or charge-off losses due to 
unauthorized use, EFT errors, billing errors, returned deposit items, 
or rescinded provisional credit.
0
9. In Supplement I to Part 1026--Official Interpretations:
0
a. Under Section 1026.2--Definitions and Rules of Construction:
0
i. 2(a)(14) Credit is revised.
0
ii. Paragraph 2(a)(15) is revised.
0
iii. 2(a)(20) Open-End Credit is revised.
0
b. Under Section 1026.4--Finance Charge:
0
i. Paragraph 4(b)(2) is revised.
0
ii. Paragraph 4(b)(12) is added.
0
iii. Paragraph 4(c)(3) is revised.
0
c. Under Section 1026.12--Special Credit Card Provisions:
0
i. Introductory paragraph 1 is revised.
0
ii. 12(a)(1) is revised.
0
iii. 12(a)(2) is revised.
0
iv. 12(c) is revised.
0
v. 12(c)(1) General Rule is revised.
0
d. Under Section 1026.55--Limitations on increasing annual percentage 
rates, fees, and charges, revise 55(a).
0
e. Under Section 1026.57--Reporting and Marketing Rules for College 
Student Open-End Credit, revise 57(a)(1).
    The revisions and addition read as follows:

Supplement I to Part 1026--Official Interpretations

* * * * *

Subpart A--General

* * * * *

Section 1026.2--Definitions and Rules of Construction

* * * * *

2(a)(14) Credit

    1. Exclusions. The following situations are not considered credit 
for purposes of the regulation:
    i. Layaway plans, unless the consumer is contractually obligated to 
continue making payments. Whether the consumer is so obligated is a 
matter to be determined under applicable law. The fact that the 
consumer is not entitled to a refund of any amounts paid towards the 
cash price of the merchandise does not bring layaways within the 
definition of credit.
    ii. Tax liens, tax assessments, court judgments, and court 
approvals of reaffirmation of debts in bankruptcy. However, third-party 
financing of such obligations (for example, a bank loan obtained to pay 
off a tax lien) is credit for purposes of the regulation.
    iii. Insurance premium plans that involve payment in installments 
with each installment representing the payment for insurance coverage 
for a certain future period of time, unless the consumer is 
contractually obligated to continue making payments.
    iv. Home improvement transactions that involve progress payments, 
if the consumer pays, as the work progresses, only for work completed 
and has no contractual obligation to continue making payments.
    v. Borrowing against the accrued cash value of an insurance policy 
or a pension account, if there is no independent obligation to repay.

[[Page 13900]]

    vi. Letters of credit.
    vii. The execution of option contracts. However, there may be an 
extension of credit when the option is exercised, if there is an 
agreement at that time to defer payment of a debt.
    viii. Investment plans in which the party extending capital to the 
consumer risks the loss of the capital advanced. This includes, for 
example, an arrangement with a home purchaser in which the investor 
pays a portion of the downpayment and of the periodic mortgage payments 
in return for an ownership interest in the property, and shares in any 
gain or loss of property value.
    ix. Mortgage assistance plans administered by a government agency 
in which a portion of the consumer's monthly payment amount is paid by 
the agency. No finance charge is imposed on the subsidy amount, and 
that amount is due in a lump-sum payment on a set date or upon the 
occurrence of certain events. (If payment is not made when due, a new 
note imposing a finance charge may be written, which may then be 
subject to the regulation.)
    2. Payday loans; deferred presentment. Credit includes a 
transaction in which a cash advance is made to a consumer in exchange 
for the consumer's personal check, or in exchange for the consumer's 
authorization to debit the consumer's deposit account, and where the 
parties agree either that the check will not be cashed or deposited, or 
that the consumer's deposit account will not be debited, until a 
designated future date. This type of transaction is often referred to 
as a ``payday loan'' or ``payday advance'' or ``deferred-presentment 
loan.'' A fee charged in connection with such a transaction may be a 
finance charge for purposes of Sec.  1026.4, regardless of how the fee 
is characterized under state law. Where the fee charged constitutes a 
finance charge under Sec.  1026.4 and the person advancing funds 
regularly extends consumer credit, that person is a creditor and is 
required to provide disclosures consistent with the requirements of 
Regulation Z. (See Sec.  1026.2(a)(17).)
    3. Transactions on the asset features of prepaid accounts when 
there are insufficient or unavailable funds. Credit includes 
authorization of a transaction on the asset feature of a prepaid 
account as defined in Sec.  1026.61 where the consumer has insufficient 
or unavailable funds in the asset feature of the prepaid account at the 
time the transaction is authorized to cover the amount of the 
transaction. It also includes settlement of a transaction on the asset 
feature of a prepaid account where the consumer has insufficient or 
unavailable funds in the asset feature of the prepaid account at the 
time the transaction is settled to cover the amount of the transaction. 
This includes a transaction where the consumer has sufficient or 
available funds in the asset feature of a prepaid account to cover the 
amount of the transaction at the time the transaction is authorized but 
insufficient or unavailable funds in the asset feature of the prepaid 
account to cover the transaction amount at the time the transaction is 
settled. See Sec.  1026.61 and related commentary on the applicability 
of this regulation to credit that is extended in connection with a 
prepaid account.
    4. Overdraft credit. Funds extended by a financial institution to a 
consumer to pay transactions that overdraw a checking or other 
transaction account held at the financial institution are credit 
whenever the consumer has a contractual obligation to repay the funds.

Paragraph 2(a)(15)

    1. Usable from time to time. A credit card must be usable from time 
to time. Since this involves the possibility of repeated use of a 
single device, checks and similar instruments that can be used only 
once to obtain a single credit extension are not credit cards.
    2. Examples.
    i. Examples of credit cards include:
    A. A card that guarantees checks or similar instruments, if the 
asset account is also tied to covered overdraft credit or if the 
instrument directly accesses a line of credit.
    B. A debit card (other than a debit card that is solely an account 
number) that also accesses a credit account (that is, a debit-credit 
card or hybrid debit-credit card as defined in Sec.  1026.62). See 
comment 2(a)(15)-2.ii.C for guidance on whether a debit card that is 
solely an account number is a credit card.
    C. An identification card that permits the consumer to defer 
payment on a purchase.
    D. An identification card indicating loan approval that is 
presented to a merchant or to a lender, whether or not the consumer 
signs a separate promissory note for each credit extension.
    E. A card or device that can be activated upon receipt to access 
credit, even if the card has a substantive use other than credit, such 
as a purchase-price discount card. Such a card or device is a credit 
card notwithstanding the fact that the recipient must first contact the 
card issuer to access or activate the credit feature.
    F. A prepaid card that is a hybrid prepaid-credit card as defined 
in Sec.  1026.61.
    ii. In contrast, credit card does not include, for example:
    A. A check-guarantee or debit card with no credit feature or 
agreement.
    B. Any card, key, plate, or other device that is used in order to 
obtain petroleum products for business purposes from a wholesale 
distribution facility or to gain access to that facility, and that is 
required to be used without regard to payment terms.
    C. An account number that accesses a credit account, unless the 
account number can access an open-end line of credit to purchase goods 
or services or as provided in Sec.  1026.61 with respect to a hybrid 
prepaid-credit card. An account number that can access an open-end line 
of credit to purchase goods or services includes an account number that 
can access a covered overdraft credit account offered by a very large 
financial institution. For example, if a creditor provides a consumer 
with an open-end line of credit that can be accessed by an account 
number in order to transfer funds into another account (such as an 
asset account with the same creditor), the account number is not a 
credit card for purposes of Sec.  1026.2(a)(15)(i). However, if the 
account number can also access the line of credit to purchase goods or 
services (such as an account number that can be used to purchase goods 
or services on the internet), the account number is a credit card for 
purposes of Sec.  1026.2(a)(15)(i), regardless of whether the creditor 
treats such transactions as purchases, cash advances, or some other 
type of transaction. Furthermore, if the line of credit can also be 
accessed by a card (such as a debit card), that card is a credit card 
for purposes of Sec.  1026.2(a)(15)(i).
    D. A prepaid card that is not a hybrid prepaid-credit card as 
defined in Sec.  1026.61.
    E. A check-guarantee or debit card that can access non-covered 
overdraft credit as defined in Sec.  1026.62 and cannot access any 
other form of credit.
    3. Charge card.
    i. Charge cards are credit cards where no periodic rate is used to 
compute the finance charge. The term charge card does not include a 
hybrid debit-credit card as defined in Sec.  1026.62. Thus, covered 
overdraft credit extended by a very large financial institution through 
a hybrid debit-credit card is not subject to special charge card rules.
    A. Under the regulation, a reference to credit cards generally 
includes charge cards. In particular, references to credit

[[Page 13901]]

card accounts under an open-end (not home-secured) consumer credit plan 
in subparts B and G generally include charge cards.
    B. The term charge card is, however, distinguished from credit card 
or credit card account under an open-end (not home-secured) consumer 
credit plan in Sec. Sec.  1026.6(b)(2)(xiv), 1026.7(b)(11) (except as 
described in comment 2(a)(15)-3.ii below), 1026.7(b)(12), 1026.9(e), 
1026.9(f), 1026.28(d), 1026.52(b)(1)(ii)(C), 1026.60, and appendices G-
10 through G-13.
    ii. A hybrid prepaid-credit card as defined in Sec.  1026.61 is a 
charge card with respect to a covered separate credit feature if no 
periodic rate is used to compute the finance charge in connection with 
the covered separate credit feature. Unlike other charge card accounts, 
the requirements in Sec.  1026.7(b)(11) apply to a covered separate 
credit feature accessible by a hybrid prepaid-credit card that is a 
charge card when that covered separate credit feature is a credit card 
account under an open-end (not home-secured) consumer credit plan. 
Thus, under Sec.  1026.5(b)(2)(ii)(A), with respect to a covered 
separate credit feature that is a credit card account under an open-end 
(not home-secured) consumer credit plan, a card issuer of a hybrid 
prepaid-credit card that meets the definition of a charge card because 
no periodic rate is used to compute a finance charge in connection with 
the covered separate credit feature must adopt reasonable procedures 
for the covered separate credit feature designed to ensure that
    (1) periodic statements are mailed or delivered at least 21 days 
prior to the payment due date disclosed on the statement pursuant to 
Sec.  1026.7(b)(11)(i)(A); and
    (2) the card issuer does not treat as late for any purposes a 
required minimum periodic payment received by the card issuer within 21 
days after mailing or delivery of the periodic statement disclosing the 
due date for that payment.
    4. Credit card account under an open-end (not home-secured) 
consumer credit plan.
    i. An open-end consumer credit account is a credit card account 
under an open-end (not home-secured) consumer credit plan for purposes 
of Sec.  1026.2(a)(15)(ii) if:
    A. The account is accessed by a credit card, as defined in Sec.  
1026.2(a)(15)(i); and
    B. The account is not excluded under Sec.  1026.2(a)(15)(ii)(A) or 
(B).
    ii. The exclusion from credit card account under an open-end (not 
home-secured) consumer credit plan provided by Sec.  
1026.2(a)(15)(ii)(B) for covered overdraft credit offered by a creditor 
that is not a very large financial institution does not apply to a 
covered separate credit feature accessible by a hybrid prepaid-credit 
card (including a hybrid prepaid-credit card that is solely an account 
number) as defined in Sec.  1026.61.
* * * * *

2(a)(20) Open-End Credit

    1. General. This definition describes the characteristics of open-
end credit (for which the applicable disclosure and other rules are 
contained in Subpart B), as distinct from closed-end credit. Open-end 
credit is consumer credit that is extended under a plan and meets all 3 
criteria set forth in the definition.
    2. Existence of a plan.
    i. The definition requires that there be a plan, which connotes a 
contractual arrangement between the creditor and the consumer.
    ii. With respect to a covered separate credit feature accessible by 
a hybrid prepaid-credit card as defined in Sec.  1026.61, a plan means 
a program where the consumer is obligated contractually to repay any 
credit extended by the creditor. For example, a plan includes a program 
under which a creditor routinely extends credit from a covered separate 
credit feature offered by the prepaid account issuer, its affiliate, or 
its business partner where the prepaid card can be used from time to 
time to draw, transfer, or authorize the draw or transfer of credit 
from the covered separate credit feature in the course of authorizing, 
settling, or otherwise completing transactions conducted with the card 
to obtain goods or services, obtain cash, or conduct person-to-person 
transfers, and the consumer is obligated contractually to repay those 
credit transactions. Such a program constitutes a plan notwithstanding 
that, for example, the creditor has not agreed in writing to extend 
credit for those transactions, the creditor retains discretion not to 
extend credit for those transactions, or the creditor does not extend 
credit for those transactions once the consumer has exceeded a certain 
amount of credit. See Sec.  1026.61(a) and related commentary for 
guidance on the applicability of this regulation to credit accessible 
by hybrid prepaid-credit cards.
    iii. Some creditors offer programs containing a number of different 
credit features. The consumer has a single account with the institution 
that can be accessed repeatedly via a number of sub-accounts 
established for the different program features and rate structures. 
Some features of the program might be used repeatedly (for example, an 
overdraft line) while others might be used infrequently (such as the 
part of the credit line available for secured credit). If the program 
as a whole is subject to prescribed terms and otherwise meets the 
definition of open-end credit, such a program would be considered a 
single, multifeatured plan.
    iv. With respect to covered overdraft credit as defined in Sec.  
1026.62, a plan means a program where the consumer is obligated 
contractually to repay any credit extended by the creditor. Such a 
program constitutes a plan notwithstanding that, for example, the 
creditor has not agreed in writing to extend credit for those 
transactions, the creditor retains discretion not to extend credit for 
those transactions, or the creditor does not extend credit for those 
transactions once the consumer has exceeded a certain amount of credit.
    3. Repeated transactions. Under this criterion, the creditor must 
reasonably contemplate repeated transactions. This means that the 
credit plan must be usable from time to time and the creditor must 
legitimately expect that there will be repeat business rather than a 
one-time credit extension. The creditor must expect repeated dealings 
with consumers under the credit plan as a whole and need not believe a 
consumer will reuse a particular feature of the plan. The determination 
of whether a creditor can reasonably contemplate repeated transactions 
requires an objective analysis. Information that much of the creditor's 
customer base with accounts under the plan make repeated transactions 
over some period of time is relevant to the determination, particularly 
when the plan is opened primarily for the financing of infrequently 
purchased products or services. A standard based on reasonable belief 
by a creditor necessarily includes some margin for judgmental error. 
The fact that particular consumers do not return for further credit 
extensions does not prevent a plan from having been properly 
characterized as open-end. For example, if much of the customer base of 
a clothing store makes repeat purchases, the fact that some consumers 
use the plan only once would not affect the characterization of the 
store's plan as open-end credit. The criterion regarding repeated 
transactions is a question of fact to be decided in the context of the 
creditor's type of business and the creditor's relationship with its 
customers. For example, it would be more reasonable for a bank or 
depository institution to contemplate repeated transactions with a 
customer than for a seller of aluminum siding to

[[Page 13902]]

make the same assumption about its customers.
    4. Finance charge on an outstanding balance.
    i. The requirement that a finance charge may be computed and 
imposed from time to time on the outstanding balance means that there 
is no specific amount financed for the plan for which the finance 
charge, total of payments, and payment schedule can be calculated. A 
plan may meet the definition of open-end credit even though a finance 
charge is not normally imposed, provided the creditor has the right, 
under the plan, to impose a finance charge from time to time on the 
outstanding balance. For example, in some plans, a finance charge is 
not imposed if the consumer pays all or a specified portion of the 
outstanding balance within a given time period. Such a plan could meet 
the finance charge criterion, if the creditor has the right to impose a 
finance charge, even though the consumer actually pays no finance 
charges during the existence of the plan because the consumer takes 
advantage of the option to pay the balance (either in full or in 
installments) within the time necessary to avoid finance charges.
    ii. With regard to a covered separate credit feature and an asset 
feature on a prepaid account that are both accessible by a hybrid 
prepaid-credit card as defined in Sec.  1026.61, any service, 
transaction, activity, or carrying charges imposed on the covered 
separate credit feature, and any such charges imposed on the asset 
feature of the prepaid account to the extent that the amount of the 
charge exceeds comparable charges imposed on prepaid accounts in the 
same prepaid account program that do not have a covered separate credit 
feature accessible by a hybrid prepaid-credit card, generally is a 
finance charge. See Sec.  1026.4(a) and (b)(11). Such charges include a 
periodic fee to participate in the covered separate credit feature, 
regardless of whether this fee is imposed on the credit feature or on 
the asset feature of the prepaid account. With respect to credit from a 
covered separate credit feature accessible by a hybrid prepaid-credit 
card, any service, transaction, activity, or carrying charges that are 
finance charges under Sec.  1026.4 constitute finance charges imposed 
from time to time on an outstanding unpaid balance as described in 
Sec.  1026.2(a)(20) if there is no specific amount financed for the 
credit feature for which the finance charge, total of payments, and 
payment schedule can be calculated.
    iii. Regardless of whether the financial institution assesses such 
charges on the deposit account itself or a separate credit account, any 
service, transaction, activity, or carrying charges imposed by a 
financial institution for paying a transaction that overdraws a 
consumer's deposit account held at the financial institution are 
finance charges unless they are excluded from the definition of finance 
charge by Sec.  1026.4(c). See Sec.  1026.4(a), (b)(12), and (c). 
Additionally, such charges would constitute finance charges imposed 
from time to time on an outstanding unpaid balance, as described in 
Sec.  1026.2(a)(20), if there is no specific amount financed for the 
plan for which the finance charge, total of payments, and payment 
schedule can be calculated.
    5. Reusable line. The total amount of credit that may be extended 
during the existence of an open-end plan is unlimited because available 
credit is generally replenished as earlier advances are repaid. A line 
of credit is self-replenishing even though the plan itself has a fixed 
expiration date, as long as during the plan's existence the consumer 
may use the line, repay, and reuse the credit. The creditor may 
occasionally or routinely verify credit information such as the 
consumer's continued income and employment status or information for 
security purposes but, to meet the definition of open-end credit, such 
verification of credit information may not be done as a condition of 
granting a consumer's request for a particular advance under the plan. 
In general, a credit line is self-replenishing if the consumer can take 
further advances as outstanding balances are repaid without being 
required to separately apply for those additional advances. A credit 
card account where the plan as a whole replenishes meets the self-
replenishing criterion, notwithstanding the fact that a credit card 
issuer may verify credit information from time to time in connection 
with specific transactions. This criterion of unlimited credit 
distinguishes open-end credit from a series of advances made pursuant 
to a closed-end credit loan commitment. For example:
    i. Under a closed-end commitment, the creditor might agree to lend 
a total of $10,000 in a series of advances as needed by the consumer. 
When a consumer has borrowed the full $10,000, no more is advanced 
under that particular agreement, even if there has been repayment of a 
portion of the debt. (See Sec.  1026.2(a)(17)(iv) for disclosure 
requirements when a credit card is used to obtain the advances.)
    ii. This criterion does not mean that the creditor must establish a 
specific credit limit for the line of credit or that the line of credit 
must always be replenished to its original amount. The creditor may 
reduce a credit limit or refuse to extend new credit in a particular 
case due to changes in the creditor's financial condition or the 
consumer's creditworthiness. (The rules in Sec.  1026.40(f), however, 
limit the ability of a creditor to suspend credit advances for home 
equity plans.) While consumers should have a reasonable expectation of 
obtaining credit as long as they remain current and within any preset 
credit limits, further extensions of credit need not be an absolute 
right in order for the plan to meet the self-replenishing criterion.
    6. Verifications of collateral value. Creditors that otherwise meet 
the requirements of Sec.  1026.2(a)(20) extend open-end credit 
notwithstanding the fact that the creditor must verify collateral 
values to comply with Federal, state, or other applicable law or 
verifies the value of collateral in connection with a particular 
advance under the plan.
    7. Open-end real estate mortgages. Some credit plans call for 
negotiated advances under so-called open-end real estate mortgages. 
Each such plan must be independently measured against the definition of 
open-end credit, regardless of the terminology used in the industry to 
describe the plan. The fact that a particular plan is called an open-
end real estate mortgage, for example, does not, by itself, mean that 
it is open-end credit under the regulation.
* * * * *

Section 1026.4--Finance Charge

* * * * *

Paragraph 4(b)(2)

    1. Checking or transaction account charges. A charge imposed in 
connection with a credit feature on a checking or transaction account 
(other than a prepaid account as defined in Sec.  1026.61 or a covered 
asset account as that term is defined in Sec.  1026.62) is a finance 
charge under Sec.  1026.4(b)(2) to the extent the charge exceeds the 
charge for a similar account without a credit feature and the charge is 
not addressed by Sec.  1026.4(b)(12). If a charge for an account with a 
credit feature does not exceed the charge for an account without a 
credit feature, the charge is not a finance charge under Sec.  
1026.4(b)(2). To illustrate:
    i. A $5 service charge is imposed on an account with an overdraft 
line of credit (where the institution has agreed in writing to pay an 
overdraft), while a $3 service charge is imposed on an account without 
a credit feature; the $2 difference is a finance charge. (If the

[[Page 13903]]

difference is not related to account activity, however, it may be 
excludable as a participation fee. See the commentary to Sec.  
1026.4(c)(4).)
    ii. A $5 service charge is imposed for each item that results in an 
overdraft on an account with an overdraft line of credit, while a $25 
service charge is imposed for paying or returning each item on a 
similar account without a credit feature; the $5 charge is not a 
finance charge.
    2. Prepaid accounts. Fees or charges related to credit offered in 
connection with prepaid accounts as defined in Sec.  1026.61 are 
discussed in Sec. Sec.  1026.4(b)(11) and 1026.61 and related 
commentary.
* * * * *

Paragraph 4(c)(3)

    1. Assessing interest on an overdraft balance. Except with respect 
to credit offered in connection with a prepaid account as defined in 
Sec.  1026.61, a charge on an overdraft balance computed by applying a 
rate of interest to the amount of the overdraft is not a finance 
charge, even though the consumer agrees to the charge in the account 
agreement, unless the financial institution agrees in writing that it 
will pay such items.
    2. Credit accessed in connection with a prepaid account. See 
comment 4(b)(11)-1 for guidance on when fees imposed with regard to 
credit accessed in connection with a prepaid account as defined in 
Sec.  1026.61 are finance charges.
    3. Credit accessed in connection with a covered asset account. See 
12 CFR 1026.4(b)(12) for guidance on when fees imposed on a covered 
asset account as defined in Sec.  1026.62 are finance charges.
* * * * *

Section 1026.12--Special Credit Card Provisions

    1. Scope. Sections 1026.12(a) and (b) deal with the issuance and 
liability rules for credit cards, whether the card is intended for 
consumer, business, or any other purposes. Sections 1026.12(a) and (b) 
are exceptions to the general rule that the regulation applies only to 
consumer credit. (See Sec. Sec.  1026.1 and 1026.3.) Notwithstanding 
paragraph (g) of this section or Regulation E, 12 CFR 1005.12(a), 
paragraphs (a) through (f) of this section apply to hybrid debit credit 
cards.
    2. Definition of ``accepted credit card''. For purposes of this 
section, ``accepted credit card'' means any credit card that a 
cardholder has requested or applied for and received, or has signed, 
used, or authorized another person to use to obtain credit. Any credit 
card issued as a renewal or substitute in accordance with Sec.  
1026.12(a) becomes an accepted credit card when received by the 
cardholder.

12(a) Issuance of Credit Cards

Paragraph 12(a)(1)

    1. Explicit request. A request or application for a card must be 
explicit. For example, a request for an overdraft plan tied to a 
checking account does not constitute an application for a credit card 
with overdraft checking features. Therefore, a very large financial 
institution cannot issue a hybrid debit-credit card to a person without 
first receiving an oral or written request or application for the 
hybrid debit-credit card. The term hybrid debit-credit card has the 
same meaning as provided in Sec.  1026.62.
    2. Addition of credit features. If the consumer has a non-credit 
card, including a prepaid card, the addition of a credit feature or 
plan to the card that would make the card into a credit card under 
Sec.  1026.2(a)(15)(i) constitutes issuance of a credit card. For 
example, the following constitute issuance of a credit card:
    i. Granting overdraft privileges on a checking account when the 
consumer already has a check guarantee card; or
    ii. Allowing a prepaid card to access a covered separate credit 
feature that would make the card into a hybrid prepaid-credit card as 
defined in Sec.  1026.61 with respect to the covered separate credit 
feature.
    iii. Extending covered overdraft credit through a hybrid debit-
credit card as defined in Sec.  1026.62.
    3. Variance of card from request. The request or application need 
not correspond exactly to the card that is issued. For example:
    i. The name of the card requested may be different when issued.
    ii. The card may have features in addition to those reflected in 
the request or application.
    4. Permissible form of request. The request or application may be 
oral (in response to a telephone solicitation by a card issuer, for 
example) or written.
    5. Time of issuance. A credit card may be issued in response to a 
request made before any cards are ready for issuance (for example, if a 
new program is established), even if there is some delay in issuance.
    6. Persons to whom cards may be issued. A card issuer may issue a 
credit card to the person who requests it, and to anyone else for whom 
that person requests a card and who will be an authorized user on the 
requester's account. In other words, cards may be sent to consumer A on 
A's request, and also (on A's request) to consumers B and C, who will 
be authorized users on A's account. In these circumstances, the 
following rules apply:
    i. The additional cards may be imprinted in either A's name or in 
the names of B and C.
    ii. No liability for unauthorized use (by persons other than B and 
C), not even the $50, may be imposed on B or C since they are merely 
users and not cardholders as that term is defined in Sec.  1026.2 and 
used in Sec.  1026.12(b); of course, liability of up to $50 for 
unauthorized use of B's and C's cards may be imposed on A.
    iii. Whether B and C may be held liable for their own use, or on 
the account generally, is a matter of state or other applicable law.
    7. Issuance of non-credit cards.
    i. Issuance of non-credit cards other than prepaid cards.
    A. Under Sec.  1026.12(a)(1), a credit card cannot be issued except 
in response to a request or an application. (See comment 2(a)(15)-2 for 
examples of cards or devices that are and are not credit cards.) A non-
credit card other than a prepaid card may be sent on an unsolicited 
basis by an issuer that does not propose to connect the card to any 
credit plan; a credit feature may be added to a previously issued non-
credit card other than a prepaid card only upon the consumer's specific 
request.
    B. Examples. A purchase-price discount card may be sent on an 
unsolicited basis by an issuer that does not propose to connect the 
card to any credit plan. An issuer demonstrates that it proposes to 
connect the card to a credit plan by, for example, including 
promotional materials about credit features or account agreements and 
disclosures required by Sec.  1026.6. The issuer will violate the rule 
against unsolicited issuance if, for example, at the time the card is 
sent a credit plan can be accessed by the card or the recipient of the 
unsolicited card has been preapproved for credit that the recipient can 
access by contacting the issuer and activating the card.
    ii. Issuance of a prepaid card. Section 1026.12(a)(1) does not 
apply to the issuance of a prepaid card where an issuer does not 
connect the card to any covered separate credit feature that would make 
the prepaid card into a hybrid prepaid-credit card as defined in Sec.  
1026.61 at the time the card is issued and only opens a covered 
separate credit feature, or provides an application or solicitation to 
open a covered separate credit feature, or allows an existing credit 
feature to become a covered separate credit feature

[[Page 13904]]

accessible by a hybrid prepaid-credit card as defined in Sec.  1026.61 
in compliance with Sec.  1026.61(c). A covered separate credit feature 
may be added to a previously issued prepaid card only upon the 
consumer's application or specific request and only in compliance with 
Sec.  1026.61(c). An issuer does not connect a prepaid card to a 
covered separate credit feature that would make the card into a credit 
card simply by providing the disclosures required by Regulation E, 12 
CFR 1005.18(b)(2)(x), (b)(4)(iv), and (vii), with the prepaid card. See 
Sec.  1026.12(a)(2) and related commentary for when a hybrid prepaid-
credit card as defined in Sec.  1026.61 may be issued as a replacement 
or substitution for another hybrid prepaid-credit card. See also 
Regulation E, 12 CFR 1005.5 and 1005.18(a), and related commentary, 
governing issuance of access devices under Regulation E.
    8. Unsolicited issuance of PINs. A card issuer may issue personal 
identification numbers (PINs) to existing credit cardholders without a 
specific request from the cardholders, provided the PINs cannot be used 
alone to obtain credit. For example, the PINs may be necessary if 
consumers wish to use their existing credit cards at automated teller 
machines or at merchant locations with point of sale terminals that 
require PINs.

Paragraph 12(a)(2)

    1. Renewal. Renewal generally contemplates the regular replacement 
of existing cards because of, for example, security reasons or new 
technology or systems. It also includes the re-issuance of cards that 
have been suspended temporarily, but does not include the opening of a 
new account after a previous account was closed.
    2. Substitution--examples. Substitution encompasses the replacement 
of one card with another because the underlying account relationship 
has changed in some way--such as when the card issuer has:
    i. Changed its name.
    ii. Changed the name of the card.
    iii. Changed the credit or other features available on the account. 
For example, the original card could be used to make purchases and 
obtain cash advances at teller windows. The substitute card might be 
usable, in addition, for obtaining cash advances through automated 
teller machines. (If the substitute card constitutes an access device, 
as defined in Regulation E, then the Regulation E issuance rules would 
have to be followed.) The substitution of one card with another on an 
unsolicited basis is not permissible, however, where in conjunction 
with the substitution an additional credit card account is opened and 
the consumer is able to make new purchases or advances under both the 
original and the new account with the new card. For example, if a 
retail card issuer replaces its credit card with a combined retailer/
bank card, each of the creditors maintains a separate account, and both 
accounts can be accessed for new transactions by use of the new credit 
card, the card cannot be provided to a consumer without solicitation.
    iv. Substituted a card user's name on the substitute card for the 
cardholder's name appearing on the original card.
    v. Changed the merchant base, provided that the new card is honored 
by at least one of the persons that honored the original card. However, 
unless the change in the merchant base is the addition of an affiliate 
of the existing merchant base, the substitution of a new card for 
another on an unsolicited basis is not permissible where the account is 
inactive. A credit card cannot be issued in these circumstances without 
a request or application. For purposes of Sec.  1026.12(a), an account 
is inactive if no credit has been extended and if the account has no 
outstanding balance for the prior 24 months. (See Sec.  1026.11(b)(2).)
    3. Substitution--successor card issuer. Substitution also occurs 
when a successor card issuer replaces the original card issuer (for 
example, when a new card issuer purchases the accounts of the original 
issuer and issues its own card to replace the original one). A 
permissible substitution exists even if the original issuer retains the 
existing receivables and the new card issuer acquires the right only to 
future receivables, provided use of the original card is cut off when 
use of the new card becomes possible.
    4. Substitution--non-credit-card plan. A credit card that replaces 
a retailer's open-end credit plan not involving a credit card is not 
considered a substitute for the retailer's plan--even if the consumer 
used the retailer's plan. A credit card cannot be issued in these 
circumstances without a request or application.
    5. One-for-one rule. An accepted card may be replaced by no more 
than one renewal or substitute card. For example, the card issuer may 
not replace a credit card permitting purchases and cash advances with 
two cards, one for the purchases and another for the cash advances.
    6. One-for-one rule--exceptions. The regulation does not prohibit 
the card issuer from:
    i. Replacing a single card that is both a debit card and a credit 
card, such as a hybrid debit-credit card as defined in Sec.  1026.62, 
with a credit card and a separate debit card with only debit functions 
(or debit functions plus an associated capability to extend overdraft 
credit that is not covered overdraft credit as defined in Sec.  
1026.62), since the latter card could be issued on an unsolicited basis 
under Regulation E.
    ii. Replacing a single card that is both a prepaid card and a 
credit card with a credit card and a separate prepaid card where the 
latter card is not a hybrid prepaid-credit card as defined in Sec.  
1026.61.
    iii. Replacing an accepted card with more than one renewal or 
substitute card, provided that:
    A. No replacement card accesses any account not accessed by the 
accepted card;
    B. For terms and conditions required to be disclosed under Sec.  
1026.6, all replacement cards are issued subject to the same terms and 
conditions, except that a creditor may vary terms for which no change 
in terms notice is required under Sec.  1026.9(c); and
    C. Under the account's terms the consumer's total liability for 
unauthorized use with respect to the account does not increase.
    7. Methods of terminating replaced card. The card issuer need not 
physically retrieve the original card, provided the old card is voided 
in some way, for example:
    i. The issuer includes with the new card a notification that the 
existing card is no longer valid and should be destroyed immediately.
    ii. The original card contained an expiration date.
    iii. The card issuer, in order to preclude use of the card, 
reprograms computers or issues instructions to authorization centers.
    8. Incomplete replacement. If a consumer has duplicate credit cards 
on the same account (Card A--one type of bank credit card, for 
example), the card issuer may not replace the duplicate cards with one 
Card A and one Card B (Card B--another type of bank credit card) unless 
the consumer requests Card B.
    9. Multiple entities. Where multiple entities share 
responsibilities with respect to a credit card issued by one of them, 
the entity that issued the card may replace it on an unsolicited basis, 
if that entity terminates the original card by voiding it in some way, 
as described in comment 12(a)(2)-7. The other entity or entities may 
not issue a card on an unsolicited basis in these circumstances.
* * * * *

[[Page 13905]]

12(c) Right of Cardholder To Assert Claims or Defenses Against Card 
Issuer

    1. Relationship to Sec.  1026.13. The Sec.  1026.12(c) credit card 
``holder in due course'' provision deals with the consumer's right to 
assert against the card issuer a claim or defense concerning property 
or services purchased with a credit card, if the merchant has been 
unwilling to resolve the dispute. Even though certain merchandise 
disputes, such as non-delivery of goods, may also constitute ``billing 
errors'' under Sec.  1026.13, that section operates independently of 
Sec.  1026.12(c). The cardholder whose asserted billing error involves 
undelivered goods may institute the error resolution procedures of 
Sec.  1026.13; but whether or not the cardholder has done so, the 
cardholder may assert claims or defenses under Sec.  1026.12(c). 
Conversely, the consumer may pay a disputed balance and thus have no 
further right to assert claims and defenses, but still may assert a 
billing error if notice of that billing error is given in the proper 
time and manner. An assertion that a particular transaction resulted 
from unauthorized use of the card could also be both a ``defense'' and 
a billing error.
    2. Claims and defenses assertible. Section 1026.12(c) merely 
preserves the consumer's right to assert against the card issuer any 
claims or defenses that can be asserted against the merchant. It does 
not determine what claims or defenses are valid as to the merchant; 
this determination must be made under state or other applicable law.
    3. Transactions excluded. Section 1026.12(c) does not apply to the 
use of a check guarantee card or a debit card (other than a hybrid 
debit-credit card) in connection with an overdraft credit plan, or to a 
check guarantee card used in connection with cash-advance checks.
    4. Method of calculating the amount of credit outstanding. The 
amount of the claim or defense that the cardholder may assert shall not 
exceed the amount of credit outstanding for the disputed transaction at 
the time the cardholder first notifies the card issuer or the person 
honoring the credit card of the existence of the claim or defense. 
However, when a consumer has asserted a claim or defense against a 
creditor pursuant to Sec.  1026.12(c), the creditor must apply any 
payment or other credit in a manner that avoids or minimizes any 
reduction in the amount subject to that claim or defense. Accordingly, 
to determine the amount of credit outstanding for purposes of this 
section, payments and other credits must be applied first to amounts 
other than the disputed transaction.
    i. For examples of how to comply with Sec. Sec.  1026.12 and 
1026.53 for credit card accounts under an open-end (not home-secured) 
consumer credit plan, see comment 53-3.
    ii. For other types of credit card accounts, creditors may, at 
their option, apply payments consistent with Sec.  1026.53 and comment 
53-3. In the alternative, payments and other credits may be applied to: 
Late charges in the order of entry to the account; then to finance 
charges in the order of entry to the account; and then to any debits 
other than the transaction subject to the claim or defense in the order 
of entry to the account. In these circumstances, if more than one item 
is included in a single extension of credit, credits are to be 
distributed pro rata according to prices and applicable taxes.
    5. Prepaid cards.
    i. Section 1026.12(c) applies to property or services purchased 
with the hybrid prepaid-credit card that accesses a covered separate 
credit feature as defined in Sec.  1026.61. The following examples 
illustrate when a hybrid prepaid-credit card is used to purchase 
property or services:
    A. A consumer uses a hybrid prepaid-credit card as defined in Sec.  
1026.61 to make a purchase to obtain goods or services from a merchant 
and credit is drawn directly from a covered separate credit feature 
accessed by the hybrid prepaid-credit card without transferring funds 
into the asset feature of the prepaid account to cover the amount of 
the purchase. For example, assume that the consumer has $10 of funds in 
the asset feature of the prepaid account and initiates a transaction 
with a merchant to obtain goods or services with the hybrid prepaid-
credit card for $25. In this case, $10 is debited from the asset 
feature and $15 of credit is drawn directly from the covered separate 
credit feature accessed by the hybrid prepaid-credit card without any 
transfer of funds into the asset feature of the prepaid account to 
cover the amount of the purchase. In this case, the consumer is using 
credit accessed by the hybrid prepaid-credit card to purchase property 
or services where credit is drawn directly from the covered separate 
credit feature accessed by the hybrid prepaid-credit card to cover the 
amount of the purchase.
    B. A consumer uses a hybrid prepaid-credit card as defined in Sec.  
1026.61 to make a purchase to obtain goods or services from a merchant 
and credit is transferred from a covered separate credit feature 
accessed by the hybrid prepaid-credit card into the asset feature of 
the prepaid account to cover the amount of the purchase. For example, 
assume the same facts as above, except that the $15 will be transferred 
from a covered separate credit feature to the asset feature, and a 
transaction of $25 is debited from the asset feature of the prepaid 
account. In this case, the consumer is using credit accessed by the 
hybrid prepaid-credit card to purchase property or services because 
credit is transferred to the asset feature of the prepaid account to 
cover the amount of a purchase made with the card. This is true even 
though the $15 credit transaction is treated as ``nonsale credit'' 
under Sec.  1026.8(b). See comments 8(a)-9.ii and 8(b)-1.vi.
    ii. For a transaction at point of sale where a hybrid prepaid-
credit card is used to obtain goods or services from a merchant and the 
transaction is partially paid with funds from the asset feature of the 
prepaid account, and partially paid with credit from the covered 
separate credit feature, the amount of the purchase transaction that is 
funded by credit generally would be subject to the requirements of 
Sec.  1026.12(c). The amount of the transaction funded from the prepaid 
account would not be subject to the requirements of Sec.  1026.12(c).

12(c)(1) General Rule

    1. Situations excluded and included. The consumer may assert claims 
or defenses only when the goods or services are ``purchased with the 
credit card.'' This would include when the goods or services are 
purchased by a consumer using a hybrid prepaid-credit card to access a 
covered separate credit feature as defined in Sec.  1026.61 or using a 
hybrid debit-credit card to access a covered overdraft credit account 
as defined in Sec.  1026.62. This could include mail, the internet or 
telephone orders, if the purchase is charged to the credit card 
account. But it would exclude:
    i. Use of a credit card to obtain a cash advance, even if the 
consumer then uses the money to purchase goods or services. Such a 
transaction would not involve ``property or services purchased with the 
credit card.''
    ii. The purchase of goods or services by use of a check accessing 
an overdraft account and a credit card used solely for identification 
of the consumer. (On the other hand, if the credit card is used to make 
partial payment for the purchase and not merely for identification, the 
right to assert claims or defenses would apply to credit extended via 
the credit card, although not to credit extended by the overdraft line. 
If partial payment for the purchase is made with a hybrid prepaid-
credit card or a hybrid debit-

[[Page 13906]]

credit card, the right to assert claims or defenses would apply to 
credit accessed from a covered separate credit feature or covered 
overdraft credit account, respectively.)
    iii. Purchases made by use of a check guarantee card in conjunction 
with a cash advance check (or by cash advance checks alone). (See 
comment 12(c)-3.) A cash advance check is a check that, when written, 
does not draw on an asset account; instead, it is charged entirely to 
an open-end credit account.
    iv. Purchases effected by use of either a check guarantee card or a 
debit card (other than a hybrid debit-credit card) when used to draw on 
overdraft credit plans. (See comment 12(c)-3.) The debit card exemption 
applies whether the card accesses an asset account via point of sale 
terminals, automated teller machines, or in any other way, and whether 
the card qualifies as an ``access device'' under Regulation E or is 
only a paper based debit card. If a card serves both as an ordinary 
credit card and also as a check guarantee or debit card, a transaction 
will be subject to this rule on asserting claims and defenses when used 
as an ordinary credit card (including when used as a hybrid debit-
credit card to access a covered overdraft credit account), but not when 
used as a check guarantee or debit card. For purchases effected by use 
of a hybrid debit-credit card where the transaction is partially paid 
with funds from the asset account, and partially paid with covered 
overdraft credit, the provisions of Sec.  1026.12(c) apply only to the 
credit portion of the purchase transaction.
* * * * *

Section 1026.55--Limitations on Increasing Annual Percentage Rates, 
Fees, and Charges

55(a) General Rule

    1. Increase in rate, fee, or charge. Section 1026.55(a) prohibits 
card issuers from increasing an annual percentage rate or any fee or 
charge required to be disclosed under Sec.  1026.6(b)(2)(ii), 
(b)(2)(iii), or (b)(2)(xii) on a credit card account unless 
specifically permitted by one of the exceptions in Sec.  1026.55(b). 
Except as specifically provided in Sec.  1026.55(b), this prohibition 
applies even if the circumstances under which an increase will occur 
are disclosed in advance. The following examples illustrate the general 
application of Sec.  1026.55(a) and (b). Additional examples 
illustrating specific aspects of the exceptions in Sec.  1026.55(b) are 
provided in the commentary to those exceptions.
    i. Account-opening disclosure of non-variable rate for six months, 
then variable rate. Assume that, at account opening on January 1 of 
year one, a card issuer discloses that the annual percentage rate for 
purchases is a non-variable rate of 15% and will apply for six months. 
The card issuer also discloses that, after six months, the annual 
percentage rate for purchases will be a variable rate that is currently 
18% and will be adjusted quarterly by adding a margin of 8 percentage 
points to a publicly-available index not under the card issuer's 
control. Furthermore, the card issuer discloses that the annual 
percentage rate for cash advances is the same variable rate that will 
apply to purchases after six months. Finally, the card issuer discloses 
that, to the extent consistent with Sec.  1026.55 and other applicable 
law, a non-variable penalty rate of 30% may apply if the consumer makes 
a late payment. The payment due date for the account is the twenty-
fifth day of the month and the required minimum periodic payments are 
applied to accrued interest and fees but do not reduce the purchase and 
cash advance balances.
    A. Change-in-terms rate increase for new transactions after first 
year. On January 15 of year one, the consumer uses the account to make 
a $2,000 purchase and a $500 cash advance. No other transactions are 
made on the account. At the start of each quarter, the card issuer may 
adjust the variable rate that applies to the $500 cash advance 
consistent with changes in the index (pursuant to Sec.  1026.55(b)(2)). 
All required minimum periodic payments are received on or before the 
payment due date until May of year one, when the payment due on May 25 
is received by the creditor on May 28. At this time, the card issuer is 
prohibited by Sec.  1026.55 from increasing the rates that apply to the 
$2,000 purchase, the $500 cash advance, or future purchases and cash 
advances. Six months after account opening (July 1), the card issuer 
may begin to accrue interest on the $2,000 purchase at the previously-
disclosed variable rate determined using an 8-point margin (pursuant to 
Sec.  1026.55(b)(1)). Because no other increases in rate were disclosed 
at account opening, the card issuer may not subsequently increase the 
variable rate that applies to the $2,000 purchase and the $500 cash 
advance (except due to increases in the index pursuant to Sec.  
1026.55(b)(2)). On November 16, the card issuer provides a notice 
pursuant to Sec.  1026.9(c) informing the consumer of a new variable 
rate that will apply on January 1 of year two (calculated using the 
same index and an increased margin of 12 percentage points). On 
December 15, the consumer makes a $100 purchase. On January 1 of year 
two, the card issuer may increase the margin used to determine the 
variable rate that applies to new purchases to 12 percentage points 
(pursuant to Sec.  1026.55(b)(3)). However, Sec.  1026.55(b)(3)(ii) 
does not permit the card issuer to apply the variable rate determined 
using the 12-point margin to the $2,000 purchase balance. Furthermore, 
although the $100 purchase occurred more than 14 days after provision 
of the Sec.  1026.9(c) notice, Sec.  1026.55(b)(3)(iii) does not permit 
the card issuer to apply the variable rate determined using the 12-
point margin to that purchase because it occurred during the first year 
after account opening. On January 15 of year two, the consumer makes a 
$300 purchase. The card issuer may apply the variable rate determined 
using the 12-point margin to the $300 purchase.
    B. Account becomes more than 60 days delinquent during first year. 
Same facts as above except that the required minimum periodic payment 
due on May 25 of year one is not received by the card issuer until July 
30 of year one. Because the card issuer received the required minimum 
periodic payment more than 60 days after the payment due date, Sec.  
1026.55(b)(4) permits the card issuer to increase the annual percentage 
rate applicable to the $2,000 purchase, the $500 cash advance, and 
future purchases and cash advances. However, Sec.  1026.55(b)(4)(i) 
requires the card issuer to first comply with the notice requirements 
in Sec.  1026.9(g). Thus, if the card issuer provided a Sec.  1026.9(g) 
notice on July 25 stating that all rates on the account would be 
increased to the 30% penalty rate, the card issuer could apply that 
rate beginning on September 8 to all balances and to future 
transactions.
    ii. Account-opening disclosure of non-variable rate for six months, 
then increased non-variable rate for six months, then variable rate; 
change-in-terms rate increase for new transactions after first year. 
Assume that, at account opening on January 1 of year one, a card issuer 
discloses that the annual percentage rate for purchases will increase 
as follows: A non-variable rate of 5% for six months; a non-variable 
rate of 10% for an additional six months; and thereafter a variable 
rate that is currently 15% and will be adjusted monthly by adding a 
margin of 5 percentage points to a publicly-available index not under 
the card issuer's control. The payment due date for the account is the 
fifteenth day of the month and the required minimum periodic payments 
are applied to

[[Page 13907]]

accrued interest and fees but do not reduce the purchase balance. On 
January 15 of year one, the consumer uses the account to make a $1,500 
purchase. Six months after account opening (July 1), the card issuer 
may begin to accrue interest on the $1,500 purchase at the previously-
disclosed 10% non-variable rate (pursuant to Sec.  1026.55(b)(1)). On 
September 15, the consumer uses the account for a $700 purchase. On 
November 16, the card issuer provides a notice pursuant to Sec.  
1026.9(c) informing the consumer of a new variable rate that will apply 
on January 1 of year two (calculated using the same index and an 
increased margin of 8 percentage points). One year after account 
opening (January 1 of year two), the card issuer may begin accruing 
interest on the $2,200 purchase balance at the previously-disclosed 
variable rate determined using a 5-point margin (pursuant to Sec.  
1026.55(b)(1)). Section 1026.55 does not permit the card issuer to 
apply the variable rate determined using the 8-point margin to the 
$2,200 purchase balance. Furthermore, Sec.  1026.55 does not permit the 
card issuer to subsequently increase the variable rate determined using 
the 5-point margin that applies to the $2,200 purchase balance (except 
due to increases in the index pursuant to Sec.  1026.55(b)(2)). The 
card issuer may, however, apply the variable rate determined using the 
8-point margin to purchases made on or after January 1 of year two 
(pursuant to Sec.  1026.55(b)(3)).
    iii. Change-in-terms rate increase for new transactions after first 
year; penalty rate increase after first year. Assume that, at account 
opening on January 1 of year one, a card issuer discloses that the 
annual percentage rate for purchases is a variable rate determined by 
adding a margin of 6 percentage points to a publicly-available index 
outside of the card issuer's control. The card issuer also discloses 
that, to the extent consistent with Sec.  1026.55 and other applicable 
law, a non-variable penalty rate of 28% may apply if the consumer makes 
a late payment. The due date for the account is the fifteenth of the 
month. On May 30 of year two, the account has a purchase balance of 
$1,000. On May 31, the card issuer provides a notice pursuant to Sec.  
1026.9(c) informing the consumer of a new variable rate that will apply 
on July 16 for all purchases made on or after June 15 (calculated by 
using the same index and an increased margin of 8 percentage points). 
On June 14, the consumer makes a $500 purchase. On June 15, the 
consumer makes a $200 purchase. On July 1, the card issuer has not 
received the payment due on June 15 and provides the consumer with a 
notice pursuant to Sec.  1026.9(g) stating that the 28% penalty rate 
will apply as of August 15 to all transactions made on or after July 16 
and that, if the consumer becomes more than 60 days late, the penalty 
rate will apply to all balances on the account. On July 17, the 
consumer makes a $300 purchase.
    A. Account does not become more than 60 days delinquent. The 
payment due on June 15 of year two is received on July 2. On July 16, 
Sec.  1026.55(b)(3)(ii) permits the card issuer to apply the variable 
rate determined using the 8-point margin disclosed in the Sec.  
1026.9(c) notice to the $200 purchase made on June 15 but does not 
permit the card issuer to apply this rate to the $1,500 purchase 
balance. On August 15, Sec.  1026.55(b)(3)(ii) permits the card issuer 
to apply the 28% penalty rate disclosed at account opening and in the 
Sec.  1026.9(g) notice to the $300 purchase made on July 17 but does 
not permit the card issuer to apply this rate to the $1,500 purchase 
balance (which remains at the variable rate determined using the 6-
point margin) or the $200 purchase (which remains at the variable rate 
determined using the 8-point margin).
    B. Account becomes more than 60 days delinquent after provision of 
Sec.  1026.9(g) notice. Same facts as above except the payment due on 
June 15 of year two has not been received by August 15. Section 
1026.55(b)(4) permits the card issuer to apply the 28% penalty rate to 
the $1,500 purchase balance and the $200 purchase because it has not 
received the June 15 payment within 60 days after the due date. 
However, in order to do so, Sec.  1026.55(b)(4)(i) requires the card 
issuer to first provide an additional notice pursuant to Sec.  
1026.9(g). This notice must be sent no earlier than August 15, which is 
the first day the account became more than 60 days' delinquent. If the 
notice is sent on August 15, the card issuer may begin accruing 
interest on the $1,500 purchase balance and the $200 purchase at the 
28% penalty rate beginning on September 29.
    2. Relationship to grace period. Nothing in Sec.  1026.55 prohibits 
a card issuer from assessing interest due to the loss of a grace period 
to the extent consistent with Sec.  1026.5(b)(2)(ii)(B) and Sec.  
1026.54. In addition, a card issuer has not reduced an annual 
percentage rate on a credit card account for purposes of Sec.  1026.55 
if the card issuer does not charge interest on a balance or a portion 
thereof based on a payment received prior to the expiration of a grace 
period. For example, if the annual percentage rate for purchases on an 
account is 15% but the card issuer does not charge any interest on a 
$500 purchase balance because that balance was paid in full prior to 
the expiration of the grace period, the card issuer has not reduced the 
15% purchase rate to 0% for purposes of Sec.  1026.55.
    3. Fees in connection with covered separate credit features 
accessible by hybrid prepaid-credit cards. With regard to a covered 
separate credit feature and an asset feature on a prepaid account that 
are both accessible by a hybrid prepaid-credit card as defined in Sec.  
1026.61 where the credit feature is a credit card account under an 
open-end (not home-secured) consumer credit plan, Sec.  1026.55(a) 
prohibits card issuers from increasing an annual percentage rate or any 
fee or charge required to be disclosed under Sec.  1026.6(b)(2)(ii), 
(iii), or (xii) on a credit card account unless specifically permitted 
by one of the exceptions in Sec.  1026.55(b). This is true regardless 
of whether these fees or annual percentage rates are imposed on the 
asset feature of the prepaid account or on the credit feature.
    4. Fees imposed on the asset feature of a prepaid account that are 
not charges imposed as part of the plan. Section 1026.55(a) does not 
apply to any fee or charge imposed on the asset feature of the prepaid 
account that is not a charge imposed as part of the plan under Sec.  
1026.6(b)(3). See Sec.  1026.6(b)(3)(iii)(D) and (E) and related 
commentary regarding fees imposed on the asset feature of the prepaid 
account that are not charges imposed as part of the plan under Sec.  
1026.6(b)(3) with respect to covered separate credit features 
accessible by hybrid prepaid-credit cards and non-covered separate 
credit features as those terms are defined in Sec.  1026.61.
    5. Fees in connection with covered overdraft credit. With regard to 
covered overdraft credit accessible by a hybrid debit-credit card, 
Sec.  1026.55(a) prohibits card issuers from increasing an annual 
percentage rate or any fee or charge required to be disclosed under 
Sec.  1026.6(b)(2)(ii), (iii), or (xii) on a credit card account unless 
specifically permitted by one of the exceptions in Sec.  1026.55(b). 
This is true regardless of whether these fees or annual percentage 
rates are imposed on the covered asset account associated with the 
covered overdraft credit or on the covered overdraft credit account.
* * * * *

[[Page 13908]]

Section 1026.57--Reporting and Marketing Rules for College Student 
Open-End Credit

57(a) Definitions

57(a)(1) College Student Credit Card

    1. Definition. The definition of college student credit card 
excludes home-equity lines of credit accessed by credit cards and 
covered overdraft credit accounts as defined in 1026.62 offered by a 
creditor other than a very large financial institution as defined in 
1026.62 that is accessed by a debit card or account number. A college 
student credit card includes a college affinity card within the meaning 
of TILA section 127(r)(1)(A). In addition, a card may fall within the 
scope of the definition regardless of the fact that it is not 
intentionally targeted at or marketed to college students. For example, 
an agreement between a college and a card issuer may provide for 
marketing of credit cards to alumni, faculty, staff, and other non-
student consumers who have a relationship with the college, but also 
contain provisions that contemplate the issuance of cards to students. 
A credit card issued to a student at the college in connection with 
such an agreement qualifies as a college student credit card. The 
definition of college student credit card includes a hybrid prepaid-
credit card as defined by Sec.  1026.61 that is issued to any college 
student where the card can access a covered separate credit feature 
that is a credit card account under an open-end (not home-secured) 
consumer credit plan. The definition of college student credit card 
also includes a prepaid account as defined in Sec.  1026.61 that is 
issued to any college student where a covered separate credit feature 
that is a credit card account under an open-end (not home-secured) 
consumer credit plan accessible by a hybrid prepaid-credit card as 
defined by Sec.  1026.61 may be added in the future to the prepaid 
account.
* * * * *

Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2024-01095 Filed 2-22-24; 8:45 am]
BILLING CODE 4810-AM-P


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