`[Federal Register Volume 89, Number 249 (Monday, December 30, 2024)]
[Rules and Regulations]
[Pages 106768-106845]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-29699]



[[Page 106767]]

Vol. 89

Monday,

No. 249

December 30, 2024

Part II





Consumer Financial Protection Bureau





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12 CFR Parts 1005 and 1026





Overdraft Lending: Very Large Financial Institutions; Final Rule

  Federal Register / Vol. 89 , No. 249 / Monday, December 30, 2024 / 
Rules and Regulations  

[[Page 106768]]


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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: Final rule; official interpretation.

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

DATES: Effective date: October 1, 2025.

FOR FURTHER INFORMATION CONTACT: George Karithanom, Regulatory 
Implementation and Guidance Program Analyst, Office of Regulations, at 
202-435-7700 or https://reginquiries.consumerfinance.gov/. If you 
require this document in an alternative electronic format, please 
contact [email protected].

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Overview
    A. Summary
    B. Market Background
II. The Proposal and Other Procedural Background
    A. Outreach and Engagement
    B. Summary of the Proposed Rule
III. Legal Authority
    A. Truth in Lending Act
    B. Electronic Fund Transfer Act
    C. Consumer Financial Protection Act
IV. Discussion of the Final Rule
    A. Overview of the CFPB's Approach
    B. Entity Coverage
    C. Transaction and Account Coverage
    D. Changes to Definition of ``Finance Charge''
    E. Changes to Covered Overdraft Credit Offered by Very Large 
Financial Institutions
V. Effective and Compliance Date
VI. Other Comments
    A. Possible Alternative or Additional Requirements
    B. Usury Limits
    C. Other Comments Regarding Statutory Authority
    D. Data Supporting Application of Regulation Z to Overdraft
    E. Implications for Other Laws
VII. CFPA Section 1022(b) Analysis
    A. Overview
    B. Data Limitation and Quantification of Benefits, Costs, and 
Impacts
    C. Baseline for Analysis
    D. Comments Received
    E. Potential Benefits and Costs to Consumers and Covered Persons
    F. Potential Benefits and Costs to Consumers and Covered Persons 
of Further Provisions of the Proposed Rule
    G. Potential Impacts on Depository Institutions and Credit 
Unions With $10 Billion or Less in Total Assets, as Described in 
CFPA Section 1026
    H. Potential Impacts on Consumer Access to Credit and on 
Consumers in Rural Areas
VIII. Regulatory Flexibility Act Analysis
IX. Paperwork Reduction Act
X. Congressional Review Act
XI. Severability

I. Overview

A. Summary

    The CFPB is updating non-statutory exceptions in Regulations Z and 
E that have allowed very large financial institutions to avoid 
statutory consumer credit protection requirements when extending 
certain overdraft credit.\1\
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    \1\ When amending commentary, the Office of the Federal Register 
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. In 
addition, the CFPB is releasing an unofficial, informal redline to 
assist industry and other stakeholders in reviewing the changes to 
the regulatory text and commentary of Regulation E and Regulation Z. 
This redline may be found on the CFPB's website. If any conflicts 
exist between the redline and the text of Regulation E or Regulation 
Z, its commentary, or this 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; other consumer credit products with similar 
features, such as short term repayment, 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 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 the negative consequences of 
a bounced check without being charged any additional fees beyond an 
amount that did not exceed 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

[[Page 106769]]

institutions make from low-balance accounts). The volume of overdrawing 
transactions and related revenue rose drastically over the years, 
including on transactions where the consumer may have otherwise 
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 per overdraft transaction 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 
updating 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 will allow consumers to better 
compare certain overdraft credit to other types of credit and will 
provide consumers with several substantive protections that already 
apply to other consumer credit.
    These amendments apply only to very large financial institutions--
i.e., insured depository institutions and credit unions with more than 
$10 billion in assets. The rule does 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 final rule, Regulation Z will 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 final rule accomplishes this result by updating two regulatory 
exceptions from the statutory definition of finance charge. First, the 
final rule updates 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\ The rule narrows this exception to no longer apply to 
``above breakeven overdraft credit'' offered by a very large financial 
institution, which generally means that profit-generating overdraft 
fees charged by very large financial institutions would no longer be 
excepted from TILA. The final rule gives 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 a standard set forth in the rule; or (2) relying on a 
benchmark fee of $5. Second, the final rule updates a related exception 
that provides that a charge imposed on an asset account in connection 
with an overdraft credit feature is not a finance charge if the charge 
does not exceed the charge for a similar transaction account without a 
credit feature.\7\ The updates clarify what is and is not a comparable 
charge in light of changes finalized in this rule.
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    \6\ 12 CFR 1026.4(c)(3).
    \7\ 12 CFR 1026.4(b)(2).
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    In the proposal, the CFPB presented four alternatives for the 
benchmark fee described above--$3, $6, $7, and $14--to solicit public 
comment on what data the CFPB should consider when calculating the fee. 
In the final rule, the CFPB will apply the same approach used to derive 
the proposed $3 benchmark fee. However, the final rule increases the $3 
benchmark fee to $5 to account for additional costs noted by 
commenters, such as costs relating to overdraft notices, branch 
servicing, collection, core providers/vendors, compliance, and 
technology. As a result of this final rule, above breakeven overdraft 
credit that is not currently subject to Regulation Z will become 
subject to Regulation Z, including provisions in subpart B that govern 
open-end credit (e.g., annual percentage rate disclosures, other 
account opening disclosures, periodic statements, and advertising 
rules), on the effective date of this rule. For ease of reference, this 
final rule 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 will become covered overdraft credit when this final rule 
becomes effective on October 1, 2025.
    The final rule also requires covered overdraft credit offered by 
very large financial institutions to be put in a credit account 
separate from the asset account, and it updates exceptions relating to 
credit cards. Among other changes, it applies the portions of 
Regulation Z that implement the Credit Card Accountability 
Responsibility and Disclosure Act of 2009 (CARD Act) \8\ 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 will apply to such overdraft credit 
include, but are not limited to, ability to pay underwriting 
requirements, limitations on penalty fees including certain fees on 
transactions that are declined due to nonsufficient funds, and various 
requirements related to rate changes.
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    \8\ Public Law 111-24; 123 Stat. 1734 (2009).
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    The final rule will also prohibit compulsory use of preauthorized 
electronic fund transfers (EFTs) for repayment of covered overdraft 
credit provided by very large financial institutions. This change will 
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 
cannot 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 will have the right to repay this overdraft credit manually if 
they prefer.
    The final rule will take effect on October 1, 2025. This effective 
date is more than six months after the date the rule is published in 
the Federal Register, consistent with 15 U.S.C. 1604(d).

B. Market Background

1. 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

[[Page 106770]]

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,\9\ 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.'' \10\ The Board subsequently adopted 
commentary excluding debit cards with no credit agreement from 
Regulation Z's definition of ``credit card.'' \11\ 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.\12\
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    \9\ 34 FR 2002 (Feb. 11, 1969).
    \10\ 42 FR 22360, 22362 (May 3, 1977).
    \11\ 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.
    \12\ 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.\13\ 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; 
\14\ however, since late 2021, in the wake of substantial CFPB 
enforcement and supervising attention on overdraft fees, a number of 
financial institutions have voluntarily eliminated such fees.\15\ 
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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    \13\ 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).
    \14\ Id.
    \15\ 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 final rule 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.\16\
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    \16\ 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 
cannot 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.\17\ While, as noted above, overdraft credit must 
technically be discretionary to be excepted from Regulation Z, in 
practice, financial 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).\18\ Financial institutions that use static limits 
sometimes 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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    \17\ CFPB 2013 White Paper at 48-52.
    \18\ 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.\19\ Financial institutions typically 
have charged the same amount

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for an NSF fee as for a non-covered overdraft fee.\20\ As noted in part 
I.B.3, many financial institutions have eliminated NSF fees over the 
past three years.
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    \19\ The CFPB is aware that some prepaid card providers charge 
NSF fees on one-time purchase transactions, based on fees disclosed 
in the CFPB's publicly-available prepaid account agreement database.
    \20\ 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 returned item 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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2. Evolution and Growth of Non-Covered Overdraft
    Non-covered overdraft credit started as a courtesy that individuals 
within financial institutions provided when they would decide on an ad 
hoc basis to pay particular check transactions into overdraft rather 
than returning those checks unpaid.\21\ 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.\22\ 
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.\23\ 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.\24\ 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 the New York metro area found that the median fee 
was $5, while some banks charged zero.\25\ By 1994, concern had risen 
about the increase in the average fee to over $15 ($5.77 in 1976 
dollars); \26\ by 2000, the average had surpassed $20 ($6.61 in 1976 
dollars) and continued to increase thereafter.\27\
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    \21\ 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'').
    \22\ 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).
    \23\ 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'').
    \24\ 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 Nov. 13, 2024); 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), Responding to Reform: Overdraft in 2023 (Oct. 8, 
2024), https://finhealthnetwork.org/research/responding-to-reform-overdraft-in-2023/ (FHN Brief 2024) (finding almost half (45 
percent) of overdrafters reported that their most recent overdraft 
occurred on a transaction of $50 or less).
    \25\ Senate Staff Report at 10-11.
    \26\ 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, FRS) (showing average overdraft fee of over $15 in 
1993); see also id. at 95-96, 101-102 (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).
    \27\ 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).
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    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 on overdraft fees.\28\ 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 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.\29\
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    \28\ CFPB 2013 White Paper at 16-17.
    \29\ 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 estimated 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.
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3. 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.\30\ 
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.\31\ With the onset of the 
pandemic

[[Page 106772]]

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.\32\ 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.\33\ Notwithstanding the trend downward during the pandemic, 
estimated market wide overdraft revenue exceeded $9 billion in 2020 and 
2021.\34\
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    \30\ Id.
    \31\ 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.
    \32\ CFPB 2021 Data Point at 22-24.
    \33\ 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.
    \34\ See discussion of methodology at FN 31.
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    Beginning in late 2021, a number of large banks began announcing 
and implementing changes to their overdraft policies.\35\ Some banks 
eliminated overdraft fees altogether or reduced them to $10 or $15 per 
transaction.\36\ Some banks made changes to their policies by expanding 
their fee waiver policies, including establishing a daily limit of one 
fee per day even if multiple overdrawing transactions are paid; \37\ 
establishing de minimis negative balance thresholds of $50 or more, 
within which overdrafts do not result in a fee; and implementing grace 
periods giving consumers time through the next business day to bring 
their accounts positive before a fee is assessed.\38\ Collectively 
these changes resulted in a sustained reduction in overdraft revenues 
as compared to pre-pandemic levels.\39\ Marketwide overdraft revenue in 
2022 was an estimated $9.1 billion ($7.9 billion in 2019 dollars, a 37 
percent drop in real terms).\40\ Of that, an estimated $6.16 billion, 
or 68 percent, was earned by financial institutions with above $10 
billion in assets.\41\ At the same time, most very large financial 
institutions eliminated NSF fees.\42\
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    \35\ 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/.
    \36\ Id.
    \37\ Id.
    \38\ Id.
    \39\ 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); see 
also CFPB, Trends in overdraft/non-sufficient fund (NSF) fee revenue 
and practices (Apr. 24, 2024), https://content.consumerfinance.gov/data-research/research-reports/trends-in-overdraftnon-sufficient-fund-nsf-fee-revenue-and-practices/ (CFPB April 2024 Data Spotlight) 
(reflecting data and analysis published periodically from Dec. 1, 
2021 to present).
    \40\ See discussion of methodology at FN 31.
    \41\ Estimated using data from 2022 Federal Financial 
Institutions Examination Council (FFIEC) Call Reports and 
methodology discussed at FN 31.
    \42\ 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).
---------------------------------------------------------------------------

    Although there was some overall decline in the charging of 
overdraft fees, a sizeable majority of banks and credit unions with 
over $10 billion in assets (i.e., 68 percent) continue to charge 
between $30 and $37 per transaction incurring an overdraft fee, and 
more than half charge $35.\43\ 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).\44\ 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.\45\ 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.\46\ 
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 IV.D.3, 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 those banks during the period studied.
---------------------------------------------------------------------------

    \43\ CFPB Market Monitoring of Publicly Available Overdraft 
Practices, Dec. 2022-July 2023.
    \44\ CFPB 2013 White Paper at 17.
    \45\ Id.
    \46\ Id.
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4. Consumer Impact of Overdraft Fees
    As cumulative overdraft fee revenue for financial institutions 
increased before recent reductions, so did the cumulative burden of 
overdraft fees on consumers, particularly more financially vulnerable 
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.\47\ 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.\48\
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    \47\ 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).
    \48\ CFPB 2017 Data Point at 5.
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    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

[[Page 106773]]

lowest share of accounts with frequent overdrafts tended to have the 
lowest rates of involuntary closure.\49\ 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 Federal Deposit 
Insurance Corporation (FDIC) estimates that there were approximately 
5.6 million unbanked households in the U.S. in 2023,\50\ nearly half of 
which had a bank account in the past.\51\ Of those previously banked 
households, nearly two-thirds have little or no interest in having a 
bank account again,\52\ with high fees, unpredictable fees, and not 
enough funds to meet minimum balance requirements among the most cited 
reasons.\53\
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    \49\ CFPB 2013 White Paper at 25.
    \50\ FDIC, 2023 FDIC National Survey of Unbanked and Underbanked 
Households, at 1 (Nov. 2024), https://www.fdic.gov/household-survey/2023-fdic-national-survey-unbanked-and-underbanked-households-report 
(FDIC 2023 Unbanked Report).
    \51\ Id. at 27 tbl.1.3 (47.4 percent of unbanked households 
previously had a bank account).
    \52\ Id. at 28 fig.1.7 (47.5 percent of previously banked 
households are not at all interested in having a bank account, and 
17.8 percent are not very interested).
    \53\ FDIC, 2023 FDIC National Survey of Unbanked and Underbanked 
Households--Appendix Tables (November 2024), at 13 tbl.A.8, https://www.fdic.gov/household-survey/2023-fdic-national-survey-unbanked-and-underbanked-households-appendix-tables (among previously banked 
households, 32.8 percent cited bank account fees are too high, 30.6 
percent cited bank account fees are too unpredictable, and 43.3 
percent cited that they do not have enough money to meet minimum 
balance requirements).
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    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.\54\ 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, or whether a particular paid transaction will be 
deemed an overdraft and assessed an overdraft fee.\55\
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    \54\ 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/; 
see also Press Release, CFPB, CFPB Orders Atlantic Union Bank to Pay 
$6.2 Million for Illegal Overdraft Fee Harvesting (Dec. 7, 2023), 
https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-atlantic-union-bank-to-pay-6-2-million-for-illegal-overdraft-fee-harvesting/.
    \55\ 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,\56\ 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 
since its inception in 2011.
---------------------------------------------------------------------------

    \56\ 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.\57\ 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.\58\ 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.\59\ In addition, 
involuntary account closure was about 2.5 times as likely for consumers 
who were opted-in than for consumers who were not.\60\
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    \57\ CFPB 2014 Data Point at 21.
    \58\ Id. at 13.
    \59\ 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 I.B.5.
    \60\ 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.\61\ Compared to non- or infrequent overdrafters, frequent 
overdrafters tend to have lower incomes and lower end-of-day 
balances.\62\ 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.\63\ Black households and Latino 
households are more likely to incur overdraft fees than white 
households.\64\
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    \61\ 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.
    \62\ Id. 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, Overdraft Trends 
Amid Historic Policy Shifts (June 1, 2023), https://finhealthnetwork.org/research/overdraft-trends-amid-historic-policy-shifts/ (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).
    \63\ CFPB 2017 Data Point at 15-16.
    \64\ See 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 FHN Brief 2024 (finding that 31 percent of 
Black, 24 percent of Latinx, and 14 percent of White households 
reported having overdrafted in 2023); 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); see also CFPB, Overdraft and Nonsufficient Fund Fees, 
at 25 (Dec. 2023), https://files.consumerfinance.gov/f/documents/cfpb_overdraft-nsf-report_2023-12.pdf (finding that Black and 
Hispanic consumers are 69 and 60 percent more likely to reside in a 
household charged at least one overdraft or NSF fee in the past 
year).
---------------------------------------------------------------------------

    Further, evidence suggests that millions of accounts with 
outstanding overdrafts are closed every year, and those former 
accountholders may have less subsequent access to the formal banking 
system as a result.\65\
---------------------------------------------------------------------------

    \65\ For example, a 2012 study found that 30 million checking 
accounts were involuntarily closed from 2001-2005 due to excessive 
overdrafts, with the former accountholders having limited or no 
subsequent access to the formal banking system. See Dennis Campbell 
et al., Bouncing out of the banking system: An empirical analysis of 
involuntary bank account closures, 36 J. Banking & Fin. 1224 (2012). 
The CFPB's supervisory experience suggests that overdraft-related 
involuntary closures remain prevalent in today's market.

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[[Page 106774]]

5. Growing Regulatory Concerns About Non-Covered Overdraft Credit
    As financial institutions began to evolve the provision of non-
covered overdraft away from the historical 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 Office of the Comptroller of the 
Currency (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.'' \66\ In 2002, the Board noted that some non-covered overdraft 
credit may not be all that different from overdraft lines of 
credit,\67\ 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.\68\ 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'' and ``[w]ere the 
Board to address these issues more specifically, it would do so 
separately under its clear [TILA] authority.'' \69\ 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'').\70\ Following the adoption of the Board's 
rule, the FDIC issued additional supervisory guidance,\71\ 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.\72\
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    \66\ OCC, Interpretive Letter No. 914, at 6 (Sept. 2001), 
https://www.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2001/int914.pdf.
    \67\ 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).
    \68\ 69 FR 31760, 31761 (June 7, 2004).
    \69\ See 70 FR 9127, 9128-29 (Feb. 24, 2005).
    \70\ 74 FR 5212 (Jan. 28, 2009).
    \71\ FDIC, Final Overdraft Payment Supervisory Guidance, FIL-81-
2010 (Nov. 24, 2010), https://www.fdic.gov/news/news/financial/2010/fil10081.html.
    \72\ Id.
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    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.\73\ 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.\74\ 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.\75\
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    \73\ 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 
Dec. 3, 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).
    \74\ 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.
    \75\ 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.\76\ 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.\77\
---------------------------------------------------------------------------

    \76\ 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.
    \77\ 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'' \78\ 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.'' \79\ 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.'' \80\ 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.'' \81\ 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.\82\
---------------------------------------------------------------------------

    \78\ 15 U.S.C. 1602(f).
    \79\ 81 FR 83934, 84168 (Nov. 22, 2016).
    \80\ Id. at 84160.
    \81\ Id.
    \82\ Id. at 84162.
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II. The Proposal and Other Procedural Background

A. Outreach and Engagement

    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.\83\ This inquiry included a request for information on

[[Page 106775]]

the impacts of overdraft fees on consumers,\84\ 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.\85\ 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.\86\ 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.\87\
---------------------------------------------------------------------------

    \83\ 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/.
    \84\ 77 FR 12031 (Feb. 28, 2012).
    \85\ See CFPB 2013 White Paper at 8; see also CFPB 2014 Data 
Point at 6-7.
    \86\ See CFPB 2013 White Paper; CFPB 2014 Data Point; CFPB 2017 
Data Point.
    \87\ 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.\88\ Since then, the CFPB has continued tracking trends in 
the marketplace \89\ and evaluating some banks' key overdraft-related 
metrics through the CFPB's supervision work.\90\ From December 2022 to 
July 2023, the CFPB reviewed the publicly available overdraft practices 
of financial institutions with assets over $10 billion.\91\ 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 IV.D as well as in 
a separate report issued in January 2024 titled ``Overdraft and NSF 
Practices at Very Large Financial Institutions.'' \92\
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    \88\ CFPB 2021 Data Point.
    \89\ CFPB April 2024 Data Spotlight.
    \90\ 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).
    \91\ CFPB Market Monitoring of Publicly Available Overdraft 
Practices, Dec. 2022-July 2023.
    \92\ See CFPB, 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 Overdraft and 
NSF Practices Report).
---------------------------------------------------------------------------

    Consistent with section 1022(b)(2)(B) of the CFPA, the CFPB has 
consulted with the appropriate prudential regulators and other Federal 
agencies, including regarding consistency with any prudential, market, 
or systemic objectives administered by these agencies. 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 II.A.

B. Summary of the Proposed Rule

    On January 17, 2024, the CFPB issued a notice of proposed 
rulemaking containing several proposed amendments to Regulations Z and 
E to extend consumer credit protections that generally apply to other 
forms of consumer credit to certain overdraft credit provided by very 
large financial institutions. This notice of proposed rulemaking was 
published in the Federal Register on February 23, 2024.\93\ The CFPB 
proposed 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 
expected that would likely fall on October 1, 2025.
---------------------------------------------------------------------------

    \93\ 89 FR 13852 (Feb. 23, 2024).
---------------------------------------------------------------------------

    As described more fully below, the CFPB proposed to amend 
Regulations Z and E, and accompanying commentary as they relate to 
overdraft credit. The amendments would have applied 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 proposed to update two regulatory exceptions from the 
definition of finance charge so that Regulation Z would 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, 
as follows. First, the proposal would have updated 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 \94\ so that the exception would not 
apply to ``above breakeven overdraft credit'' offered by a very large 
financial institution. The proposal would have given 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 a standard set forth in the proposal; or 
(2) relying on a benchmark fee set by the CFPB in the proposal. The 
CFPB asked for comment on four potential benchmark fees: $3, $6, $7, or 
$14. Second, the proposal would have updated a related exception that 
provides that a charge imposed on an asset account in connection with 
an overdraft credit feature is not a finance charge if the charge does 
not exceed the charge for a similar transaction account without a 
credit feature.\95\
---------------------------------------------------------------------------

    \94\ 12 CFR 1026.4(c)(3).
    \95\ 12 CFR 1026.4(b)(2).
---------------------------------------------------------------------------

    As a result of these proposed changes, above breakeven overdraft 
credit that is not currently subject to Regulation Z would have 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).
    The proposal would also have required covered overdraft credit 
offered by very large financial institutions to be put in a credit 
account separate from the asset account, and it would have updated 
exceptions relating to credit cards. Among other changes, it would have 
applied the portions of Regulation Z that implement the Credit Card 
Accountability Responsibility and Disclosure Act of 2009 (CARD Act) 
\96\ 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

[[Page 106776]]

credit from a very large financial institution. Provisions of the CARD 
Act that would have applied to such overdraft credit include, but are 
not limited to, ability to pay underwriting requirements, limitations 
on penalty fees including certain fees on transactions that are 
declined due to nonsufficient funds, and various requirements related 
to rate changes.
---------------------------------------------------------------------------

    \96\ Public Law 111-24; 123 Stat. 1734 (2009).
---------------------------------------------------------------------------

    The proposal would also have prohibited compulsory use of 
preauthorized electronic fund transfers (EFTs) for repayment of covered 
overdraft credit provided by very large financial institutions, which 
would have ensured 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.
Comments
    The CFPB received over 48,000 comments on the proposal.\97\ Over 
47,000 of those comments were from individual consumers and over 1,000 
were from or about institutions with fewer than $10 billion in assets. 
The CFPB also received many comments from consumer advocate commenters, 
academic commenters, industry commenters, State regulators, State 
Attorneys General, and members of Congress. This also includes comments 
received after the comment period closed via ex parte submissions and 
meetings.\98\ All comments, including ex parte submissions and 
summaries of ex parte meetings, will be available on the public docket 
for this rulemaking.\99\
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    \97\ See https://www.regulations.gov/docket/CFPB-2024-0002/comments.
    \98\ See CFPB, Policy on Ex Parte Presentations in Rulemaking 
Proceedings, 82 FR 18687 (Apr. 21, 2017).
    \99\ See https://www.regulations.gov/docket/CFPB-2024-0002/.
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    Relevant information received via comment letters, as well as ex 
parte submissions, is discussed below in subsequent parts of this 
document, as applicable. The CFPB considered all the comments it 
received regarding the proposal, made certain modifications, and is 
adopting the final rule as described in part IV below.

III. Legal Authority

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.\100\ 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.\101\ 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.\102\ 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.\103\
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    \100\ 15 U.S.C. 1604(a).
    \101\ 15 U.S.C. 1601(a).
    \102\ Id.
    \103\ Id.
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    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.\104\
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    \104\ Public Law 111-24; sec. 2, 123 Stat. 1734, 1735 (2009).
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    For the reasons discussed in this notice, the CFPB is amending 
Regulation Z with respect to overdraft credit to carry out TILA's 
purposes. The CFPB is retaining additional requirements, adjustments, 
and exceptions as, in the CFPB's judgment, are necessary and proper to 
carry out the purposes of TILA, prevent circumvention or evasion 
thereof, or to facilitate compliance. In developing these amendments 
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.\105\ Among other things, EFTA contains provisions regarding 
compulsory use of EFTs.\106\
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    \105\ 15 U.S.C. 1693.
    \106\ 15 U.S.C. 1693k.
---------------------------------------------------------------------------

    EFTA section 904(a) authorizes the CFPB to prescribe regulations to 
carry out the purposes of EFTA.\107\ 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.\108\ 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.'' \109\
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    \107\ 15 U.S.C. 1693b(a).
    \108\ 15 U.S.C. 1693b(c).
    \109\ 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 IV 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

[[Page 106777]]

CFPB's authority under, as applicable, EFTA section 904(a) and (c).

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.'' \110\
---------------------------------------------------------------------------

    \110\ 12 U.S.C. 5512(b)(1).
---------------------------------------------------------------------------

    Among other statutes, TILA, EFTA, and the CFPA are Federal consumer 
financial laws.\111\ Accordingly, in issuing this rule, 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.
---------------------------------------------------------------------------

    \111\ 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)).
---------------------------------------------------------------------------

IV. Discussion of the Final Rule

A. Overview of the CFPB's Approach

    As discussed above, the CFPB proposed 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 estimated costs and losses. These consumer protections allow 
consumers to better comparison shop across credit products and provide 
substantive protections that apply to other consumer credit.
    As a result of the evolution of the overdraft market over the last 
few decades, the regulatory exceptions for overdraft credit provided by 
very large financial institutions no longer serve their original 
purpose. The CFPB proposed preserving a limited exception to encourage 
the availability of overdraft coverage, which can benefit consumers, 
especially given that much overdraft credit is incidental in nature, as 
consumers often do not know with certainty whether a transaction will 
be presented against sufficient funds. But the proposal stated that 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 to consumers, nor as consistent with TILA's purposes of 
promoting the informed use of credit and comparison shopping across 
credit products, and protecting consumers against inaccurate and unfair 
credit billing and credit card practices.
    The CFPB is adopting the same general approach in the final rule, 
with some modifications, as discussed herein.
Comments Received on the CFPB's Proposed Approach Generally
    Comments received by the CFPB on the proposal, and responses 
thereto, are discussed in more detail throughout this part IV. The 
following is a synopsis of comments received on the CFPB's proposed 
approach generally.
    Many of the commenters supported the CFPB's proposal, stating among 
other things that the rule would reduce fee burdens and associated 
consequences and support the informed use of credit. These commenters 
generally focused on negative consumer experiences with overdraft fees, 
stating that what began as a narrow exception to provide for occasional 
accommodation now generates billions of dollars in fees from vulnerable 
populations. A State agency commenter noted that overdraft fees can 
discourage many consumers from wanting a bank account at all and noted 
that overdraft fees can deduct funds from a consumer's public benefits, 
thereby frustrating the purpose of those benefit programs. A consumer 
advocate commenter noted that some financial institutions are already 
lowering fees or offering alternative products to meet consumer needs 
and posited that the CFPB's proposal would continue this progress by 
supporting market shifts that benefit consumers. Another commenter 
noted that the proposal continues to offer flexibility to covered 
entities such that they may offer overdraft as courtesy non-covered 
overdraft or as a covered overdraft line of credit.
    Other commenters, including banks, credit unions, and industry 
groups, did not support the proposed rule, arguing, for example, that 
it is unnecessary because overdraft fees are already effectively 
disclosed consistent with Regulations DD and E, and that consumers find 
value in overdraft programs and expressly opt into them. Therefore, 
some argued that the CFPB should further study why consumers sometimes 
use higher-cost credit options and, in the case of overdraft programs, 
expressly opt into them, before proposing new regulations to ensure 
that any changes will achieve their goals. Commenters also emphasized a 
number of changes to overdraft programs that have already reduced fees 
in recent years and noted that if the proposal is finalized, financial 
institutions might pass along costs to consumers by increasing other 
fees or limiting credit or other services, including the possibility 
that transactions would not be paid through overdraft credit but would 
instead be declined or that consumers might migrate to less regulated 
credit alternatives. Some commenters objected to the CFPB's focus on 
whether overdraft fees recover more than applicable costs and losses.

B. Entity Coverage

Proposed Rule
    The CFPB proposed to expand protections to consumers of overdraft 
credit at financial institutions with more than $10 billion in assets. 
Under the proposal, the regulatory framework would not change 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 have defined 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. The proposed rule then used the term ``very 
large financial institution'' to limit the scope of overdraft credit 
that would be subject to the proposed rule.
    The CFPB preliminarily determined in the proposal that overdraft 
services offered by financial institutions with more than $10 billion 
in assets should be subject to this rule. The proposal noted that, 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 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 preliminarily determined in the proposal that consumers 
would benefit from a rule that would apply to very large financial 
institutions--i.e., those with assets of $10 billion or more. The 
proposal noted that such a rule would increase protections for the 
overwhelming majority of consumers of overdraft credit. The CFPB noted 
that the proposed rule would have covered

[[Page 106778]]

financial institutions holding approximately 80 percent of consumer 
deposits as of December 2022 \112\ and responsible for approximately 68 
percent of overdraft charges as of December 2022.\113\ The CFPB 
preliminarily determined that consumers at very large financial 
institutions would benefit from the expanded protections that would be 
provided by the proposed rule.
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    \112\ Computed from 2022 FFIEC and National Credit Union 
Administration call report data.
    \113\ Estimated using data from 2022 FFIEC Call Reports and 
methodology discussed at FN 29.
---------------------------------------------------------------------------

    The CFPB noted that in light of the different circumstances smaller 
financial institutions may face in adapting to the proposed regulatory 
framework, the CFPB did not propose to extend the proposed rule to 
those institutions with $10 billion or less in assets. The CFPB noted 
that while it did not propose 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 requested 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.
    For the reasons discussed below, the CFPB is adopting the very 
large financial institution definition as proposed.
Comments Received
    Several commenters, including several consumer advocates, supported 
the proposal's approach to apply the rule to very large financial 
institutions. They stated that the rule would benefit a majority of 
consumers, that very large financial institutions have greater 
resources to adapt to regulatory changes, and that the CFPB may need 
additional time to gather relevant cost data for smaller financial 
institutions. These commenters recommended that the CFPB take steps to 
conduct a rulemaking as soon as possible to consider expanding the 
scope of the rule to entities that are not very large financial 
institutions (non-VLFIs).
    A number of industry commenters maintained that the CFPB did not 
provide a sufficient justification for applying the rule only to very 
large financial institutions. The industry commenters criticized on 
several different grounds the proposed rule's approach to apply the 
revised regulatory framework only to very large financial institutions.
    Some industry commenters stated that the CFPB lacks authority to 
apply the rule only to very large financial institutions. Several 
industry commenters maintained that the differential treatment of very 
large financial institutions would be inconsistent with TILA, stating 
that the proposed rule did not explain why subjecting smaller financial 
institutions to the rule would not provide a meaningful benefit to 
consumers while subjecting very large financial institutions to the 
rule would provide a meaningful benefit. Other industry commenters 
stated that the proposal did not consider the five factors for an 
exemption under section 105(f)(2) of TILA and that the CFPB did not 
explain why it would be appropriate to define overdraft as credit and 
an overdraft fee as a finance charge only for very large financial 
institutions.
    Several industry commenters stated that the proposal failed to 
provide a sufficient explanation for covering only very large financial 
institutions. The commenters stated that the proposal noted the $10 
billion supervisory threshold but did not sufficiently explain why that 
threshold was relevant for exempting very large financial institutions 
from the proposed overdraft rule. While these commenters acknowledged 
that the proposal noted that smaller financial institutions may face 
``different circumstances,'' they maintained that the proposal did not 
sufficiently explain what those circumstances are and why they are 
relevant.
    Several industry commenters stated that the proposal provided 
insufficient data to support applying the rule only to very large 
financial institutions. The commenters stated that data cited in the 
proposed rule indicated that smaller financial institutions hold only 
20 percent of deposits but receive 32 percent of overdraft fees. 
Commenters stated the CFPB's own data indicate that smaller financial 
institutions appear to receive similar or greater overdraft fees per 
account compared to larger financial institutions.
    Several industry commenters also maintained that applying the rule 
only to very large financial institutions would cause consumer 
confusion and market disruption. The commenters stated that consumers 
would receive different disclosures based upon the asset size of their 
financial institution and may not understand the differences among the 
overdraft programs at different financial institutions.
    Several industry commenters expressed concern that the CFPB's 
proposal to apply the rule only to very large financial institutions 
avoided the CFPB's SBREFA obligations. Moreover, some commenters argued 
that the CFPB did not fulfill its obligations with respect to the 
SBREFA process.
    In addition, many non-VLFI industry commenters stated that, even if 
the rule would not apply to non-VLFIs, they would nevertheless face 
competitive pressure to alter their overdraft programs and reduce their 
overdraft fees. They maintained that, because they lack the resources 
of larger financial institutions, they would have difficulty altering 
their overdraft programs and reducing their fees to compete with larger 
financial institutions and may be forced to decrease availability of or 
discontinue overdraft programs.
    Several commenters, including consumer advocates, academic 
commenters, and State Attorneys General, recommended that the CFPB 
apply the rule's framework to all financial institutions. They stated 
that non-VLFIs engage in the same problematic overdraft practices that 
harm consumers and that all consumers should receive the protections 
from the rule's overdraft framework. Some commenters stated that many 
large institutions already have eliminated or reduced their overdraft 
and NSF fees, whereas most small institutions have not and that the 
proposed rule therefore would not apply to many of the institutions 
that are causing significant harm to their consumers through their 
overdraft programs.
    A couple of commenters recommended adjusting the threshold. One 
consumer advocate supported reducing the threshold to the SBREFA 
threshold of $850 million, noting that the rule provides multiple 
pathways for financial institutions to determine breakeven overdraft 
fees. A few other commenters recommended raising the threshold to $100 
billion or more, arguing that the largest financial institutions have 
the resources to adapt to regulatory changes.
    Some commenters, including a consumer advocate and a bank, raised 
concerns that nonbanks that partner with banks to offer bank accounts 
could evade coverage under the rule. They stated that large nonbanks 
could evade the rule by partnering with multiple smaller banks with 
assets under $10 billion. The consumer advocate stated that some 
nonbanks offer accounts that they claim are checking accounts exempt 
from the prepaid rule and its protections applicable to overdraft fees 
on prepaid cards. The consumer advocate recommended that the CFPB 
clarify that any such account, even if tied to a bank account, is a 
prepaid

[[Page 106779]]

account. Alternatively, the consumer advocate recommended that the CFPB 
expand the rule's definition of ``very large financial institution'' by 
using the Regulation E definition of ``financial institution,'' which 
is broader than depository institutions, and including within the scope 
of the rule nonbanks that offer accounts in partnership with depository 
institutions. Otherwise, the consumer advocate stated, nonbanks will 
partner with one or more smaller financial institutions with less than 
$10 billion in assets to ensure that their accounts would not be 
subject to this rule. The consumer advocate stated that nonbanks 
already are using these partnerships to avoid having to comply with the 
Durbin Amendment's interchange fee limits.
Final Rule
    For the reasons stated in the proposal and below, the CFPB is 
adopting the very large financial institution definition as proposed to 
expand protections for consumers of overdraft credit at financial 
institutions with more than $10 billion in assets. The rule does not 
change the regulatory framework for overdraft credit offered at 
financial institutions with $10 billion or less in assets. The CFPB 
plans to monitor market responses to the protections adopted in this 
rule, analyze additional information, and consider whether to apply 
expanded protections to overdraft credit offered by financial 
institutions with $10 billion or less in assets. As in the proposed 
rule, the final rule defines the term ``very large financial 
institution'' in Sec.  1026.62(b)(6) 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/. The final rule uses the term very large 
financial institution to limit the scope of overdraft credit that is 
subject to the final rule.
    The CFPB has determined that it is appropriate to move forward with 
a rule that expands protections for consumers of overdraft credit at 
very large financial institutions. The majority of consumers will 
benefit from such a rule. As noted above, approximately 80 percent of 
consumer deposits are at very large financial institutions, and more 
than two-thirds of overdraft fees were imposed by very large financial 
institutions. Using its supervision and market monitoring capabilities, 
the CFPB has observed recent market changes for overdraft programs, 
especially at very large financial institutions. Many very large 
financial institutions have altered their overdraft programs and 
reduced or eliminated overdraft fees without imposing additional fees, 
indicating that very large financial institutions have the capacity to 
adapt their overdraft programs without impairing their provisions of 
other products and services.
    By contrast, smaller financial institutions may have less 
flexibility in adapting to changes in the regulatory framework for 
overdraft credit. To the extent that changes to the regulatory 
framework would result in a reduction in overdraft revenue, smaller 
financial institutions may have greater difficulty in absorbing a 
reduction in overdraft revenue without it having some impact on their 
operations, and this impact could negatively affect consumers at 
smaller financial institutions. Although the CFPB has less information 
about smaller financial institutions, information from the bank call 
reports and comments on the proposal indicate that smaller financial 
institutions currently are more reliant on overdraft revenue under the 
existing regulatory framework than very large financial institutions. 
For example, based on 2023 call report data, combined revenue from 
overdraft and NSF charges was 44 percent of deposit service charges and 
4.7 percent of noninterest income for banks with assets between $1 
billion and $10 billion, as compared to 19 percent and 1.8 percent, 
respectively, for banks with assets greater than $10 billion. These 
data suggest that smaller financial institutions are more reliant on 
overdraft revenue and may be less able to adapt to a regulatory 
framework that results in reductions in overdraft revenue. A number of 
non-VLFI industry commenters claimed that if they were subject to the 
rule, they would face significant challenges that would cause them to 
alter or eliminate their overdraft programs and impair their ability to 
offer other products and services. Moreover, as a consumer advocate 
commenter noted, smaller institutions may have less flexibility to 
adjust their product offerings.
    As noted above, many very large financial institutions have 
recently adjusted their overdraft credit programs by, among other 
things, reducing or eliminating fees. This suggests that very large 
financial institutions, with their diverse product offerings and 
multiple sources of revenue, would have flexibility to respond to 
changes in the regulatory framework for overdraft credit and would be 
able to adapt to a reduction in fee revenue from non-covered overdraft 
credit. This also suggests that, if very large financial institutions 
want to continue offering non-covered overdraft credit that is not 
subject to Regulation Z after the rule goes into effect, they should be 
able to reduce their fees to continue providing non-covered overdraft 
credit. The CFPB has not observed a significant number of smaller 
financial institutions modifying their overdraft credit offerings to 
reduce or eliminate overdraft fees. On the contrary, the CFPB received 
feedback from smaller financial institutions stating that they were not 
capable of making such changes. Given the CFPB's limited information 
about the potential impact that revising the regulatory framework for 
overdraft credit could have on smaller financial institutions, and the 
consumers that rely on those smaller financial institutions, the CFPB 
has determined that it should proceed at this time with a rulemaking 
that narrows the exceptions only for very large financial institutions, 
i.e., those with assets of $10 billion or more.
    As noted above, several industry commenters stated that the CFPB 
lacks authority under TILA to revise the regulatory framework only for 
very large financial institutions, maintaining that the proposed rule 
did not consider the standards for TILA exemptions under section 
1604(f). As discussed in more detail elsewhere, including in the 
section discussing changes to the definition of finance charge, the 
CFPB is partially removing the existing regulatory exceptions created 
by the Board, not creating new exemptions from TILA or Regulation Z, 
and therefore need not invoke its statutory exception or exemption 
authority. Section 1604(f)(2) starts with the phrase ``[i]n determining 
which classes of transactions to exempt,'' and then provides a list of 
factors that the CFPB would need to consider to justify creating an 
exemption under that authority. It is not a list of factors the CFPB 
must consider to justify partially removing an existing exception, 
which is what this rule does.\114\ And the CFPB

[[Page 106780]]

is not obligated to justify the portion of the Board's exception that 
the CFPB is not reversing (the portion applicable to non-VLFIs) using 
those factors) just because the CFPB is declining at this time to 
remove that portion of the existing exception due to the policy and 
prudential reasons described herein. As noted above, the CFPB plans to 
monitor market responses to the protections adopted in this rule and 
consider whether to remove the exception as to smaller financial 
institutions.
---------------------------------------------------------------------------

    \114\ Section 1604(a) provides that the CFPB may prescribe 
regulations that contain 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. The CFPB 
likewise does not have to invoke this statutory adjustment or 
exception authority to narrow the scope of an existing exception.
---------------------------------------------------------------------------

    Nevertheless, these changes are also consistent with TILA Sec.  
105(a), which grants the CFPB authority to establish ``additional 
requirements, classifications, differentiations, or other provisions, 
and may provide for such adjustments and exceptions for all or any 
class of transactions, as in the judgment of the [CFPB] are necessary 
or proper to effectuate the purposes of this subchapter, to prevent 
circumvention or evasion thereof, or to facilitate compliance 
therewith.'' Consistent with the discussion above, the CFPB has 
determined that covering overdraft credit only from VLFIs in this rule 
at this time will facilitate compliance with TILA and its purposes by 
providing the protections of TILA and Regulation Z to the vast majority 
of consumers of overdraft credit, while the CFPB monitors the market 
impact of the rule, but not disturbing the status quo for smaller 
financial institutions that may be less equipped to adapt to such 
changes without impacting their operations in a manner that could 
negatively affect their consumers. The CFPB notes that consumers of 
overdraft credit at smaller institutions will remain covered by the 
existing regulatory regime.
    For similar reasons, the CFPB has determined that the elimination 
of the regulatory exception to EFTA's compulsory use prohibition only 
for overdraft credit provided by a VLFI is consistent with EFTA Sec.  
904(c), which empowers the CFPB to ``provide for such adjustments and 
exceptions for any class of electronic fund transfers or remittance 
transfers as in the judgment of the [CFPB] are necessary or proper to 
effectuate the purposes of this subchapter, to prevent circumvention or 
evasion thereof, or to facilitate compliance therewith,'' and also to 
``modify the requirements imposed by [EFTA] on small financial 
institutions if the Bureau 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 [EFTA].'' The CFPB has determined that, because smaller 
financial institutions may face difficulty in adapting to these 
regulatory changes without negatively impacting their consumer base, 
applying the amendment to the compulsory use exception only to VLFIs in 
this rule at this time will prevent undue compliance burden on those 
institutions, facilitate compliance with EFTA, and be consistent with 
the purpose and objective of EFTA by continuing, for now, the existing 
regulatory framework establishing the rights, liabilities, and 
responsibilities of participants in those electronic fund transfer 
systems while the CFPB monitors the market impact of the rule.
    Several industry commenters maintained that the CFPB lacks data for 
its approach of limiting the applicability of the rule to very large 
financial institutions, noting that non-VLFIs hold only 20 percent of 
deposits but receive 32 percent of overdraft fees. As noted above, the 
CFPB has concluded that it is appropriate to adopt a rule now that 
covers very large financial institutions because the CFPB has more 
information about overdraft programs at very large financial 
institutions and about the capacity for them to adapt to a revised 
regulatory framework and because such a rule would provide protections 
to a significant majority of consumers. The CFPB has limited 
information about the costs for overdraft programs at smaller financial 
institutions and the cost data that the CFPB relied upon in developing 
the benchmark fee in Sec.  1026.62(d)(1)(ii) may not be representative 
of the costs for non-VLFIs. The CFPB is concerned that non-VLFIs would 
face more significant challenges in adapting to a revised regulatory 
framework. The CFPB is not basing its decision to apply this rule to 
VLFIs on material differences in the overdraft programs at very large 
financial institutions and non-VLFIs.
    Several industry commenters also stated that applying the rule only 
to very large financial institutions would cause consumer confusion and 
market disruption. They noted that the rule would result in a 
marketplace in which consumers would receive different disclosures for 
otherwise similar services based upon the size of the financial 
institution. The CFPB appreciates that the rule would create some 
differences in regulatory treatment of overdraft programs in the 
marketplace. However, the CFPB concludes that the benefits of providing 
additional protections to most consumers while proceeding cautiously 
with respect to smaller financial institutions outweighs those 
concerns. The CFPB plans to monitor market responses to the protections 
adopted in this rule.
    As noted above, a number of industry commenters maintained that the 
CFPB did not comply with its obligations under the SBREFA process. 
Several non-VLFI industry commenters maintained that the rule will have 
a negative impact on their financial condition and their ability to 
offer overdraft products and other products and services because market 
pressures will force non-VLFIs to lower their overdraft fees and adjust 
their overdraft programs even if the rule itself does not require them 
to do so. Other commenters maintained that the CFPB's decision to 
remove the existing exception for larger financial institutions but not 
for smaller financial institutions was designed to circumvent SBREFA. 
But leaving in place an existing exception for smaller financial 
institutions is not inconsistent with SBREFA. The CFPB has complied 
with its obligations under SBREFA. The rule does not require non-VLFIs 
to comply with the revised regulatory framework, and any competitive 
pressures to adjust their overdraft programs are indirect and 
uncertain. It is far from clear that market forces will force non-VLFIs 
to adjust their overdraft programs. As noted above, many very large 
financial institutions already have adjusted their overdraft programs, 
including by reducing or eliminating overdraft fees, but these changes 
have not forced other non-VLFIs to alter their overdraft programs 
similarly.
    The CFPB has concluded that $10 billion is an appropriate asset 
threshold for this rulemaking. The CFPB reached the decision to use $10 
billion as the threshold by borrowing from Congress's policy judgment 
to use that threshold to separate very large financial institutions 
from smaller entities in other contexts in the CFPA. The CFPB also 
considered the lower threshold of $850 million used by the SBA to 
define small financial institutions, but decided to take the more 
prudent and cautious approach of initially finalizing a higher 
threshold that applies only to ``very large'' entities and not just 
``large'' entities. Congress used a relatively high $10 billion 
threshold to define ``very large banks, credit unions, and savings 
associations'' for purposes of limiting the CFPB's primary supervision 
and enforcement authority to very large depository institutions. The 
CFPB will be able to use its primary supervisory authority to closely 
monitor the implementation of the rule with respect to these entities, 
which will aid its understanding of the effects of the rule as the CFPB 
studies the market to

[[Page 106781]]

determine whether and what regulations are appropriate for the rest of 
the market.
    The CFPB has concluded that updating the regulatory framework is 
appropriate for very large financial institutions for several reasons, 
including that the CFPB has more information about overdraft credit 
offered by financial institutions with more than $10 billion in assets 
and about their ability to adapt to changes in the regulatory framework 
for their overdraft programs. As noted above, financial institutions 
with more than $10 billion in assets have greater diversity in product 
offerings and likely would have greater flexibility in adapting quickly 
to a revised regulatory framework for overdraft credit. Indeed, as also 
noted above, many financial institutions with more than $10 billion in 
assets already have modified their overdraft credit offerings to reduce 
or eliminate overdraft fees and available evidence indicates that these 
financial institutions are less reliant on overdraft revenue, 
indicating that they have the ability to adapt to any reductions in 
overdraft revenue that may result from these changes to the regulatory 
framework for overdraft credit.
    As noted above, a bank and a consumer advocate raised concerns 
about nonbanks evading the rule by partnering with smaller banks to 
offer accounts with overdraft credit. The consumer advocate recommended 
clarifying that such accounts offered by nonbanks are prepaid accounts 
subject to the protections of the prepaid rule or, alternatively, 
revising the definition of ``very large financial institution'' in this 
rule to cover nonbanks with more than $10 billion in assets. The CFPB 
declines to address in this rule whether such accounts would be 
considered prepaid accounts. The CFPB also declines to revise the 
definition of ``very large financial institution'' to include nonbanks. 
Nevertheless, the CFPB will continue to monitor the market and will 
analyze whether any market participants are taking steps to evade 
coverage under the rule.

C. Transaction and Account Coverage

    The CFPB proposed to add Sec.  1026.62(a) and (b) to define the 
scope of transactions and accounts that would be covered under the 
proposed rule. As discussed below, to update non-statutory exceptions 
in Regulation Z, the proposed updates included defined terms (e.g., 
``above breakeven overdraft credit,'' ``covered asset account,'' and 
``hybrid debit-credit card'') that specifically reference a ``very 
large financial institution,'' as defined in proposed Sec.  
1026.62(b)(8). The proposal would not change the regulatory framework 
for overdraft services offered by financial institutions with assets of 
$10 billion or less.
    The proposal defined overdraft credit in proposed Sec.  
1026.62(a)(2), and also provided an example of overdraft credit in 
proposed comment 2(a)(14)-4. The CFPB's proposed rule would have added 
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 CFPB proposed definitions 
of covered overdraft credit and non-covered overdraft credit by adding 
Sec.  1026.62(b) to assist with ease of reference. The proposal 
provided that covered overdraft credit 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. The 
proposal provided that non-covered overdraft credit 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 proposed to add a 
definition for covered overdraft credit account to facilitate ease of 
reference to credit accounts through which the financial institutions 
extend or can extend covered overdraft credit. Each of these proposed 
amendments is discussed below.
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.\115\ 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.
---------------------------------------------------------------------------

    \115\ 15 U.S.C. 1602(f).
---------------------------------------------------------------------------

The CFPB's Proposal
    To facilitate compliance, proposed comment 2(a)(14)-4 provided an 
example of 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 whenever the 
consumer has a contractual obligation to repay the funds. The proposal 
noted, as stated in the 2016 Prepaid Final Rule, that a ``person, in 
extending overdraft funds, has provided the consumer with `the right . 
. . to incur debt and defer its payment.' '' \116\
---------------------------------------------------------------------------

    \116\ 81 FR 83934, 84168 (Nov. 22, 2016).
---------------------------------------------------------------------------

    As part of defining the scope of credit transactions that would be 
covered under the proposed rule, proposed Sec.  1026.62(a)(2) provided 
a definition of ``overdraft credit'': 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)(2) provided non-exhaustive examples, such as consumer credit 
extended through a transfer from a credit card account or overdraft 
line of credit. The definition of ``overdraft credit'' in proposed 
Sec.  1026.62(a)(2) did not include credit exempt from Regulation Z 
pursuant to existing Sec.  1026.3.
    For the reasons discussed below, the CFPB is adopting comment 
2(a)(14)-4 substantially as proposed and is adopting Sec.  1026.62(a) 
as proposed. The CFPB is also adopting a proposed cross reference to 
the definition of ``overdraft credit'' at Sec.  1026.62(b)(7) as 
proposed but with technical changes to conform to Code of Federal 
Regulations style requirements.
Comments Received
    Several commenters, including State Attorneys General, consumer 
advocates, and nonprofits, agreed that when a financial institution 
extends funds to pay transactions that overdraw a checking account held 
at the financial institution, the financial institution is providing 
credit. A consumer advocate commenter stated that it is common sense 
that overdraft is credit and that regulators, including the Board, have 
long acknowledged that overdraft is credit. For example, the commenter 
noted that in 2005 the Board--along with the OCC, FDIC, and National 
Credit Union Administration--issued Joint Guidance on Overdraft 
Protection Programs, which stated that ``[w]hen overdrafts are paid, 
credit is extended.'' \117\ Among other examples, the commenter also 
pointed to a 2001 OCC interpretive letter stating that an ``overdraft 
would be `credit,' as defined by the Truth in Lending Act and 
Regulation Z.'' \118\
---------------------------------------------------------------------------

    \117\ 70 FR 9127, 9129 (Feb. 24, 2005).
    \118\ OCC Interpretive Letter No. 914 (Aug. 3, 2001).
---------------------------------------------------------------------------

    A nonprofit commenter stated that the TILA statute defines 
``credit'' broadly and does not exclude overdraft. The commenter 
further stated that when the Board excepted certain overdraft

[[Page 106782]]

charges from Regulation Z's definition of ``finance charge,'' the Board 
did not rely on an interpretation of the terms ``finance charge'' or 
``credit'' in the statute (rather, the Board used its authority to 
create a regulatory exception). A consumer advocate commenter stated 
that it is immaterial to the definition of ``credit'' whether the 
financial institution has previously committed to pay overdrafts or has 
an absolute right to use every means to collect repayment; rather, 
``credit'' simply means the right to defer payment of debt or to incur 
debt and defer its payment.
    Several industry commenters asserted that overdraft is not credit 
under TILA and that TILA does not confer authority upon the CFPB to 
regulate overdraft. A commenter stated that the term ``overdraft'' does 
not appear in TILA's text and that the legislative history is similarly 
silent on the issue. Some commenters stated that, if the intent of 
Congress was for overdraft to be subject to TILA, then Congress would 
have amended TILA to supersede the Board's regulatory exception for 
overdraft.
    Several commenters asserted that in 1969 when the Board excepted 
discretionary overdraft charges from Regulation Z's definition of 
``finance charge,'' it did so because the Board determined that 
discretionary overdraft is not ``credit.'' A commenter asserted that 
the history of Regulation Z and various Board statements show that 
discretionary overdraft was never considered to be ``credit.'' For 
example, the commenter pointed to a 1977 interpretive letter where 
Board staff stated that the regulatory exception for overdraft charges 
``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.'' \119\
---------------------------------------------------------------------------

    \119\ 42 FR 22360, 22362 (May 3, 1977).
---------------------------------------------------------------------------

    Several commenters stated that overdraft is not credit because the 
financial institution retains the right to decline transactions that 
would overdraw the account. Some commenters stated that overdraft is 
not credit because the consumer is obligated to pay the debt within a 
very short timeframe; for example, commenters pointed to a State court 
opinion interpreting the Iowa Consumer Credit Code definition of 
``credit'' as not covering overdraft because the consumer ``must pay 
the bank back immediately upon their next deposit.'' \120\ Some 
commenters also asserted that overdraft does not involve a written 
obligation, an interest rate, an application, or an underwriting 
process and otherwise lacks the hallmarks of credit.
---------------------------------------------------------------------------

    \120\ Legg v. W. Bank, 873 NW 2d 763, 770 (Iowa 2016).
---------------------------------------------------------------------------

    The CFPB received few comments regarding the specific language of 
proposed comment 2(a)(14)-4 and proposed Sec.  1026.62(a). A consumer 
advocate commenter generally supported the language of these proposed 
provisions and made some suggestions. First, in addition to the 
proposed language referencing a contractual ``obligation,'' the 
commenter suggested referencing a contractual agreement regardless of 
whether the financial institution has agreed to limit its means of 
recourse if the consumer does not repay. Second, the commenter 
suggested revisions to reflect the possibility that overdraft credit 
could be extended by a different entity than the financial institution 
that holds the account. Third, the commenter suggested referencing an 
``asset account'' rather than a ``checking or other transaction 
account.'' Fourth, among other non-exhaustive examples of overdraft 
credit, the commenter suggested adding a reference to ``overdraft 
services'' as defined in Regulation E Sec.  1005.17(a).
Final Rule
    For the reasons discussed below, the CFPB is adopting comment 
2(a)(14)-4 substantially as proposed and is adopting Sec.  1026.62(a) 
as proposed. As proposed, Sec.  1026.62(a)(2) provided the definition 
of ``overdraft credit'' and the CFPB is finalizing it without change. 
The definition of ``overdraft credit'' does not include credit exempt 
from Regulation Z pursuant to existing Sec.  1026.3 (e.g., 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). Nor does the definition of 
``overdraft credit'' cover prepaid accounts, as the CFPB's Prepaid 
Accounts Rule already provides comprehensive consumer protections 
tailored to prepaid accounts.
    Arguments that overdraft is not credit under TILA or that TILA does 
not confer authority upon the CFPB to regulate overdraft are not 
supported by the statute itself. The final rule is consistent with 
TILA's definition of ``credit'' \121\ and with the CFPB's statutory 
authority under TILA section 105(a).\122\
---------------------------------------------------------------------------

    \121\ 15 U.S.C. 1602(f).
    \122\ 15 U.S.C. 1604(a).
---------------------------------------------------------------------------

    TILA defines ``credit'' broadly and does not exclude overdraft. As 
stated in the 2016 Prepaid Final Rule, ``[b]y authorizing or paying a 
transaction where the consumer does not have sufficient or available 
funds . . . to cover the amount of the transaction when the transaction 
is authorized or paid, the [institution] is allowing the consumer to 
incur a debt with the [institution] where payment of that debt is not 
immediate.'' \123\ Thus, when a transaction exceeds the funds in the 
consumer's account and a financial institution elects to cover the 
transaction by extending overdraft funds, then the financial 
institution has provided the consumer with the right to defer payment 
of debt or to incur debt and defer its payment, and therefore has 
extended ``credit'' under the plain language of TILA's definition.\124\
---------------------------------------------------------------------------

    \123\ 81 FR 83934, 84167-68 (Nov. 22, 2016).
    \124\ 15 U.S.C. 1602(f).
---------------------------------------------------------------------------

    The fact that Congress did not legislatively supersede the Board's 
regulatory exception for overdraft does not demonstrate that overdraft 
is outside the scope of TILA. Rather, Congress provided a broad 
definition of ``credit'' under the statute and then delegated to the 
Board (and, later, the CFPB) the authority to prescribe regulations 
``to carry out the purposes of'' TILA and which ``may provide for such 
adjustments and exceptions . . . as in the judgment of the [agency] are 
necessary or proper to effectuate the purposes of [TILA], to prevent 
circumvention or evasion thereof, or to facilitate compliance 
therewith.'' \125\ The Board used its delegated authority to create a 
regulatory exception from the definition of finance charge for certain 
overdraft fees and the CFPB is using its authority to narrow that 
exception.\126\
---------------------------------------------------------------------------

    \125\ 15 U.S.C. 1604(a).
    \126\ Commenters disagreed about whether the Board, in issuing 
the original regulatory exception for certain overdraft fees from 
TILA's definition of finance charge, was relying on its delegated 
authority to create adjustments and exceptions or was using its 
delegated rule-writing authority to implement an interpretation of a 
statutory provision of TILA. The Board's original 1969 issuance over 
50 years ago was not explicit about what authority it used for the 
overdraft charge exception. 34 FR 2002, 2004 (Feb. 11, 1969). And it 
neither discussed policy rationales nor interpretation of statutory 
text. The proposal did, however, invoke the Board's exception 
authority generally. 33 FR 15506 (Oct. 18, 1968). The inclusion of a 
specific ``exception'' for overdraft charges that would have met the 
general definition of finance charge but for the exception, in a 
rule that did not state it was an interpretation or engage in 
textual interpretation, suggests the exception was not created as an 
interpretive exercise. Regardless, the CFPB has put forward its 
interpretation of the relevant provisions of TILA in this rule and 
explained why the statute covers overdraft fees.

---------------------------------------------------------------------------

[[Page 106783]]

    Commenters' assertion that the Board determined that discretionary 
overdraft is not ``credit'' conflates the definition of ``credit'' with 
the definition of ``finance charge.'' The history of Regulation Z and 
the Board's statements show that the Board excepted certain overdraft 
charges from Regulation Z's definition of ``finance charge,'' which 
would have been unnecessary if overdraft was not credit. The Board did 
not except overdraft from the definition of ``credit.'' Existing 
Regulation Z's definition of ``finance charge'' excepts overdraft 
charges ``unless the payment of such items and the imposition of the 
charge were previously agreed upon in writing.'' \127\ But the fact 
that these charges were not considered ``finance charges'' under the 
regulation does not mean that the underlying overdrafts were not 
considered credit. For example, existing Regulation Z commentary 
acknowledges the existence of ``incidental credit that is not extended 
under an agreement between the consumer and the financial 
institution.'' \128\ One example of such incidental ``credit'' in the 
overdraft context is ``credit inadvertently extended incident to an 
electronic fund transfer using a debit card, . . . if the bank and the 
consumer do not have an agreement to extend credit when the consumer's 
account is overdrawn.'' \129\ Incidental overdraft credit remains 
``credit,'' notwithstanding that the Board excepted the overdraft 
charges from Regulation Z's definition of ``finance charge.''
---------------------------------------------------------------------------

    \127\ 12 CFR 1026.4(c)(3).
    \128\ Regulation Z comment 13(i)-2 (emphasis added).
    \129\ Id. (emphasis added).
---------------------------------------------------------------------------

    Regarding the 1977 interpretive letter cited by a commenter, the 
CFPB notes that the letter addresses whether certain overdraft charges 
are finance charges, not whether overdraft is credit.\130\ Board staff 
did not exclude overdraft from the definition of ``credit.'' Rather, 
the letter states that the Board's regulatory exception for overdraft 
charges (i.e., excepting them from Regulation Z's definition of 
``finance charge'') ``relates only to regular demand deposit accounts 
which carry no credit features and in which a bank may occasionally . . 
. honor a check which inadvertently overdraws that account.'' \131\ 
Existing Regulation Z commentary similarly distinguishes between an 
account with incidental overdraft credit and an account with an 
overdraft ``credit feature.'' \132\ On a deposit account with no 
``credit feature,'' as explained above, charges for incidental 
overdraft credit are excepted from existing Regulation Z's definition 
of ``finance charge''--but nonetheless the incidental overdraft credit 
remains ``credit.''
---------------------------------------------------------------------------

    \130\ 42 FR 22360, 22362 (May 3, 1977).
    \131\ Id. (emphasis added).
    \132\ Compare Regulation Z comment 13(i)-2 (providing that 
credit inadvertently extended incident to an electronic fund 
transfer using a debit card is governed solely by Regulation E error 
resolution procedures), with Regulation Z comment 13(i)-3 (providing 
that certain Regulation Z error resolution provisions apply if a 
consumer uses a debit card to withdraw money at an automated teller 
machine and activates an overdraft credit feature).
---------------------------------------------------------------------------

    Commenters' argument that overdraft is not credit because the 
financial institution retains the right to decline overdraft 
transactions is not consistent with the text of TILA and likewise 
appears to conflate the definition of ``credit'' with the definition of 
``finance charge.'' The Board excepted overdraft charges from 
Regulation Z's definition of ``finance charge'' depending on whether 
the payment and charge were ``previously agreed upon'' in writing.\133\ 
The TILA definition of ``credit'' requires a ``right'' (i.e., the right 
to defer payment of debt or to incur debt and defer its payment)--but 
does not require that such right be previously agreed upon.\134\ 
Notwithstanding that a financial institution had retained discretion 
and could have declined an overdraft transaction, when the financial 
institution nonetheless elects to cover the transaction by extending 
overdraft funds, then the financial institution has provided the 
consumer with the ``right'' to defer payment of debt or to incur debt 
and defer its payment, and has therefore extended ``credit'' under the 
plain language of TILA's definition.\135\ Moreover, it is well 
established that a financial institution's right to decline 
transactions does not prevent those transactions from constituting 
credit under TILA: as the CFPB noted in its proposal and previously in 
the 2016 Prepaid Final Rule, credit card issuers reserve the right to 
reject individual transactions in their contractual agreements, yet 
credit card programs are regulated as credit under TILA and Regulation 
Z.\136\
---------------------------------------------------------------------------

    \133\ 12 CFR 1026.4(c)(3).
    \134\ 15 U.S.C. 1602(f); see also 12 CFR 1026.2(a)(14).
    \135\ 15 U.S.C. 1602(f).
    \136\ 81 FR 83934, 84176 (Nov. 22, 2016).
---------------------------------------------------------------------------

    Regarding commenters' statements that overdraft is not credit 
because the consumer is obligated to pay the debt within a very short 
timeframe, such assertion is not supported by TILA. When a financial 
institution extends overdraft funds that the consumer must pay back 
upon their next deposit, the institution ``is allowing the consumer to 
incur a debt with the [institution] where payment of that debt is not 
immediate.'' \137\ And even though the consumer's next deposit to repay 
the institution is typically soon (e.g., on the consumer's next 
payday), TILA's definition of ``credit'' does not have an exclusion for 
short-term repayment periods. TILA similarly does not support 
commenters' assertions that overdraft is not credit because it lacks 
certain so-called hallmarks of credit (e.g., a written obligation, an 
interest rate, an application), or an underwriting process. TILA 
broadly defines ``credit'' to simply mean the right granted by a 
creditor to a debtor to defer payment of debt or to incur debt and 
defer its payment.\138\ TILA does not require a transaction to have any 
of the so-called hallmarks to be considered credit. Moreover, to the 
extent that commenters' factual assertions accurately describe current 
market practices, some such practices might not align with Regulation Z 
because they pertain to currently non-covered overdraft credit (e.g., 
overdraft credit with charges excepted from existing Regulation Z's 
definition of ``finance charge''). Creditors may need to change their 
practices as a result of the final rule to come into compliance, but 
that does not mean that such overdraft practices today are not credit 
under TILA.
---------------------------------------------------------------------------

    \137\ Id. at 84167-68.
    \138\ 15 U.S.C. 1602(f).
---------------------------------------------------------------------------

    In response to a commenter's suggestion that proposed comment 
2(a)(14)-4 reference not only a contractual ``obligation'' but also a 
contractual agreement regardless of the recourse, the CFPB is not 
adopting this specific suggestion but comment 2(a)(14)-4, as finalized, 
highlights that it provides but one ``example'' of overdraft credit. 
Comment 2(a)(14)-4 is not an exhaustive list of examples. As proposed, 
Sec.  1026.62(a)(2) provided the definition of overdraft credit and the 
CFPB is finalizing it without change.
    Regarding the commenter's suggested revisions to reflect the 
possibility that overdraft credit could be extended by a different 
entity than the financial institution that holds the account, the CFPB 
notes that such revisions are unnecessary because such credit does not 
fall within the Board's regulatory exception for overdraft and thus 
such credit is generally covered under existing Regulation Z. 
Similarly, it is also unnecessary to adopt the commenter's suggestion 
to reference an ``asset account,'' rather than a ``checking

[[Page 106784]]

or other transaction account,'' given that the Board referenced a 
``checking or other transaction account'' when it excepted certain 
overdraft charges from Regulation Z's definition of ``finance charge.'' 
\139\
---------------------------------------------------------------------------

    \139\ 12 CFR 1026.4(b)(2).
---------------------------------------------------------------------------

    In response to the commenter's suggestion to revise proposed Sec.  
1026.62(a)(2) by adding a reference to ``overdraft service'' as defined 
in Regulation E Sec.  1005.17(a), the CFPB is not doing so because, 
consistent with TILA's broad definition of ``credit,'' Sec.  
1026.62(a)(2) ``includes, but is not limited to, any . . . overdraft 
line of credit.'' The commenter's suggested revision is unnecessary and 
could introduce confusion because the term ``overdraft service'' as 
defined in Regulation E Sec.  1005.17(a) ``does not include any payment 
of overdrafts pursuant to . . . [a] line of credit subject to 
Regulation Z (12 CFR part 1026), including transfers from . . . [an] 
overdraft line of credit.'' \140\
---------------------------------------------------------------------------

    \140\ 12 CFR 1005.17(a)(1).
---------------------------------------------------------------------------

2. Clarifications to Definition of 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. This 
definition is consistent with TILA's definitions of ``open end credit 
plan'' and ``open end consumer credit plan,'' which mean a plan under 
which the creditor reasonably contemplates repeated transactions, which 
prescribes the terms of such transactions, and which provides for a 
finance charge which may be computed from time to time on the 
outstanding unpaid balance.\141\
---------------------------------------------------------------------------

    \141\ 15 U.S.C. 1602(j).
---------------------------------------------------------------------------

The CFPB's Proposal
    The CFPB proposed to clarify 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. For clarity and to facilitate 
compliance, the CFPB proposed to add commentary regarding two terms 
used in the definition of open-end credit: ``plan'' and ``finance 
charge.''
    The CFPB proposed 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.
    The CFPB also proposed to add 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. Proposed 
comment 2(a)(20)-4.iii also states that these are finance 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.
    As discussed below, the CFPB is finalizing these changes 
substantially as proposed with only minor technical revisions for 
clarity, including to ensure that the changes to the commentary apply 
only to very large financial institutions.
Comments Received
Interpretation That Covered Overdraft Credit is Generally Open-End 
Credit
    Consumer advocate commenters supported the proposed rule's analysis 
concluding that overdraft credit is open-end credit. Specifically, the 
commenters agreed with the CFPB's analysis of some of the specific 
elements of ``open-end credit.'' First, one commenter stated that 
overdraft fees are payable by the consumer and are imposed directly by 
banks as an incident to and as a condition of the extension of credit, 
and therefore, meet the definition of a ``finance charge.'' Second, 
that commenter agreed that a financial institution that imposes an 
overdraft fee on an unpaid overdraft is imposing a finance charge from 
time to time on an unpaid balance, regardless of whether the charge is 
on the deposit account or a separate credit account. Third, the 
commenter agreed that a very large financial institution that extends 
covered overdraft credit would be a ``creditor'' under TILA because 
that financial institution would regularly extend consumer credit 
subject to a finance charge, and the obligation is payable to that 
institution by agreement. Finally, the commenter agreed that financial 
institutions that extend overdraft credit reasonably contemplate that 
consumers may engage in repeat overdrafts.
    Some commenters disagreed with the proposal's determination that 
overdraft credit is open-end credit. One commenter questioned the 
CFPB's authority to categorize overdraft fees as ``open-end credit,'' 
explaining that they believe the Board appropriately excepted from the 
definition of ``finance charge'' overdraft fees that are not expressly 
agreed upon in writing because this exception aligned with the 
statutory intent of TILA to regulate finance charges on ``open end 
consumer credit'' plans. The commenter did not provide further 
explanation as to why the exception aligned with TILA's statutory 
authority. This commenter appears to take issue with the revised 
exceptions to the definition of ``finance charge'' and not with the 
definition of ``open-end credit.'' The CFPB addresses the revisions to 
these exceptions in part IV.D below.
``Plan'' (Comment 2(a)(20)-2.iv)
    A consumer advocate commenter generally supported proposed comment 
2(a)(20)-2.iv. Specifically, the commenter agreed that a creditor 
extends credit even if (1) it does not agree in writing to extend the 
overdraft credit or (2) it retains the discretion to refuse to extend 
that credit in the future.
    However, the commenter recommended that the language regarding what 
constitutes a ``plan'' under the definition of ``open-end credit'' be 
changed from ``obligated contractually to pay'' to ``obligated or 
contractually agrees to pay'' because, the commenter stated, that 
financial institutions may be able to manipulate whether a consumer is 
considered ``obligated contractually to pay'' by giving the consumer 
the right to cancel authorization for repayment or limiting the 
financial institution's recourse for repayment.
    The commenter also suggested that the comment clarify that a 
program will be considered a ``plan'' when the creditor does not extend 
credit for transactions once the consumer has exceeded a certain 
amount, whether or not the limit is disclosed.
Finance Charge Imposed From Time to Time on an Outstanding Balance 
(Comment 1026.2(a)(20)-4.iii)
    A consumer advocate commenter supported comment 1026.2(a)(20)-
4.iii, which clarifies that overdraft fees are finance charges imposed 
from time to time on an outstanding balance if there

[[Page 106785]]

is no specific amount financed for the plan and regardless of whether 
the fees are imposed on the deposit account or the credit account. The 
commenter specifically supported two aspects of the statement: (1) that 
there is a finance charge from time to time on the outstanding balance 
of a plan regardless of whether the charge is on the deposit account or 
separate credit account; and (2) there is a finance charge from time to 
time on the outstanding balance of a plan if there is no specific 
amount financed for the plan because the amount of any overdraft is 
never precalculated from inception of the plan.
    The commenter suggested that the term ``deposit account'' in the 
comment be replaced with ``asset account'' because deposit account is 
undefined and could present problems because there is no established 
regulatory or caselaw definition for deposit account.
    Industry commenters stated that the proposed comment 2(a)(20)-4.iii 
would introduce ambiguity around finance charges. The commenters stated 
that the proposed comment would make it difficult for financial 
institutions to determine their obligations when establishing overdraft 
credit products. The commenters stated that the uncertain financed 
amount for a plan would challenge a financial institution's compliance 
efforts and their ability to transparently disclose terms to consumers.
    An individual commenter questioned the CFPB's conclusion that an 
overdraft fee is ``imposed from time to time on an outstanding unpaid 
balance. . . .'' The commenter stated that an overdraft fee is imposed 
because a transaction exceeded the dollar amount in the account, and it 
is imposed regardless of whether the transaction is paid by the 
financial institution or the amount of the overdraft credit extended.
Final Rule
    For the reasons stated below, the CFPB is finalizing comments 
2(a)(20)-2.iv and 2(a)(20)-4.iii substantially as proposed with 
technical revisions for clarity, including to ensure that the comments 
address only the subject of the rule, i.e., when a very large financial 
institution covers a transaction that would otherwise overdraft a 
consumer's account.
    Like the proposal, the final rule does not revise the definition of 
``open-end credit.'' Rather, the final rule adds commentary to clarify 
how overdraft products meet the elements of the definition of ``open-
end credit.'' Specifically, and as discussed herein, the final rule 
adds two comments to clarify (1) the definition of a ``plan'' and (2) 
that overdraft fees 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 commentary does not change the term ``open-end credit'' in 
Regulation Z, which implements the statutory term ``open end credit 
plan'' under TILA. Rather, the commentary provides clarification in 
light of the revisions made to the regulatory exceptions to the 
definition of ``finance charge.'' Moreover, the commentary facilitates 
compliance with TILA by helping participants understand how overdraft 
products may be subject to TILA's requirements as open-end credit.
    In addition, consistent with the proposal and as discussed below, 
the CFPB concludes 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. Thus, when above breakeven overdraft 
credit becomes covered overdraft credit on the effective date of this 
rule, such credit will also likely be considered open-end credit.
    (1) Credit. As discussed above, a person extending overdraft funds 
has provided credit under TILA and Regulation Z.\142\
---------------------------------------------------------------------------

    \142\ 15 U.S.C. 1602(f); 12 CFR 1026.2(a)(14).
---------------------------------------------------------------------------

    (2) Plan. An 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.\143\ 
Specifically, but for the Regulation Z exceptions, the 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.''
---------------------------------------------------------------------------

    \143\ 15 U.S.C. 1602(j).
---------------------------------------------------------------------------

    The CFPB is finalizing proposed comment 2(a)(20)-2.iv generally as 
proposed (but with technical revisions for clarity) to clarify that the 
reservation of discretion in connection with covered overdraft does not 
mean the absence of an open-end credit plan. The CFPB understands that 
financial institutions offering automated overdraft services include in 
their agreements' provisions governing 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 as 
long as the overdraft transaction is within the overdraft coverage 
limit that the institution has 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 open-end credit plans under TILA and Regulation Z. 
Treating the provision of automated overdraft credit in a comparable 
way promotes consistency and follows from the text of TILA and 
Regulation Z. Therefore, the CFPB has determined that an 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.
    Regarding the commenter's suggestion that comment 2(a)(20)-2.iv be 
revised to state that a ``plan'' under the definition of open-end 
credit means a program where the consumer is ``obligated to or 
contractually agrees to repay any credit extended by the creditor'' 
instead of stating that the consumer is ``obligated contractually to 
repay . . . '', the CFPB is not adopting this specific suggestion. 
However, the CFPB has determined that certain minor changes would help 
make clear that the comment is an illustrative example. In particular, 
comment 2(a)(20)-2.iv, as finalized, replaces ``means'' with 
``includes'' to state ``a plan includes a program where the consumer is 
obligated contractually to repay any credit extended by the creditor.'' 
The comment also highlights that it is providing one ``example'' of 
overdraft credit and not an exhaustive list of all overdraft credit.
    In response to the same commenter's suggestion that comment 
2(a)(20)-2.iv be revised to note that a plan under the definition of 
open-end credit will be a plan regardless of whether the consumer 
receives disclosure of the overdraft credit limit, the CFPB finds this 
clarification unnecessary since existing comment 2(a)(20)-5.ii already 
clarifies

[[Page 106786]]

that a creditor does not need to establish a specific credit limit for 
a line of credit.
    The final rule also replaces ``covered overdraft credit'' with 
``covered asset account'' to ensure that changes to the commentary 
apply only to very large financial institutions.
    (3) Imposing a ``finance charge'' from time to time. Overdraft 
credit is generally subject to fees that would meet the definition of 
``finance charges'' but for the exceptions created by Regulation Z to 
that statutory definition. As discussed elsewhere, this final rule 
modifies those Regulation Z exceptions so that above breakeven 
overdraft credit fees will be finance charges when this rule becomes 
effective. Thus, as explained below, the CFPB has determined that an 
institution offering covered overdraft credit, including above-
breakeven overdraft credit, is generally imposing a finance charge from 
time to time because 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 is finalizing comment 2(a)(20)-4.iii generally as proposed 
(but with technical revisions for clarity) to clarify that (1) charges 
imposed by a very large financial institution for paying a transaction 
that overdraws a consumer's account generally are finance charges 
unless they are excluded from the definition of finance charge; and (2) 
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 any such 
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 cannot 
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. Therefore, to the extent that any finance charge may be imposed 
in connection with such a credit plan, the credit plan will meet this 
criterion.
    Regarding the comment that an overdraft fee is not ``imposed from 
time to time on an outstanding unpaid balance'' because the fee is 
charged on the occurrence of there being nonsufficient funds in the 
consumer's account and not based on the extension of credit, the CFPB 
disagrees for the reasons explained in more detail in part IV.D 
addressing the definitions of ``credit'' and ``finance charge.''
    With respect to the commenter stating that comment 2(a)(20)-4.iii 
would introduce ambiguity around finance charges, the commenter 
explained that this is because a plan with no specific finance amount 
makes it harder for financial institutions to determine their financial 
risks and challenges an institution's ability to disclose terms to 
consumers. The CFPB notes that this characteristic in overdraft credit 
is no different from any other open-end credit product that similarly 
does not have a specific amount financed, and which generally must also 
comply with Regulation Z disclosure and other regulatory requirements.
    Regarding the commenter's suggestion that comment 2(a)(20)-4.iii 
reference an ``asset account,'' rather than a ``deposit account,'' the 
CFPB is not adopting this specific suggestion. For the same reasons 
provided in relation to ``overdraft credit'' in part IV.C.1, the CFPB 
finds it unnecessary to change the term to ``asset account.'' However, 
the final rule replaces ``deposit account'' with ``covered asset 
account'' to ensure that regulatory changes are limited to the subject 
of this rule, i.e., overdraft credit provided by very large financial 
institutions. The final rule also includes other clarifying edits, 
including to ensure that comment 2(a)(20)-4.iii properly cross-
references Sec.  1026.4.
    (4) Person extending credit is a creditor. Assuming that overdraft 
fees are finance charges, 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.\144\ Thus, 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.
---------------------------------------------------------------------------

    \144\ See Sec.  1026.2(a)(17)(i).
---------------------------------------------------------------------------

    The CFPB anticipates that most persons offering covered overdraft 
credit regularly extend overdraft credit and therefore would meet the 
definition of ``creditor.'' Further, if an institution providing open-
end covered overdraft credit is considered a ``card issuer,'' then it 
is also considered a creditor under existing Sec.  1026.2(a)(17)(iii) 
for purposes of Regulation Z, subpart B.
    (5) Reasonably contemplates repeated transactions. Institutions 
providing overdraft credit typically contemplate repeated overdraft 
transactions. As noted above, the CFPB understands that financial 
institutions offering automated overdraft services include in their 
agreements' provisions governing how the overdraft service will operate 
and including information about overdraft fees. These agreements 
contemplate that consumers may overdraw repeatedly. Further, the CFPB 
found that 93.2 percent of overdraft and NSF fees were assessed on 
consumers with four or more overdraft or NSF transactions per 
year.\145\
---------------------------------------------------------------------------

    \145\ CFPB 2017 Data Point at 13.
---------------------------------------------------------------------------

    (6) Amount of credit replenishes when outstanding balance is 
repaid. Institutions providing 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 absolute 
right 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 concludes 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's Proposal
    The CFPB proposed 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

[[Page 106787]]

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 IV.D, some 
charges imposed in connection with overdraft credit are not considered 
finance charges.
    The proposed definition of ``overdraft credit'' was limited to 
consumer credit, but, even with that qualification, not all overdraft 
credit would be subject to Regulation Z under the proposed rule. 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, under the 
proposed rule, 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) currently 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. 
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.\146\
---------------------------------------------------------------------------

    \146\ 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.
---------------------------------------------------------------------------

    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 not to be card issuers and 
would therefore not be creditors under Sec.  1026.2(a)(17)(iii).
Comments Received and Final Rule
    A commenter questioned the CFPB's authority to define covered and 
non-covered overdraft credit because the commenter stated that Congress 
has not directed the CFPB to differentiate between these two terms. The 
commenter questioned the CFPB's justification for departing from its 
prior approach to treating overdraft under Regulation Z because the 
delineation between covered and non-covered overdraft credit introduces 
unnecessary complexity.
    The CFPB is finalizing the definition of ``covered overdraft 
credit'' and ``non-covered overdraft credit'' as proposed. With the 
addition of these two definitions, the CFPB does not create any 
substantive changes to TILA or Regulation Z. Instead, the additional 
definitions carry out the purposes of TILA by helping participants 
understand which forms of overdraft are subject to TILA's requirements. 
The CFPB did not receive any comments on the definition of ``card 
issuer'' and is finalizing this definition as proposed because the CFPB 
has 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 goals of the final rule.
4. Covered Overdraft Credit Account (Sec.  1026.62(b)(4))
The CFPB's Proposal
    The proposed rule defined ``covered overdraft credit account'' as a 
credit account through which a financial institution extends or can 
extend covered overdraft credit. The term would include 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 
linked checking or other transaction accounts.
Comments Received and Final Rule
    The comments received on this proposed definition agreed with the 
CFPB's position, and the CFPB is finalizing the definition of ``covered 
overdraft credit account'' without change. One consumer advocate 
commenter supported the definition of ``covered overdraft credit 
account'' because it believes that any account that can be used to 
access overdraft credit should be covered by the rule, regardless of 
the technicalities through which the credit is extended. The commenter 
stated that a narrower, more specific definition may encourage evasions 
of the rule.
    For the reasons stated above, the CFPB is finalizing the definition 
of ``covered overdraft credit account'' as proposed.
D. Changes to Definition of ``Finance Charge''
    In explaining the meaning of ``finance charge,'' TILA section 
106(a) (15 U.S.C. 1605(a)) 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.'' 
\147\ The finance charge does not include charges of a type payable in 
a comparable cash transaction.\148\
---------------------------------------------------------------------------

    \147\ 15 U.S.C. 1605(a).
    \148\ Id. The term finance charge also excludes certain fees and 
amounts imposed by third party closing agents.
---------------------------------------------------------------------------

    Similarly, 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.'' \149\ 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

[[Page 106788]]

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.\150\ Neither of these exclusions appear 
within the statutory text of TILA.
---------------------------------------------------------------------------

    \149\ 12 CFR 1026.4(c)(3).
    \150\ 12 CFR 1026.4(b)(2).
---------------------------------------------------------------------------

    The CFPB proposed to amend the definition of ``finance charge'' in 
Sec.  1026.4 in three ways. First, it proposed to 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 proposed to add Sec.  1026.4(b)(12) 
to provide examples of charges imposed in connection with overdraft 
credit that are finance charges. Third, it proposed to 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 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. 
Each of these proposed changes are discussed below.
1. Examples of Finance Charges (Sec.  1026.4(b)(2))
    Section 1026.4(b) provides examples of types of charges that are 
finance charges, except if those charges are specifically excluded 
under existing Sec.  1026.4(c) through (e). In particular, existing 
Sec.  1026.4(b)(2) provides that examples of finance charges generally 
include service, transaction, activity, and carrying charges imposed on 
a checking or other transaction account (except a prepaid account as 
defined in Sec.  1026.61). However, the Board added a partial exception 
to this example such that if a charge for an account with a credit 
feature does not exceed the charge for a similar account without a 
credit feature, then the charge is not a finance charge under existing 
Sec.  1026.4(b)(2) and its commentary.\151\ As discussed in the 
proposal, the Board and the CFPB have amended Sec.  1026.4(b)(2) and 
its commentary over time.\152\
---------------------------------------------------------------------------

    \151\ Regulation Z comment 4(b)(2)-1.
    \152\ 89 FR 13852, 13864 (Feb. 23, 2024).
---------------------------------------------------------------------------

    The CFPB proposed to amend this current example of a finance charge 
as described in Sec.  1026.4(b)(2) and comment 4(b)(2)-1 to set forth a 
different rule for when charges imposed on a covered asset account, as 
that term is defined in Sec.  1026.62(b)(2), would be finance charges. 
The CFPB also proposed to add Sec.  1026.4(b)(12) to provide examples 
of finance charges with regard to a covered asset account, as defined 
in proposed Sec.  1026.62(b)(2). These proposed changes specified which 
overdraft transactions include a finance charge and, therefore, may be 
subject to the requirements of TILA and Regulation Z.
    Proposed Sec.  1026.4(b)(12)(i) described as an example of a 
finance charge any service, transaction, activity, or carrying charges 
imposed on the separate credit account required by Sec.  1026.62(c), 
which is also a covered overdraft credit account. Proposed Sec.  
1026.4(b)(12)(ii) described as an example of a finance charge any 
service, transaction, activity, or carrying charges imposed on the 
covered asset account to the extent the charge exceeds a comparable 
charge imposed on a checking or other transaction account that does not 
have overdraft credit. Proposed Sec.  1026.4(b)(12)(iii) then described 
certain charges imposed on a checking or other transaction account that 
does not have overdraft credit that are not comparable to charges 
imposed on a covered asset account, which, by definition (see Sec.  
1026.62(b)(2)), does have overdraft credit tied to it and is provided 
by a very large financial institution. As discussed in the proposal, 
the proposed limitations in Sec.  1026.4(b)(12)(iii)(A) through (E) 
would prohibit a very large financial institution from comparing 
charges that are not comparable cash transactions or from using 
comparisons in a way that may lead to evasion of the requirements of 
Regulation Z. These proposed changes would broaden the example of a 
``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. For the reasons discussed below, the CFPB is 
finalizing these proposed revisions with certain clarifying changes.
Finance Charges Generally
    Several commenters, including industry trade groups, objected to 
the CFPB's proposed changes to Sec.  1026.4(b)(2) and (b)(12), while 
other commenters, including consumer advocate and academic commenters, 
supported the changes. Most commenters did not address the specific 
language of the proposed changes to Sec.  1026.4(b)(2) and (b)(12), 
focusing instead on broader concerns. One consumer advocate commenter 
supported the language of the proposed changes and suggested certain 
changes, including adding additional commentary, an additional example, 
and an additional comment related to eliminating the participation fee 
exception for covered asset accounts.
    Commenters opposing the proposed changes argued that the CFPB's 
proposal misclassifies overdraft as ``credit'' and, because overdraft 
is not credit, overdraft charges are not a ``finance charge'' under 
TILA. As discussed above, arguments that overdraft is not credit under 
TILA are not supported by the statute itself; TILA defines ``credit'' 
broadly and does not exclude overdraft.
    Industry commenters opposing the proposed changes also argued that, 
even if overdraft is ``credit,'' overdraft charges are not incident to 
or a condition of the extension of credit and therefore do not meet the 
definition of a ``finance charge.'' These commenters argued that 
overdraft charges are service charges applied, for example, for keeping 
an overdrawn account open or compensating for the failure to timely 
remedy the overdraft. Commenters pointed to case law that they believe 
supports this characterization of overdraft charges. At least one 
industry commenter further argued that the CFPB lacks the authority 
under TILA to redefine covered overdraft fees as finance charges.
    Commenters supporting the proposal argued that the term ``finance 
charge'' is broadly defined and contains no limitation for overdraft 
charges in its definition. Members of Congress commented that the 
proposed rule is consistent with and helps fulfill TILA's purpose by 
ensuring that consumers have critical protections when offered credit. 
A consumer advocate commenter stated that overdraft charges imposed on 
a credit account are clearly incident to credit, and that charges for 
credit imposed on other asset accounts are part of the cost of the 
credit and incidental to that credit, even if there are comparable 
charges in another non-credit context. A consumer advocate commenter 
provided specific suggestions for amending existing comments 4(b)(2)-1 
and 4(b)(2)-1.ii.
    With respect to commenters stating that an overdraft charge is not 
a ``finance charge'' under TILA and that TILA does not confer authority 
upon the CFPB to regulate overdraft, such assertions are inconsistent 
with TILA.\153\ The definition of ``finance charge'' under TILA section 
106(a) and in Regulation Z under Sec.  1026.4(a) is very broad and, 
unless specifically excluded by the regulation, includes amounts 
imposed directly or indirectly by the

[[Page 106789]]

creditor as an incident to or condition of the extension of credit.
---------------------------------------------------------------------------

    \153\ See part III.A for a discussion of the CFPB's authority 
under TILA section 105(a).
---------------------------------------------------------------------------

    Moreover, the CFPB discussed the regulatory history of the 
overdraft exception extensively in the prepaid rule proposal.\154\ As 
summarized in that proposal, although Congress did not exempt overdraft 
services or similar programs offered in connection with deposit 
accounts from TILA, the Board in issuing Regulation Z in 1969 carved 
financial institutions' ``bounce-protection'' programs out of the new 
regulation.\155\ The Board revisited the exception of bounce protection 
programs from Regulation Z over the years, including signaling concern 
with overdraft services in a number of rulemaking actions.\156\ In 
particular, the Board revisited the exception of bounce protection 
programs from Regulation Z in 1981, in a rulemaking in which the Board 
implemented the Truth in Lending Simplification and Reform Act.\157\ In 
the related proposal, the Board considered adjusting its overdraft 
exception to apply only to ``inadvertent'' overdrafts because, as the 
Board stated, ``a charge imposed for honoring an instrument under any 
agreement between the institution and the consumer is a charge imposed 
for a credit extension and thus fits the general definition of a 
finance charge, whether or not the charge and the honoring of the check 
are reflected in a written agreement. The characterization of the 
charge will thus depend on whether `credit' has been extended, within 
the meaning of the regulation.'' \158\ Further, in a 2002 proposal to 
amend Regulation Z with regard to the status of certain credit card-
related fees and other issues, the Board noted that some overdraft 
services may not be all that different from overdraft lines of credit, 
which typically include a written agreement, and requested comment on 
whether and how Regulation Z should be applied to banks' bounce-
protection services.\159\ That proposal cited to Regulation Z's 
exclusion of a charge for overdraft unless the payment of such items 
and the imposition of the charge are previously agreed upon in writing 
and noted that ``[f]ees imposed in connection with `bounce protection' 
services may or may not meet the definition of a finance charge.'' 
\160\ This regulatory history indicates that, but for the exception 
established under Regulation Z, a charge for overdraft would fall 
within the definition of a ``finance charge.''
---------------------------------------------------------------------------

    \154\ 79 FR 77102, 77117-20 (Dec. 23, 2014).
    \155\ 34 FR 2002 (Feb. 11, 1969). See Sec.  1026.4(b)(2) and 
(c)(3).
    \156\ 79 FR 77102, 77119 (Dec. 23, 2014).
    \157\ Public Law 96-221, sec. 601, 94 Stat. 132; 45 FR 80648 
(Dec. 5, 1980).
    \158\ 45 FR 80648, 80657 (Dec. 5, 1980). The Board ultimately 
made only a few minor editorial changes to the exclusion, thus 
preserving the exemption unless there is an agreement in writing to 
pay items and impose a charge. 46 FR 20848, 20855 (Apr. 7, 1981).
    \159\ 67 FR 72618, 72620 (Dec. 6, 2002).
    \160\ Id. The Board did not modify the Regulation Z exemptions 
when it issued final rules in 2003, instead stating in preamble 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).
---------------------------------------------------------------------------

    Some comments stated that an overdraft charge is not a finance 
charge because it is a fee for providing a service related to the 
account and is imposed regardless of whether credit is extended such 
that it is not a fee incident to or a condition of the extension of 
credit. The CFPB notes, however, that this argument appears 
inconsistent with current market practices, which do often distinguish 
between overdraft fees and other fees. Financial institutions subject 
to this rule generally make clear in their account agreements that 
overdraft coverage is a separate feature with fees that often differ 
from those charged when an overdrawing transaction is declined. Such 
financial institutions also often do not assess NSF fees on declined 
card transactions, and many such financial institutions are no longer 
charging NSF fees on any types of transactions. These considerations 
highlight the fact that the overdraft fee is incident to or a condition 
of the extension of credit, even if the financial institution charges 
an NSF fee, characterizes the fee as a bank account service fee, or 
charges the fee for keeping an overdraft account open or because an 
overdraft is not repaid within a certain period of time.
    For these reasons, CFPB is finalizing the proposed change to Sec.  
1026.4(b)(2) and corresponding changes to comment 4(b)(2)-1 to set 
forth a different rule for when charges imposed on a covered asset 
account, as that term is defined in Sec.  1026.62, are finance charges. 
As discussed below, the CFPB is also finalizing Sec.  1026.4(b)(12) to 
provide an example of a finance charge with regard to a covered asset 
account.
    The CFPB declines to incorporate the commenter's suggestions on 
commentary 4(b)(2)-1 because it believes that finalizing commentary 
4(b)(2)-1 as proposed makes clear that charges applied to covered asset 
accounts are evaluated under Sec.  1026.4(b)(12). The CFPB declines to 
incorporate the commenter's suggested revisions on commentary 4(b)(2)-
1.ii. While the CFPB recognizes that retaining the existing language 
regarding ``paying or returning'' an item on a similar account without 
a credit feature could be read to imply that a comparable account with 
overdraft is nevertheless an account without a credit feature, the 
discussion of ``overdraft credit'' above in part IV.C.1 notes the 
distinction between incidental credit and a credit feature.
Example of a Finance Charge for the Separate Credit Account
    With regard to a covered asset account, proposed Sec.  
1026.4(b)(12)(i) described as an example of a finance charge any 
service, transaction, activity, or carrying charge imposed on the 
separate credit account required by Sec.  1026.62(c). Proposed section 
1026.62(c) stated that a very large financial institution shall 
structure covered overdraft credit as a separate credit account and 
stated that the separate credit account is a covered overdraft credit 
account.
    An industry commenter objected to the lack of language in proposed 
Sec.  1026.4(b)(12)(i) to account for a comparable cash transaction or 
to provide for a comparison to a charge imposed on a checking or other 
transaction account that does not have overdraft credit. This commenter 
argued that the lack of such language contravenes the specific 
exclusion in TILA section 1605(a) for charges of a type payable in a 
comparable cash transaction, and stated that these exclusions from the 
finance charge definition are mandated by TILA's provisions and tied to 
TILA's purpose.
    A consumer advocate commenter supported Sec.  1026.4(b)(12)(i) 
because the service, transaction, activity or carrying charges 
identified in that section are imposed on a credit account and thus are 
clearly incident to credit. This commenter noted that this is true 
under the law today and would remain true if banks restructure their 
overdraft services as lines of credit to comply with the CFPB's rule. 
This commenter also agreed with the proposal's rationale that it would 
not make sense to compare fees on a credit account to those on a 
noncredit account.
    Regarding the commenter's argument that the CFPB erred by not 
providing for a comparison to a charge imposed on a checking or other 
transaction account that does not have overdraft credit, final Sec.  
1026.4(b)(12)(i) does not change existing law. Existing Sec.  
1026.4(b)(2) provides that examples of finance charges include service, 
transaction, activity, and carrying charges imposed on a credit 
account. Onto this example, the Board added a partial exception in 
Sec.  1026.4(b)(2) stating that any charge

[[Page 106790]]

imposed on a checking or other transaction account (emphasis added), 
such as a service or transaction account charge, is only a finance 
charge to the extent that the charge exceeds the charge for a similar 
asset account without a credit feature.\161\ Under existing Sec.  
1026.4(b)(2), service, transaction, activity, and carrying charges 
imposed on an overdraft line of credit account (as opposed to the 
checking or other transaction account to which the credit line is tied) 
are generally finance charges. This is true whether or not the charge 
exceeds the charge for a similar asset account without a credit 
feature. The CFPB's rule does not change this treatment of fees 
assessed on overdraft lines of credit or credit card accounts, which 
many financial institutions currently provide, and which are, in 
general, currently covered by Regulation Z. Similarly, the separate 
credit account required by Sec.  1026.62(c) is not a checking or other 
transaction account that would qualify for the partial exception. The 
CFPB is also, as described in the proposal, concerned that adding such 
a comparison might lead to potential evasion of the rule. For these 
reasons, proposed Sec.  1026.4(b)(12)(i) is consistent with existing 
Sec.  1026.4(b)(2) and the CFPB is finalizing Sec.  1026.4(b)(12)(i) as 
proposed.
---------------------------------------------------------------------------

    \161\ Existing comment 4(b)(2)-1 similarly provides that a 
checking or transaction account charge imposed in connection with a 
credit feature is a finance charge under existing Sec.  1026.4(b)(2) 
to the extent the charge exceeds the charge for a similar account 
without a credit feature.
---------------------------------------------------------------------------

Example of a Finance Charge for the Covered Asset Account
    Proposed Sec.  1026.4(b)(12)(ii) largely echoed existing Sec.  
1026.4(b)(2) by providing that any service, transaction, activity, or 
carrying charge imposed on a 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 overdraft 
credit. Commenters, in general, did not focus specifically on proposed 
Sec.  1026.4(b)(12)(ii), instead focusing their criticism or support on 
Sec.  1026.4(b)(12)(iii) (discussed below). The CFPB is finalizing 
Sec.  1026.4(b)(12)(ii) largely as proposed with minor stylistic 
changes to match existing Sec.  1026.4(b)(2).
    Proposed Sec.  1026.4(b)(12)(iii) described five specific types of 
charges imposed on a checking or other transaction account without 
overdraft credit that are not comparable to charges imposed on a 
covered asset account. Industry commenters objected to Sec.  
1026.4(b)(12)(iii), focusing most heavily on the inability to use a 
nonsufficient funds (NSF) fee as a comparable charge to reduce the 
extent to which an overdraft fee is a finance charge. These commenters 
argued that eliminating this exception would reduce the availability of 
covered overdraft credit, and such reduction would disadvantage 
consumers, who would face the same or higher fees without the benefit 
of a paid transaction. At least one industry commenter also argued that 
precluding this comparison contradicts TILA's goal of requiring 
disclosure of fees that are payable by credit customers but not by cash 
customers. This same commenter argued that both an overdraft charge and 
an NSF fee are imposed upon an overdrawn account and serve many of the 
same functions, citing to court cases and agency publications grouping 
overdraft and NSF fees in the same category. This commenter argued that 
nothing in TILA section 1605(a) precludes the ``cash transaction'' 
description from applying to a payment for services and that the 
concept of a ``cash transaction'' relates to the method of payment, 
rather than what is provided in return.
    A consumer advocate commenter supported this proposed provision, 
arguing that the comparable cash transaction exception has been used to 
hide or exclude amounts even where no comparable transaction actually 
exists; therefore, the proposed restrictions in Sec.  
1026.4(b)(12)(iii) would help to prevent evasions. This commenter also 
argued that returning an item unpaid is not a comparable cash 
transaction to paying it as an overdraft as one transaction is credit, 
with the fee being the cost of that credit, and the other transaction 
is not credit, with the fee serving a different purpose. This commenter 
supported the limitations proposed in Sec.  1026.4(b)(12)(iii), arguing 
that the charges listed in (A) through (D) are not associated with cash 
transactions. This commenter also supported the limitation on using a 
charge for transferring funds into the checking or other transaction 
account from any other asset account (such as a savings account), 
arguing that a charge for overdraft credit reflects the cost of that 
credit and that the full amount of that fee should be viewed as a 
finance charge, noting that this policy is already reflected in 
existing comment 4(a)-4 and would reflect the reality that the 
consumers who incur the most overdraft fees are unlikely to have 
significant linked savings or other asset accounts that can be used to 
cover overdrafts.
    This commenter also recommended adding commentary interpreting 
Sec.  1026.4(b)(12) for clarity, including a comment stating that 
transfer fees imposed on any credit account, whether an overdraft line 
of credit or traditional credit card, are a finance charge and a 
comment comparing the monthly account fees of two asset accounts that 
differ in whether they have a tied credit feature or not, such that the 
difference in the asset accounts' monthly fees is a finance charge.
    As to the commenter's request for additional commentary, the 
purpose of Sec.  1026.4(b)(12)(iii) is to clarify which types of 
transactions are not comparable to an overdraft charge for purposes of 
the comparison calculation described in Sec.  1026.4(b)(12)(ii). As 
discussed further below, specific charges are identified in Sec.  
1026.4(b)(12)(iii) for the purpose of prohibiting comparison for 
purposes of Sec.  1026.4(b)(12)(ii); Sec.  1026.4(b)(12)(iii) does not 
address whether or not such fees are themselves ``finance charges.'' 
Thus, the CFPB declines to add additional commentary.
    After considering the comments, the CFPB is finalizing Sec.  
1026.4(b)(12)(iii) largely as proposed in order to prohibit very large 
financial institutions from comparing overdraft charges to charges that 
are not comparable cash transactions, to prevent using such comparisons 
in a way that may lead to evasion of the requirements of Regulation Z, 
and to ensure that the full cost of credit is more accurately 
disclosed. Accordingly, Sec.  1026.4(b)(12)(iii) includes the 
limitation in proposed Sec.  1026.4(b)(12)(iii)(B) and (C) because fees 
for declining to authorize or pay a transaction or for returning a 
transaction unpaid--often referred to as NSF fees--are not comparable 
to overdraft charges. As discussed in the proposal, an NSF fee is 
assessed when a transaction is declined while an overdraft charge is 
assessed when a transaction is paid and the institution lends the 
consumer money to pay that transaction. As to commenters' concerns that 
proposed Sec.  1026.4(b)(12)(iii) would have designated NSF fees 
themselves as examples of ``finance charges,'' final Sec.  
1026.4(b)(12)(iii) does not do so. The proposed regulatory text was 
intended to prohibit the use of an NSF fee to offset an overdraft 
charge. Final Sec.  1026.4(b)(12)(iii) prohibits that same comparison 
but adds stylistic changes to clarify that the types of transactions 
identified in Sec.  1026.4(b)(12)(iii)(A) through (E) are itemized 
solely for the purpose of clarifying that they cannot be compared to 
charges imposed when overdraft credit is extended. Nothing in

[[Page 106791]]

final Sec.  1026.4(b)(12)(iii)(A) through (E) changes or modifies 
whether or not these five types of transactions are examples of finance 
charges. Specifically, final Sec.  1026.4(b)(12)(iii) does not comment 
on whether or not an NSF fee would be a finance charge.
    For the reasons discussed above, the CFPB is finalizing Sec.  
1026.4(b)(12)(ii) and (iii) largely as proposed. The CFPB makes two 
additional clarifying changes to the regulatory text of Sec.  
1026.4(b)(12)(iii). First, the final rule strikes ``covered'' from 
``covered overdraft credit'' in Sec.  1026.4 (b)(12)(iii). Proposed 
Sec.  1026.4(b)(12)(ii) referred to a checking or other transaction 
account that does not have overdraft credit; proposed Sec.  
1026.4(b)(12)(iii) referred to a checking or other transaction account 
that does not have covered overdraft credit. Thus, changing ``covered 
overdraft credit'' to ``overdraft credit'' in final Sec.  
1026.4(b)(12)(iii) resolves what could have been read as a conflict 
between the regulatory text of final Sec.  1026.4(b)(12)(ii) and final 
Sec.  1026.4(b)(12)(iii) to which this section applies. Second, the 
final regulatory text of Sec.  1026.4(b)(12)(iii) adds descriptive 
language to make clear that the comparison at issue is between the 
charge or combination of charges, including a per transaction fee, 
imposed on a covered asset account when overdraft credit is extended 
and the five types of charges itemized in final Sec.  
1026.4(b)(12)(iii)(A) through (E). Accordingly, the CFPB finalizes 
Sec.  1026.4(b)(12)(iii) with these clarifying changes.
2. The Sec.  1026.4(c)(3) Finance Charge Exception
The CFPB's Proposal
    Existing Sec.  1026.4(c)(3) provides that charges imposed by a 
financial institution for paying items that overdraw an account are not 
finance charges unless the payment of such items and the imposition of 
the charge were previously agreed upon in writing. The CFPB proposed to 
change this exception to the finance charge definition by adding a new 
sentence to the end of Sec.  1026.4(c)(3) that provided that the 
paragraph does not apply to above breakeven overdraft credit as defined 
in proposed Sec.  1026.62. In addition to amending Sec.  1026.4(c)(3), 
the CFPB also proposed to add comment 4(c)(3)-3 to 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. 
For the reasons discussed below, the CFPB is finalizing these changes 
as proposed and is revising comment 4(c)(3)-1 to clarify that it does 
not apply to above breakeven overdraft credit as defined in Sec.  
1026.62(b)(1).
Comments Received
    Many commenters criticized the existing Sec.  1026.4(c)(3) 
exception, stating that it does not adequately protect consumers. 
Several of these commenters noted that financial institutions 
frequently offer overdraft services under the existing Sec.  
1026.4(c)(3) exception at a high cost relative to other credit options. 
Among these commenters, several observed that, in the aggregate, low-
income and minority consumers typically pay higher fees for non-covered 
overdraft credit offered through the existing Sec.  1026.4(c)(3) 
exception. At least one of these commenters also explained that the 
existing Sec.  1026.4(c)(3) exception helps financial institutions 
disguise the true cost of deposit accounts by allowing them to generate 
substantial fee revenue, which they use to drive profits and to offer 
free or low-cost banking services to consumers who are relatively more 
advantaged.
    Commenters who criticized the existing Sec.  1026.4(c)(3) exception 
generally expressed support for the proposed changes to the Sec.  
1026.4(c)(3) exception. Many of these commenters indicated that the 
proposed changes would advance one of TILA's fundamental purposes-
promoting the informed use of credit. Specifically, these commenters 
agreed with the proposal's preliminary determination that the proposed 
changes would ensure that, when consumers utilized above breakeven 
overdraft credit, they would receive important Regulation Z 
protections, such as account-opening disclosures, credit card 
protections, and ability to repay assessments. These commenters further 
noted that, by providing consumers with these Regulation Z protections, 
the proposed changes to the Sec.  1026.4(c)(3) exception not only would 
help consumers recognize that they are entering into a credit 
transaction when utilizing above breakeven overdraft credit, but also 
would help consumers compare the cost of above breakeven overdraft 
credit with other credit options more effectively. One academic 
commenter supported requiring TILA disclosures for overdraft products 
but also emphasized the importance of simplicity and clarity in such 
disclosures.
    Many of the proponents of the proposed changes to the Sec.  
1026.4(c)(3) exception also stated that it made sense for the proposed 
rule to allow very large financial institutions to continue to provide 
non-covered overdraft credit at or below a very large financial 
institution's breakeven price. These commenters noted that limiting the 
application of the Sec.  1026.4(c)(3) exception to non-covered 
overdraft credit offered at or below a very large financial 
institution's breakeven price, as proposed, would return the Sec.  
1026.4(c)(3) exception to its original courtesy purpose and would 
reduce fee burdens on consumers, especially low-income and minority 
consumers. They also explained that returning the Sec.  1026.4(c)(3) 
exception to its original courtesy purpose would realign the incentives 
of very large financial institutions so that they would be deterred 
from adopting practices that push consumers into overdrafting and 
incurring high fees. Further, they stated that it was unnecessary to 
eliminate the Sec.  1026.4(c)(3) exception completely because consumers 
typically would benefit from receiving non-covered overdraft credit 
provided at or below cost, making TILA protections less critical.
    The same commenters also noted that the proposed changes to the 
Sec.  1026.4(c)(3) exception would require very large financial 
institutions to better disclose the terms of above breakeven overdraft 
credit. As a result of these proposed changes, they anticipated that 
the proposal would help many consumers avoid surprise overdrafts.
    Other commenters opposed the proposed changes to the Sec.  
1026.4(c)(3) exception. Many of these commenters stated that very large 
financial institutions should be allowed to earn a profit on non-
covered overdraft without abiding by the requirements of TILA and 
Regulation Z. These commenters also expressed concern that financial 
institutions could not sustainably offer overdraft credit at or below 
their breakeven price and would not incur the operational costs or take 
the compliance and litigation risks necessary to offer above breakeven 
overdraft in compliance with Regulation Z.
    Commenters opposed to the proposed changes to the Sec.  
1026.4(c)(3) exception also questioned the need for the proposed 
changes. Specifically, these commenters contended that existing 
disclosures and opt-in requirements adequately inform consumers of the 
terms for non-covered overdraft services. At least one of these 
commenters further stated that the CFPB inadequately explained why 
consumers are currently unable to compare the cost and terms of 
overdraft credit with other kinds of credit. Another commenter 
questioned why the CFPB would not consider the existing disclosures for

[[Page 106792]]

overdraft services provided under Regulations DD and E effective in 
helping consumers understand above breakeven overdraft credit. This 
commenter further questioned why the CFPB finds that Regulation Z 
disclosures would provide consumers a better understanding of these 
services and would help them make more informed decisions when using 
such services.
    Commenters opposed to the proposed changes to the Sec.  
1026.4(c)(3) exception also stated that the CFPB's proposal to change 
the Sec.  1026.4(c)(3) exception was arbitrary and capricious. At least 
one of these commenters stated that the CFPB's proposal to change the 
Sec.  1026.4(c)(3) exception was arbitrary and capricious because the 
changes it proposed would apply only to above breakeven overdraft 
credit even though the proposal's stated consumer protection goals 
would apply equally to non-covered overdraft credit. At least one other 
commenter argued that the CFPB arbitrarily and capriciously relied upon 
the promotion of the informed use of credit to apply TILA and 
Regulation Z to overdraft fees. This commenter stated that the CFPB 
provided inadequate evidence to support its statement that applying 
consumer credit protections to above breakeven overdraft credit would 
help consumers make informed decisions about such credit. In 
particular, the commenter questioned the volume of evidence marshalled 
by CFPB. The commenter also stated that the CFPB should consider other 
reasons consumers may utilize non-covered overdraft credit rather than 
alternative credit products, including timeliness, ease of use, lack of 
access to alternatives, or cost.
    A few commenters asked the CFPB to amend its proposal to change the 
Sec.  1026.4(c)(3) exception. One commenter recommended that the CFPB 
amend comment 4(c)(3)-1 to specify that the comment does not apply to 
above breakeven overdraft credit offered in connection with a covered 
asset account as defined in Sec.  1026.62(b)(2). Another commenter 
stated that the CFPB should eliminate the Sec.  1026.4(c)(3) exception 
rather than attempt to amend it. This commenter provided several 
justifications for this viewpoint, including that the exception 
originally applied to checks, but that checks are used less frequently 
today, and that overdraft fees put a significant strain on low-income 
households while providing outsized profits to financial institutions.
Final Rule
    For the reasons stated in the proposal and below, the CFPB 
finalizes Sec.  1026.4(c)(3) and comment 4(c)(3)-3 as proposed. 
Additionally, as discussed below, the CFPB revises comment 4(c)(3)-1 to 
clarify that it does not apply to above breakeven overdraft credit as 
defined in Sec.  1026.62(b)(1).
    As further discussed below, the CFPB is finalizing Sec.  
1026.4(c)(3) for several independent reasons, consistent with the 
proposal. First, amending the Sec.  1026.4(c)(3) exception so that it 
no longer applies to above breakeven overdraft credit (the Sec.  
1026.4(c)(3) amendment) returns 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. Additionally, the Sec.  1026.4(c)(3) 
amendment furthers TILA's purpose of promoting the informed use of 
credit by ensuring that above breakeven overdraft credit is disclosed 
as a credit product and facilitating comparison shopping across credit 
products. Moreover, applying the Regulation Z regulatory framework to 
above breakeven overdraft credit products will benefit consumers by 
applying the regulation's existing substantive protections to such 
credit products, consistent with TILA's purpose of protecting consumers 
against inaccurate and unfair credit billing and credit card practices. 
The Sec.  1026.4(c)(3) amendment also reflects, in part, an effort to 
balance the reliance interests of very large financial institutions and 
consumers against these other considerations.
Adapting the Courtesy Exception To Fit Within the Modern Payments 
System
    Commenters opposed to the revision to the Sec.  1026.4(c)(3) 
exception stated that the rationales for the amendment provided in the 
proposed rule--protecting consumers against inaccurate and unfair 
credit practices and promoting the informed use of credit--were 
arbitrary and capricious. They stated that this was because the 
consumer protection goals justifying the amendment apply equally to 
both above breakeven overdraft credit and non-covered overdraft credit 
provided at or below breakeven pricing, and the amendment applies only 
to at or below breakeven overdraft credit. The CFPB acknowledges that 
Regulation Z disclosures and protections would be helpful to consumers 
both in circumstances where overdraft fees are profit-generating and in 
circumstances where they are not. However, consistent with the Board's 
original reasoning, the CFPB's revision to the exception is based on 
the countervailing considerations discussed herein, including that 
consumers receive a benefit from the availability of this service if it 
is offered as a courtesy and that very large financial institutions are 
more likely to offer courtesy overdraft when they are able to recover 
the costs of providing that service. In light of these considerations, 
the revision to the Sec.  1026.4(c)(3) exception allows very large 
financial institutions to provide non-covered overdraft without being 
subject to Regulation Z requirements.
    As explained in the proposal, the existing Sec.  1026.4(c)(3) 
exception no longer reflects its original courtesy purpose. 
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.\162\ However, instead of 
returning the check unpaid, a financial institution, in its discretion, 
might have paid the check into overdraft as a courtesy.\163\
---------------------------------------------------------------------------

    \162\ 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 (2003) (Cocheo 2003).
    \163\ 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).
---------------------------------------------------------------------------

    When it issued Regulation Z in 1969, the Board created a limited 
exception for this longstanding practice.\164\ 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

[[Page 106793]]

upon in writing.'' \165\ A bank providing discretionary, check-centric 
overdraft (also known as ``bounce-check protection'' or ``courtesy 
overdraft protection'' services, as noted in later Federal Register 
publications) \166\ 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).\167\ 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.\168\
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    \164\ 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.'').
    \165\ 34 FR 2002, 2004 (Feb. 11, 1969).
    \166\ 70 FR 29582, 29582 n.1 (May 24, 2005).
    \167\ See 12 CFR 1026.2(a)(17)(i).
    \168\ 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.\169\ Specifically, the Board changed the term ``bank'' to 
``financial institution'' and the term ``checks'' to ``items.'' \170\ 
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.'' \171\ Additionally, the Board renumbered 
Sec.  226.4(d) to Sec.  226.4(c)(3).\172\ By making these ``minor 
editorial changes,'' the Board stated that ``[n]o substantive change is 
intended . . . .'' \173\ 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 ad hoc, fee-based, check-
centric, courtesy overdraft services without having to comply with the 
requirements of TILA and Regulation Z.\174\
---------------------------------------------------------------------------

    \169\ 46 FR 20848, 20855 (Apr. 7, 1981).
    \170\ Id.
    \171\ Id.
    \172\ Id.
    \173\ Id.
    \174\ 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 existing version of Regulation Z. 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.
---------------------------------------------------------------------------

    Despite the fact that neither the Board nor the CFPB has changed 
the purpose of the Sec.  1026.4(c)(3) exception, 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.\175\ 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.
---------------------------------------------------------------------------

    \175\ 74 FR 5212 (Jan. 29, 2009); 81 FR 83934, 83950-51 (Nov. 
22, 2016).
---------------------------------------------------------------------------

    Unlike in 1969, when checks made up the lion's share of overdraft 
transactions,\176\ 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.\177\ 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.\178\ 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.\179\ 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).\180\ In other words, for many consumers who use debit cards 
frequently, non-covered overdraft credit services are no longer 
provided as an occasional accommodation.\181\ 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,\182\ and nearly two-thirds of banks 
with over $10 billion in assets have eliminated NSF fees \183\).\184\ 
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.\185\ This shift 
represents a significant departure from the historical courtesy model, 
which provided an accommodation to consumers for the occasional, 
inadvertent overdraft.
---------------------------------------------------------------------------

    \176\ Stephen Quinn & William Roberds, The Evolution of the 
Check as a Means of Payment: A Historical Survey, 93 Fed. Rsrv. Bank 
Atlanta Econ. Rev. 1, at 21 (2008).
    \177\ CFPB 2014 Data Point at 17.
    \178\ 81 FR 83934, 83950-51 (Nov. 22, 2016).
    \179\ CFPB 2014 Data Point at 15 tbl.4c.
    \180\ Id.
    \181\ 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.'').
    \182\ 74 FR 5212, 5217 (Jan. 29, 2009).
    \183\ See CFPB October 2023 Data Spotlight.
    \184\ 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.
    \185\ 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.
---------------------------------------------------------------------------

    The CFPB's amendment to the Sec.  1026.4(c)(3) exception 
reestablishes the original courtesy purpose of the Sec.  1026.4(c)(3) 
exception by providing the exception only for overdraft credit priced 
at or below a very large financial institution's breakeven point.
Promoting the Informed Use of Credit
    Commenters opposed to the CFPB's amendment to the Sec.  
1026.4(c)(3) exception contended that existing disclosures and opt-in 
requirements adequately inform consumers of the terms for non-covered 
overdraft services.
    As an initial matter, the CFPB is amending the Sec.  1026.4(c)(3) 
exception to return the regulatory requirements closer to TILA's 
original effect. The CFPB is following Congress's judgment that 
standardized disclosures across

[[Page 106794]]

different types of credit help consumers better comparison shop.
    As the CFPB explained in the proposed rule, most non-covered 
overdraft credit is subject to Regulations DD and E. Although 
Regulations DD and E require certain disclosures for non-covered 
overdraft credit, 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. Unlike the 
disclosures required under Regulations DD and E, the disclosures 
required by Regulation Z are designed to set forth contractual terms 
for credit products clearly. Regulation Z would also apply additional 
requirements under subparts B and G, including periodic statement 
requirements and advertising rules meant to help consumers better 
understand credit terms, monitor their use of the product, and trace 
how their funds are being used.
    Applying the Regulation Z regulatory framework to above breakeven 
overdraft credit benefits 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 benefits consumers by helping them understand that they 
are entering into a contract for a credit product provided by a 
creditor.
    Additionally, disclosing above breakeven overdraft credit services 
under the Regulation Z regulatory framework also promotes the informed 
use of credit because requiring very large financial institutions to 
present the credit terms for above breakeven overdraft credit in the 
same form that creditors present the credit terms of other credit 
products will allow consumers to compare the cost of such credit with 
the cost of alternative credit products. For example, the cost of non-
covered overdraft credit is typically disclosed as a fee, and no annual 
percentage rate disclosure is required. In contrast, Regulation Z 
requires disclosure of periodic rates as annual percentage rates, which 
will aid consumers in comparing the cost of covered overdraft credit to 
other credit products.
    At least one commenter also contended that the CFPB did not 
adequately explain how its proposed amendment would allow consumers to 
compare the cost and terms of overdraft credit with other kinds of 
credit better than existing requirements. In particular, this commenter 
stated that the CFPB did not cite sufficient evidence to support its 
finding that consumers have difficulty comparing non-covered overdraft 
credit services with available alternatives. The commenter also 
asserted that the CFPB failed to consider other reasons why consumers 
may utilize non-covered overdraft credit over alternative sources of 
liquidity, such as timeliness, ease of use, lack of access to 
alternatives, and cost.
    As an initial matter, the reports cited in the proposed rule to 
support the finding that many consumers have difficulty comparing non-
covered overdraft credit services with available alternatives are 
bolstered by other research.\186\ For example, a survey conducted by 
the Pew Charitable Trust found that 42 percent of the overdrafters they 
polled had sufficient credit available on a credit card to cover an 
emergency expense of $400.\187\ This finding is significant because, 
according to a CFPB 2014 report, the median amount of overdraft credit 
extended per non-covered overdraft transaction was $50 across all 
transaction types \188\ and was only $25.50 for debit card 
transactions,\189\ well within the amount of credit card credit 
available to many overdrafters polled by Pew. Therefore, as explained 
in the proposal, a significant number of consumers continue to use non-
covered overdraft credit services despite the availability of 
alternative credit that is generally much cheaper than overdraft 
credit.\190\
---------------------------------------------------------------------------

    \186\ 89 FR 13852, 13868 n.165 (Feb. 23, 2024); CFPB 2013 White 
Paper at 52; CFPB 2014 Data Point at 5.
    \187\ Pew Charitable Tr., Overdraft Does Not Meet the Needs of 
Most Consumers, at 9 (Dec. 2017), https://www.pewtrusts.org/-/media/assets/2017/12/cb_overdraft_does_not_meet_the_needs_of_most_consumers.pdf (Pew 2017 
Chartbook). The proposed rule referenced this study as evidence that 
consumer understanding of the Regulation E opt-in right is low. See 
89 FR 13852, 13892 n.255 (Feb. 23, 2024).
    \188\ CFPB 2014 Data Point at 5.
    \189\ 89 FR 13852, 13869 n.166 (Feb. 23, 2024).
    \190\ Id. at 13868.
---------------------------------------------------------------------------

    As the commenter noted, consumers who have access to cheaper, 
alternative sources of liquidity still may opt to use non-covered 
overdraft credit services despite the higher cost if, for example, they 
believe these services are more timely and easier to use. (The 
commenter's other two theories for why consumers might use non-covered 
overdraft--lack of access to alternatives and cost--do not apply to 
consumers who have access to lower cost liquidity.) However, other 
evidence cited in the proposal indicates that many consumers often do 
not understand the cost and terms of non-covered overdraft. For 
example, the proposed rule noted that a significant number of 
commenters responding to the CFPB's 2022 request for information (2022 
RFI) stated that overdraft fees were unclear or confusing. The proposed 
rule further noted that the concerns raised by commenters responding to 
the 2022 RFI were generally consistent with the concerns reflected in 
consumer complaints about overdraft fees submitted to the CFPB.
Applying Substantive Protections
    Applying the Regulation Z regulatory framework to above breakeven 
overdraft credit services also benefits consumers by applying the 
regulation's existing substantive protections to such credit services. 
For example, the rule applies the due date requirement in Sec.  
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 accessible via a hybrid debit-credit card prohibits 
very large financial institutions from immediately taking funds from 
any incoming deposit in repayment of the consumer's overdraft balance, 
requires very large financial institutions to establish due dates on 
the same day of each billing cycle, and requires very large financial 
institutions to assess the consumer's ability to pay for such credit--
all protections that the current Regulations DD and E regulatory 
frameworks do not provide.
Balancing Reliance Interests Against Other Considerations
    The rule does not entirely eliminate the Sec.  1026.4(c)(3) 
exception in part because both very large financial institutions and 
consumers have reliance interests in the existence of non-covered 
overdraft. Very large financial institutions have undertaken efforts to 
ensure that their non-covered overdraft credit programs comply with 
Regulations DD and E, and some consumers have come to rely on the 
availability of non-covered overdraft credit.
    The rule's amendment to the Sec.  1026.4(c)(3) exception addresses 
the CFPB's consumer protection concerns while recognizing these 
reliance interests. Under the rule's approach, consumers who use above 
breakeven overdraft credit will receive Regulation Z's credit 
disclosures as well as Regulation Z's substantive protections.

[[Page 106795]]

Consumers who use non-covered overdraft credit will receive courtesy 
overdraft credit priced at or below a very large financial 
institution's breakeven point. In addition, very large financial 
institutions that have invested in compliance with Regulations DD and E 
can maintain their current processes for providing consumers with non-
covered overdraft credit so long as they price such credit at or below 
breakeven pricing.
    Commenters opposed to the CFPB's amendment to the Sec.  
1026.4(c)(3) exception objected to the amendment's impact on the 
pricing of non-covered overdraft credit. These commenters stated that, 
as a matter of principle, very large financial institutions should be 
allowed to earn a profit on non-covered overdraft without abiding by 
the requirements of TILA and Regulation Z. The CFPB takes a different 
view. When Congress created TILA, it did not exempt any category of 
overdraft credit from TILA. Rather, the Board created a limited 
exception for the longstanding practice of courtesy overdraft. 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 is inconsistent with the 
concept of providing an additional service as a courtesy because it 
encourages financial institutions to promote consumers' use of non-
covered overdraft credit and/or to calibrate their systems to increase 
overdraft fee revenue.\191\ In contrast, providing overdraft credit at 
or below its breakeven point incentivizes a very large financial 
institution to provide overdraft credit simply for the convenience of 
the customer so as to foster customer goodwill and to improve customer 
retention.
---------------------------------------------------------------------------

    \191\ 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.
---------------------------------------------------------------------------

    These commenters also expressed concern that financial institutions 
could not sustainably offer overdraft credit at or below their 
breakeven price and would not incur the operational costs or take the 
compliance and litigation risks necessary to offer above breakeven 
overdraft in compliance with Regulation Z. However, even before the 
CFPB issued the proposed rule, several very large financial 
institutions had reduced or eliminated their overdraft fees,\192\ and 
most financial institutions currently waive overdraft fees for at least 
some overdrafts. Since some very large financial institutions can 
provide consumers with overdraft credit without assessing any overdraft 
fees, it stands to reason that other very large financial institutions 
could continue to provide non-covered overdraft credit for a fee that 
is at or near their breakeven price. Similarly, many very large 
financial institutions currently offer overdraft lines of credit that 
comply with Regulation Z. Commenters have not explained why they think 
that applying Regulation Z to above breakeven overdraft credit would 
create compliance and litigation risks that are materially different 
from the compliance and litigation risks that very large financial 
institutions already face when offering overdraft lines of credit. The 
CFPB acknowledges that certain above breakeven overdraft credit also 
must comply with certain CARD Act provisions and the compulsory use 
prohibition; but again, commenters have not explained how these 
provisions create materially different compliance and litigation risks 
from the risks faced by very large financial institutions with respect 
to their existing credit card offerings. And lastly, the breakeven 
standard is designed to allow very large financial institutions to 
break even regardless of the financial institution's cost level. If a 
financial institution has unique circumstances that cause it to have 
higher compliance or other costs or losses, those can be incorporated 
into the financial institution's fee amount to ensure that the courtesy 
overdraft product is offered without overall losses to the financial 
institution. The CFPB does not find it credible that a financial 
institution would choose to incur the reputational and competitive 
harms associated with eliminating overdraft altogether if the financial 
institution does not lose money on the service; however, if a financial 
institution chose to do so, consumers who want non-covered overdraft 
could avoid any ensuing harms by switching to a financial institution 
that does offer non-covered overdraft credit.
---------------------------------------------------------------------------

    \192\ See CFPB May 2023 Data Spotlight.
---------------------------------------------------------------------------

Requested Changes to the CFPB's Amendment to the Sec.  1026.4(c)(3) 
Exception
    One commenter recommended that the CFPB amend comment 4(c)(3)-1 to 
specify that the comment does not apply to above breakeven overdraft 
credit offered in connection with a covered asset account as defined in 
Sec.  1026.62(b)(2).
    Comment 4(c)(3)-1 currently provides that, 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. The purpose of the comment is to clarify whether interest 
charged on overdraft credit is exempt from the Regulation Z definition 
of a finance charge. In the proposed rule, the CFPB proposed to amend 
the regulatory text of Sec.  1026.4(c)(3) to establish that the 
paragraph does not apply to above breakeven overdraft credit. 
Accordingly, the paragraph's commentary also would not have applied to 
above breakeven overdraft credit. Therefore, interest charges imposed 
on above breakeven overdraft credit would have been finance charges 
under the proposed rule regardless of whether a very large financial 
institution agreed in writing to pay an item into overdraft. 
Nonetheless, for clarity, the final rule amends comment 4(c)(3)-1 to 
provide that the comment, like the regulatory text in Sec.  
1026.4(c)(3), does not apply to above breakeven overdraft credit as 
defined in Sec.  1026.62(b)(1).
    Another commenter stated that the CFPB should eliminate the Sec.  
1026.4(c)(3) exception rather than attempt to amend it. They noted that 
the exception originally applied to checks, but that checks are used 
less frequently today, and contended that overdraft fees put a 
significant strain on low-income households while providing outsized 
profits to financial institutions.
    The CFPB has determined that amending the Sec.  1026.4(c)(3) 
exception better serves the market and consumers than eliminating the 
exception completely because the amendment addresses the CFPB's 
consumer protection concerns while acknowledging the long-standing 
reliance interests of both very large financial institutions and 
consumers and ensuring availability of courtesy overdraft credit. As 
explained above, the rule's amendment to the Sec.  1026.4(c)(3) 
exception adequately addresses the CFPB's consumer protection concerns 
because consumers who use above breakeven overdraft credit will receive 
Regulation Z's credit disclosures as well as Regulation Z's substantive 
protections while consumers who use non-covered overdraft credit will 
receive courtesy overdraft credit priced at or below a very large 
financial institution's breakeven point. This approach mitigates 
certain risks associated with current non-covered overdraft credit, 
like high cumulative fee burdens, account charge-offs, involuntary 
account closures, and loss of access to the banking system, while

[[Page 106796]]

allowing very large financial institutions to continue offering and 
consumers to continue accessing non-covered below breakeven overdraft 
credit as a courtesy.
Comment 4(c)(3)-3
    Proposed comment 4(c)(3)-3 would have directed readers to see 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 
received no comments specifically addressing this proposed comment. 
Accordingly, the CFPB finalizes comment 4(c)(3)-3 as proposed.
3. Defining and Determining ``Above Breakeven Overdraft Credit''
The CFPB's Proposal
    The proposed rule added ``above breakeven overdraft credit'' as a 
new defined term at proposed Sec.  1026.62(b)(1). Proposed Sec.  
1026.62(b)(1) defined above breakeven overdraft credit 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 imposed 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 proposed Sec.  1026.62(d).
    Proposed Sec.  1026.62(d)(1) clarified that overdraft credit 
offered by a very large financial institution was ``above breakeven 
overdraft credit'' for purposes of proposed Sec.  1026.62(b)(1) if the 
charge or combination of charges for such credit exceeded 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'' included all revenue received in connection with an overdraft 
transaction, including any extended or sustained overdraft fees, any 
interest charges on outstanding overdraft balances, and any other 
payments the very large financial institution received in connection 
with an overdraft transaction or transactions.
    Proposed Sec.  1026.62(d)(1) provided two methods for determining 
whether an overdraft charge exceeded the average of a very large 
financial institution's costs and charge-off losses for providing non-
covered overdraft credit-the breakeven standard and the benchmark fee. 
To the extent that a very large financial institution preferred not to 
calculate its average costs and charge-off losses for providing non-
covered overdraft credit using the breakeven standard, the proposal 
permitted the very large financial institution to determine whether it 
was offering above breakeven overdraft credit based solely on the 
benchmark fee.
Proposed Breakeven Standard
    Under the proposed breakeven standard, a very large financial 
institution used a two-step process to determine whether an overdraft 
charge exceeded the average of the institution's costs and charge-off 
losses for providing non-covered overdraft credit. First, the very 
large financial institution determined its total direct costs and 
charge-off losses for providing non-covered overdraft credit to all 
accounts open at any point in the previous year (Step 1). For Step 1, 
proposed Sec.  1026.62(d)(2) clarified that only costs and charge-off 
losses that were specifically traceable to a very large financial 
institution's provision of non-covered overdraft credit in the previous 
year could be considered total direct costs and charge-off losses for 
purposes of the breakeven standard. The proposed rule instructed a very 
large financial institution to exclude general overhead costs and 
charge-off losses resulting from unauthorized use, EFT errors, billing 
errors, returned deposit items, and rescinded provisional credit from 
the breakeven calculation because those costs and charge-off losses 
were not specifically traceable to a very large financial institution's 
provision of non-covered overdraft credit.
    Next, the very large financial institution divided the total direct 
costs and charge-off losses figure from Step 1 by the total number of 
non-covered overdraft transactions attributable to those accounts 
occurring in the previous year (Step 2). For purposes of calculating 
Step 2, the proposed rule allowed the very large financial institution 
to exclude non-covered overdraft transactions that did not incur fees 
from the total number of non-covered overdraft transactions. 
Additionally, the proposed rule clarified that, when a very large 
financial institution applied the breakeven standard either for the 
first time or after transitioning from the benchmark fee described at 
proposed Sec.  1026.62(d)(1)(ii), the very large financial institution 
could include direct costs and charge-off losses from any non-covered 
overdraft transaction occurring in the previous year regardless of 
whether the transaction would be considered above breakeven overdraft 
credit during that period.
Proposed Benchmark Fee
    Under the benchmark fee approach outlined at proposed Sec.  
1026.62(d)(1)(ii), a very large financial institution could presume 
that any charge or combination of charges it imposed for paying a 
transaction that overdraws an account did not exceed its costs and 
charge-off losses for providing non-covered overdraft credit if the 
charge or combination of charges was less than or equal to any 
benchmark fee established by the CFPB. The CFPB proposal suggested four 
potential options for this benchmark fee--$3, $6, $7, and $14--and 
sought comment on whether to finalize one of these numbers or some 
other number.
    The CFPB used the same general formula to calculate all four of the 
proposed alternative benchmark fees--charge-off losses divided by non-
covered overdraft transactions, plus costs of $1 per non-covered 
overdraft transaction--but referred to different datapoints from data 
collected from five very large financial institutions (the sample) to 
derive each fee amount. The CFPB proposed four benchmark fee amounts in 
order to get feedback on two issues: (1) whether the CFPB should 
calculate charge-off losses based on the average across all 
institutions in its sample or across just the outlier in its sample 
with the highest costs (the outlier); and (2) whether the CFPB should 
include all non-covered overdraft transactions in its calculation or 
only non-covered overdraft transactions for which the institutions in 
its sample assessed a fee (fee-assessed transactions).
    The proposed $3 benchmark fee is the fee that results from 
calculating the benchmark fee using all non-covered overdraft 
transactions from all institutions in the CFPB's sample; the proposed 
$6 benchmark fee is the fee that results from calculating the benchmark 
fee using only fee-assessed non-covered overdraft transactions from all 
institutions in the CFPB's sample; the proposed $7 benchmark fee is the 
fee that results from calculating the benchmark fee using all non-
covered overdraft transactions from the outlier in the CFPB's sample; 
and the proposed $14 benchmark fee is the fee that results from 
calculating the benchmark fee using only fee-assessed non-covered 
overdraft transactions from the outlier in the CFPB's sample.

[[Page 106797]]

Comments Received
Comments Relating to Above Breakeven Overdraft Credit
    Several commenters responded to the proposed rule's requests for 
comment soliciting alternative approaches for determining whether 
credit is above breakeven overdraft credit. Some of these commenters 
recommended that the final rule allow the threshold for above breakeven 
overdraft credit to vary based on a range of factors, such as the 
amount of the overdraft, the amount of overdraft fees, the duration of 
the overdraft, the cost to the very large financial institution of 
providing the overdraft, the size of the very large financial 
institution, and the frequency with which the consumer overdraws their 
account. At least one of these commenters recommended that the charge 
to the consumer for non-covered overdraft should decline with each 
successive overdraft so that the consumer would not fall into a debt 
trap. Another of these commenters recommended that the charge to the 
consumer for the first overdraft should be lower than the charge for 
subsequent overdrafts in order to deter the consumer from frequently 
overdrawing their account. Other commenters recommended that the final 
rule define the threshold for above breakeven overdraft credit as an 
annual percentage rate rather than a flat fee.
    At least one commenter recommended that the final rule allow above 
breakeven overdraft credit to continue to qualify as non-covered 
overdraft credit if such credit included consumer-friendly features, 
such as cure periods, de minimis limits, transaction limits, and real-
time notifications.
Comments Relating to the Breakeven Standard
Specifically Traceable Costs and Charge-Offs
    Various commenters asked the CFPB to provide greater clarity 
regarding the breakeven standard. Most of these commenters asked the 
CFPB to provide additional guidance regarding the types of costs and 
charge-off losses that would have been considered specifically 
traceable costs and charge-off losses under the breakeven standard. One 
of these commenters asked the CFPB to amend the Official 
Interpretations of Regulation Z to clarify whether the final rule would 
permit a very large financial institution to allocate a portion of its 
call center expenses to overdraft transactions if it did not have a 
method to track the calls it received relating to non-covered overdraft 
credit.
    A significant number of commenters requesting additional guidance 
regarding the breakeven standard also expressed concern that, as 
proposed, it was unclear whether the breakeven standard allowed very 
large financial institutions to recover certain costs, such as 
communication costs, branch servicing costs, collection costs, core 
provider/vendor costs, compliance costs, and technology costs. These 
commenters stated that a lack of clarity regarding these costs would 
create too much compliance and litigation risk for very large financial 
institutions to adopt the breakeven standard. Industry commenters 
stated that the formula for calculating costs and charge-off losses 
under the breakeven standard should include general overhead costs and 
charge-off losses resulting from unauthorized use, EFT errors, billing 
errors, returned deposit items, or rescinded provisional credit. These 
commenters also stated that the CFPB did not sufficiently explain its 
rationale for excluding such costs and losses from the breakeven 
standard's cost and loss calculation formula. In contrast, consumer 
advocate commenters stated that it was appropriate to exclude general 
overhead costs and charge-off losses resulting from unauthorized use, 
EFT errors, billing errors, returned deposit items, and rescinded 
provisional credit from the breakeven standard's cost and loss 
calculation formula because those costs and charge-off losses did not 
have a direct relationship to the provision of non-covered overdraft 
services. These commenters further explained that including such costs 
in the breakeven standard's cost and loss calculation formula would 
allow very large financial institutions to earn profits from their non-
covered overdraft programs.
Using Less Than 12 Months of Cost and Charge-Off Loss Data
    At least one commenter asked the CFPB to clarify how a very large 
financial institution would implement the breakeven standard if the 
institution lacked 12 months of cost and charge-off loss data. This 
commenter suggested that the CFPB should amend the breakeven standard 
so that it provides very large financial institutions with the 
flexibility to use less than 12 months of cost and charge-off loss data 
to calculate the breakeven fee.
Accounting for Fee Waiver Policies
    Various commenters addressed whether the final rule's breakeven 
standard should allow very large financial institutions to adjust their 
non-covered overdraft transaction totals to account for non-covered 
overdraft transactions that do not incur fees. Many commenters opposed 
allowing such adjustments because they believed that very large 
financial institutions would be less likely to grant discretionary 
waivers to frequent overdrafters than to infrequent overdrafters. These 
commenters also expressed concern that frequent overdrafters, who are 
disproportionately made up of lower-income and minority consumers, 
would pay higher fees than they would if very large financial 
institutions could not adjust their non-covered overdraft transaction 
totals to account for their fee waiver policies. Other commenters 
supported a rule that would allow very large financial institutions to 
adjust their non-covered overdraft transaction totals to account for 
non-covered overdraft transactions that do not incur fees. These 
commenters noted that, if transaction totals included waived and 
refunded transactions, it would discourage very large financial 
institutions from continuing consumer friendly policies, such as 
offering grace periods before assessing overdraft fees, capping the 
number of overdraft fees per day, and establishing de minimis 
thresholds for assessing overdraft fees. Additionally, these commenters 
noted that very large financial institutions legally cannot charge 
overdraft fees for certain transactions, such as certain APSN 
transactions, and, therefore, those institutions likely would reduce 
access to overdraft credit if the rule required them to include such 
transactions in their transaction totals. One of these commenters 
further stated that the final rule should only allow very large 
financial institutions to adjust their non-covered overdraft 
transaction totals to account for their fee waiver policies if the rule 
also mandated additional consumer protections, such as grace periods, 
caps on the number of overdraft fees per day, and de minimis 
thresholds.
Extended or Sustained Overdraft Fees, Interest Charges on Outstanding 
Overdraft Balances, and Other Fees
    At least one commenter asked the CFPB to amend the Official 
Interpretations of Regulation Z to clarify whether extended or 
sustained overdraft fees, interest on outstanding overdraft balances, 
and transfer fees assessed to move funds from a credit account to the 
consumer's depository account would count as overdraft charges for 
purposes of determining whether overdraft credit was above breakeven 
overdraft credit.

[[Page 106798]]

Calculating Average Costs and Charge-Off Losses Within Subsets of 
Account Portfolios When Applying the Breakeven Standard
    At least one commenter provided their views on whether the final 
rule should allow very large financial institutions applying the 
breakeven standard to make separate calculations of their average costs 
and charge-off losses for non-covered overdraft within subsets of their 
depository account portfolios, such as account relationship tiers or 
average account balance ranges. This commenter stated that the final 
rule should not allow this practice because it would allow very large 
financial institutions to charge vulnerable consumers higher fees for 
non-covered overdraft credit while also raising the bar for such 
consumers to receive Regulation Z protections.
Comments Relating to the Benchmark Fee
The Benchmark Fee Formula
    At least one commenter stated that the formula used to calculate 
the benchmark fee should match the formula used to calculate the 
breakeven standard.
Support for a Specific Benchmark Amount
    Numerous commenters responded to the proposed rule's requests for 
comment soliciting feedback on the proposed benchmark fee figures. 
Commenters consisting of consumer advocates, government organizations, 
plaintiffs' attorneys, and members of the public generally supported 
adoption of a $3 benchmark fee while financial institution and industry 
trade group commenters generally supported adoption of a high benchmark 
fee ($14 or more). Some commenters supported benchmark fees falling 
between $3 and $14.
    Proponents of the $3 benchmark fee noted that it would provide 
greater benefits to consumers. These benefits included access to 
cheaper credit, decreased risk of falling into debt cycles, and 
decreased risk of becoming unbanked. Proponents of the $3 benchmark 
were generally skeptical that adopting a low benchmark fee would limit 
consumers' access to overdraft credit. They presented three points in 
support of this view. First, they noted that many very large financial 
institutions either currently do not charge a fee for overdraft 
services or have significantly reduced their fees. Second, they noted 
that very large financial institutions with costs exceeding the $3 
benchmark fee could calculate their own costs under the breakeven 
standard and charge a higher fee, or offer overdraft credit that 
complies with Regulation Z. Third, they noted that very large financial 
institutions could make changes to their overdraft programs to lower 
their costs in response to the rule.
    Proponents of a $3 benchmark fee further stated that the proposed 
rule's cost and loss estimates were generous. Specifically, they 
explained that, when estimating the cost of funds for financial 
institutions, the proposed rule assumed that financial institutions 
would lend an average of $120 to consumers per transaction for a period 
of one month. However, they noted that the median overdraft is only $50 
and is repaid in three days. Similarly, they explained that, when 
estimating financial institutions' operational costs for providing 
overdraft credit, the proposed rule assumed 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. 
They believed that those estimates overstated the amount of call center 
expense associated with operational costs.
    Proponents of a $3 benchmark fee further stated that the CFPB 
should not base the final rule's benchmark fee on the charge-off costs 
of the one very large financial institution in its data with the 
highest costs because that institution appeared to be an outlier and, 
as a policy matter, the CFPB should incentivize very large financial 
institutions to reduce charge-offs because they often lead to consumers 
becoming unbanked.
    Proponents of a higher benchmark fee generally indicated that the 
CFPB should adopt a benchmark of $14 or more or stated only that $14 
was too low. Several industry commenters stated that the proposed 
ranges for the benchmark fee would not allow them to recoup their 
costs. Some of these commenters stated that the $1 per transaction 
estimate for costs of funds and operational costs in the proposed rule 
was too low. Other industry commenters offered thoughts on what 
benchmark fee might be more appropriate for them. Two of these 
commenters, representing the interests of credit unions, including 
credit unions with assets exceeding the very large financial 
institution threshold, stated that average costs for the credit unions 
they represent ranged from $20-22 per overdraft transaction. Another 
commenter representing a state-chartered bank with $1.6 billion in 
assets stated that the known operational costs (including charge-off 
losses) for non-covered overdraft at their institution were roughly 39 
percent of overdraft fees, but that the institution incurs other costs, 
and that its total costs exceed $14 per overdraft transaction. Several 
other industry commenters stated that the CFPB should adopt the 
proposed $14 benchmark fee. Two of these commenters representing credit 
unions with assets below the very large financial institution threshold 
indicated that the institutions they represent recently lowered their 
overdraft fees from the $25-$35 range to the $10-$15 range (implying 
that their costs fall within or below the $10-$15 range). Another 
commenter expressed concern that the sample used to calculate the 
benchmark fee was too small and that the CFPB should set the benchmark 
at $14 until the agency had an opportunity to review a larger sample. 
They further noted that a $14 fee benchmark fee would represent a 
significant fee reduction from the current average fee of $34 and would 
save low-balance account holders, on average, just over $90 per year 
and frequent overdrafters at least $220 per year. They also noted that 
several very large financial institutions recently reduced their fees 
to between $10 and $15, so setting the benchmark fee at $14 would make 
it easier for those institutions to comply with the rule. At least one 
industry commenter stated that the CFPB should set the benchmark fee at 
the current average fee in the market and adjust it for inflation going 
forward.
    At least one industry commenter representing a credit union with 
assets of approximately $4.8 billion supported a $5 fee per overdraft, 
limited to one fee per day. This commenter further explained that their 
institution conducted a review of costs for overdraft credit and 
determined that a $5 fee would be sustainable. A consumer advocate 
commenter stated that the CFPB should set the benchmark fee at $6 
(i.e., the proposed benchmark fee that results from calculating the 
benchmark fee using only fee-assessed non-covered overdraft 
transactions from all institutions in the CFPB's sample), but only if 
the rule also mandated additional consumer protections, such as grace 
periods, caps on the number of overdraft fees per day, and de minimis 
thresholds.
Data Used for the Benchmark Fee
    Industry commenters criticized the analysis used to establish the 
proposed benchmark fee amounts. First, they stated that the sample used 
for the

[[Page 106799]]

analysis was inadequate. Specifically, they noted that the sample 
consisted of only five very large financial institutions (or 
approximately three percent of the very large financial institutions 
that the proposed rule would have covered). They further observed that, 
by attempting to incorporate a diverse set of geographic footprints, 
asset sizes, and business models into the sample, entire categories of 
financial institution types were represented by only a single 
institution's data. They expressed concern that estimating the 
breakeven cost of overdraft credit based on five institutions would not 
be representative of the breakeven cost of overdraft credit for most 
very large financial institutions. They further criticized the sample 
because it did not include data from financial institutions that fell 
under the threshold for very large financial institutions. They 
explained that, even though the proposed rule would not have covered 
such institutions, it would have impacted such institutions indirectly 
because they would have had to adjust their overdraft fees to remain 
competitive with very large financial institutions. As a result, they 
believed that the analysis should have considered the impact of the 
proposed rule on those institutions.
Consideration of Effects to Consumer Behavior
    Industry commenters stated that the analysis used to establish the 
proposed benchmark fee amounts failed to consider changes in consumer 
behavior. Specifically, these commenters explained that in the current 
market fees for non-covered overdraft credit have a deterrent effect. 
These commenters anticipated that, if the CFPB finalized any of the 
proposed benchmark fees, consumers would increase their use of 
overdraft credit. These commenters expressed concern that, as consumers 
increased their use of overdraft credit, more consumers would default 
on such credit, increasing charge-off costs as well as increasing the 
frequency of involuntary account closures and negative credit 
reporting. The commenters further anticipated that, as more consumers 
defaulted on non-covered overdraft credit, very large financial 
institutions would increase restrictions on such credit. In contrast, 
consumer advocate commenters expressed skepticism that overdraft fees 
were an effective way to deter consumers from overdrawing their deposit 
accounts.
Consideration of Market Conditions
    Various commenters stated that the analysis used to establish the 
proposed benchmark fee amounts failed to consider changes in market 
conditions, in particular how charge-off costs would increase during an 
economic downturn. At least one of these commenters also expressed 
concern that neither the benchmark fee nor the breakeven fee would be 
sufficient for very large financial institutions to recover losses 
incurred during an economic downturn. Additionally, several industry 
commenters noted that the proposed benchmark fee amounts failed to 
adjust for inflation.
Final Rule
    For the reasons stated in the proposal and below, the CFPB:
     Finalizes as proposed (but with technical edits to conform 
to Code of Federal Regulations style requirements) the definition of 
above breakeven overdraft credit at Sec.  1026.62(b)(1), the 
methodology described at Sec.  1026.62(d)(1) for determining whether 
credit is above breakeven overdraft credit, the description of the 
breakeven standard at Sec.  1026.62(d)(1)(i), and the formula at Sec.  
1026.62(d)(2) for calculating the breakeven standard;
     Amends Sec.  1026.62(d)(1)(ii) to set the benchmark fee at 
$5;
     Adds Sec.  1026.62(d)(3) to provide additional guidance 
regarding the circumstances under which a cost or charge-off loss is 
specifically traceable;
     Adds Sec.  1026.62(d)(4) to provide additional guidance 
regarding the meaning of the phrase ``charge or combination of 
charges'' for purposes of Sec.  1026.62(d)(1);
     Adds Sec.  1026.62(d)(5) to provide additional guidance on 
how a very large financial institution determines the pro rata share of 
its total direct costs and charge-off losses under Sec.  
1026.62(d)(1)(i); and
     Adds Sec.  1026.62(d)(6) to define ``previous year'' for 
purposes of Sec.  1026.62(d)(1)(i).
    These sections are discussed more fully below.
Definition of Above Breakeven Overdraft Credit (Sec.  1026.62(b)(1))
    Section 1026.62(b)(1) defines above breakeven overdraft credit as 
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).
    As discussed above, several commenters asked the CFPB to consider a 
threshold for above breakeven overdraft credit that varies based on a 
range of factors, such as the amount of the overdraft, the amount of 
overdraft fees, the duration of the overdraft, the cost to the very 
large financial institution of providing the overdraft, the size of the 
very large financial institution, the frequency with which the consumer 
overdraws their account, or a periodic rate. Other commenters asked the 
CFPB to allow above breakeven overdraft credit to continue to qualify 
as non-covered overdraft credit if such credit included consumer-
friendly features, such as cure periods, de minimis limits, transaction 
limits, and real-time notifications.
    The CFPB adopts the approach outlined in the proposed rule over the 
approaches proposed by commenters because it is easier for financial 
institutions to implement, easier for regulators to enforce, and more 
protective of consumers. Under the approach adopted in this rule, 
overdraft credit is above breakeven overdraft if the charge exceeds the 
higher of the fee calculated using the breakeven standard or the 
benchmark fee. As a result, both very large financial institutions and 
regulators can readily determine whether an overdraft transaction is 
above breakeven overdraft credit by reviewing the fee charged to verify 
whether it exceeds either the benchmark fee or the fee permitted under 
the breakeven standard. If the threshold for above breakeven overdraft 
varied by factors such as the amount, duration, and cost of each 
overdraft, both very large financial institutions and regulators would 
need to make case-by-case determinations regarding whether individual 
transactions fell above or below the relevant threshold for above 
breakeven overdraft credit.
    As noted, the approach adopted in the rule is also more protective 
of consumers. For example, many non-covered overdraft programs 
operating under the existing 1026.4(c)(3) exception already include 
consumer-friendly features, such as cure periods, de minimis limits, 
and transaction limits. Unfortunately, despite having these consumer-
friendly features, many non-covered overdraft programs still operate as 
high-cost consumer credit products that put consumers at risk of harms 
such as high cumulative fee burdens, account charge-offs, involuntary 
account closures, and loss of access to the banking system. Allowing 
above breakeven overdraft credit to continue to qualify as non-covered 
overdraft credit when it

[[Page 106800]]

includes consumer-friendly features would allow those potential harms 
to persist in their present form. In contrast, the approach adopted in 
the rule significantly mitigates these risks by ensuring that very 
large financial institutions provide the non-covered overdraft credit 
as a courtesy. Therefore, the CFPB adopts Sec.  1026.62(b)(1) as 
proposed.
General Calculations for Above Breakeven Overdraft Credit (Sec.  
1026.62(d)(1))
    Proposed Sec.  1026.62(d)(1) clarified 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 the breakeven standard 
outlined in Sec.  1026.62(d)(2); or (2) the benchmark fee published by 
the CFPB.
    The CFPB adopts Sec.  1026.62(d)(1) as proposed. As explained in 
the proposed rule, the Sec.  1026.62(d)(1) provides very large 
financial institutions 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 and the benchmark fee. This approach 
decreases 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, while providing other very large financial institutions the 
flexibility to make the above breakeven calculation on their own.
    In response to commenters' request for guidance clarifying whether 
extended or sustained overdraft fees, interest on outstanding overdraft 
balances, and transfer fees would count as overdraft charges for 
purposes of determining whether overdraft credit was above breakeven 
overdraft credit, the CFPB amends its proposal by adding Sec.  
1026.62(d)(4), which incorporates guidance that appeared in the 
preamble of the proposed rule into the final regulation text.\193\ 
Specifically, Sec.  1026.62(d)(4) provides that, for purposes of Sec.  
1026.62(d)(1), a charge or combination of charges includes all revenue 
received in connection with an overdraft transaction, including, but 
not limited to, 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.
---------------------------------------------------------------------------

    \193\ 89 FR 13852, 13869 (Feb. 23, 2024).
---------------------------------------------------------------------------

Breakeven Standard (Sec. Sec.  1026.62(d)(1)(i), 1026.62(d)(5), and 
1026.62(d)(6))
    Proposed Sec.  1026.62(d)(1)(i) outlined the breakeven standard 
used to determine whether overdraft credit was above breakeven 
overdraft credit for purposes of proposed Sec.  1026.62(b)(1). To 
employ the breakeven standard described at proposed Sec.  
1026.62(d)(1)(i), a very large financial institution determines its 
total direct costs and charge-off losses for providing non-covered 
overdraft credit to all accounts open at any point during the prior 
year and then divides that figure by the total number of non-covered 
overdraft transactions attributable to those accounts occurring in the 
prior year. The CFPB adopts Sec.  1026.62(d)(1)(i) as proposed.
    The CFPB sought comment regarding whether the breakeven standard 
should allow very large financial institutions to make separate 
calculations of their average costs and charge-off losses for non-
covered overdraft within subsets of their depository account portfolio, 
such as account relationship tiers or average account balance ranges. 
At least one commenter stated that the final rule should not allow very 
large financial institutions to make separate calculations of their 
average costs and charge-off losses for non-covered overdraft within 
subsets of their depository account portfolios. As explained above, the 
CFPB favors an approach for determining whether a transaction is above 
breakeven overdraft that is straightforward for very large financial 
institutions to implement and simple for regulators to validate. 
Requiring very large financial institutions to calculate their average 
costs and charge-off losses for non-covered overdraft across their 
entire depository account portfolio advances these goals in at least 
two ways. First, it simplifies the breakeven calculation because 
financial institutions would not need to determine how they would 
apportion costs within subsets of their depository account portfolios. 
Second, it allows regulators to confirm a very large financial 
institution's compliance with the above breakeven overdraft requirement 
more easily because they would only need to review a single 
calculation. Therefore, the final rule requires very large financial 
institutions to calculate their average costs and charge-off losses for 
non-covered overdraft across their entire depository account portfolio.
    The CFPB also sought comment regarding whether the rule should 
allow a very large financial institution to exclude non-covered 
overdraft transactions from the transaction totals used to calculate 
the threshold for the breakeven standard in instances where the very 
large financial institution waived, refunded, or otherwise did not 
assess fees for those transactions (``uncharged transactions''). As 
discussed above, several commenters addressed this issue. The CFPB has 
considered these comments and determined that a very large financial 
institution should include all non-covered overdraft transactions, 
including uncharged transactions, in the transaction totals used to 
calculate the breakeven threshold.
    The CFPB takes this position because including all non-covered 
overdraft transactions in the transaction totals used to calculate the 
breakeven threshold will keep the breakeven standard tailored to 
ensuring financial institutions can break even on just the non-covered 
overdraft transaction products and is not used to cross-subsidize other 
deposit account-related expenses like losses associated with uncharged 
transactions. The rule is not designed to allow a financial institution 
to turn a profit on non-covered overdraft transactions in order to 
cover other expenses related to the depository account. And the CFPB 
concludes that it would not need to provide an incentive to ensure 
uncharged transactions continue because the fact that financial 
institutions are providing them now at a loss suggests there is already 
sufficient logistical, competitive, or reputational incentive for them 
to exist.
    This approach will also result in fairer treatment of consumers who 
pay fees for non-covered overdraft. As explained above, a very large 
financial institution employs the breakeven standard by dividing its 
total direct costs and charge-off losses for providing non-covered 
overdraft credit to all accounts open at any point during the prior 
year (the numerator) by the total number of non-covered overdraft 
transactions attributable to those accounts occurring in the prior year 
(the denominator). If the final rule permitted very large financial 
institutions to exclude transactions that do not incur fees from the 
denominator, the share of costs and losses attributable to the 
transactions remaining in the denominator increases. As a result, 
consumers who paid fees for non-covered overdraft transactions would 
pay higher fees for those

[[Page 106801]]

transactions than they otherwise would under a rule requiring very 
large financial institutions to include all non-covered overdraft 
transactions in the transaction totals used to calculate the breakeven 
threshold. To avoid such cost shifting, the CFPB has determined that a 
very large financial institution should include all non-covered 
overdraft transactions, including uncharged transactions, in the 
transaction totals used to calculate the breakeven threshold.
    The CFPB notes that another method for ensuring that the breakeven 
fees only covered losses on non-covered overdraft transactions would be 
to take out losses associated with uncharged transactions. The CFPB has 
determined that it would be practically difficult for financial 
institutions to isolate losses from charge-offs that resulted from 
overdrafts that incurred fees from losses from charge-offs resulting 
from uncharged transactions. Therefore, the CFPB has determined the 
best approach is to allow financial institutions to include all losses 
in the breakeven calculation, and account for that by including all 
overdraft transactions, whether they involved a fee or not. The result 
is to reach a fee amount that more accurately reflects a financial 
institution's marginal costs and losses per transaction.
    To clarify that very large financial institutions must include 
uncharged transactions in the transaction totals used to calculate the 
threshold for the breakeven standard, the CFPB amends its proposal by 
adding Sec.  1026.62(d)(5). Section 1026.62(d)(5) will provide that, 
when calculating the pro rata share of its total direct costs and 
charge-off losses for providing non-covered overdraft credit in the 
previous year, a very large financial institution must include all non-
covered overdraft transactions from the previous year in its 
calculation.
    At least one other commenter asked the CFPB to clarify how a very 
large financial institution can implement the breakeven standard if the 
institution lacks cost and charge-off loss data from the previous year. 
This commenter suggested that the CFPB amend the breakeven standard so 
that it provides very large financial institutions with the flexibility 
to use less than 12 months of cost and charge-off loss data to 
calculate the breakeven fee.
    As explained in the proposed rule, very large financial 
institutions must use annualized cost and charge-off loss figures 
because those figures even out seasonal variations that could occur 
with a shorter review period.\194\ As a result, if a very large 
financial institution lacks cost and charge-off loss data covering a 
full year, it cannot implement the breakeven standard. Instead, a very 
large financial institution wishing to offer non-covered overdraft 
credit should utilize the benchmark fee until it has sufficient data to 
implement the breakeven standard.
---------------------------------------------------------------------------

    \194\ 89 FR 13852, 13870 (Feb. 23, 2024).
---------------------------------------------------------------------------

    The proposal did not define the term ``previous year'' for purposes 
of Sec.  1026.62(d)(1)(i), but the CFPB intended to provide very large 
financial institutions with flexibility to use cost and charge-off loss 
data from a recent 12-month period, such as the prior calendar year, 
any 365-day period that begins within the prior calendar year, the 
prior four financial quarters, or the prior accounting year. To provide 
additional guidance regarding the meaning of ``previous year,'' the 
CFPB amends its proposal by adding Sec.  1026.62(d)(6). Section 
1026.62(d)(6) provides that, for purposes of Sec.  1026.62(d)(1)(i), 
the term ``previous year'' means a period that encompasses, at the very 
large financial institution's option, any of the following periods--the 
prior calendar year, any 365-day period that begins within the prior 
calendar year, the prior four financial quarters, or the very large 
financial institution's prior accounting year.
    When implementing the breakeven standard either for the first time 
or after transitioning from the benchmark fee, a very large financial 
institution can include direct costs and charge-off losses from any 
transaction that was a non-covered overdraft transaction during the 
previous year. For example, to comply with the final rule's effective 
date of October 1, 2025, a very large financial institution using the 
breakeven standard could calculate direct costs and charge-off losses 
based on all non-covered overdraft transactions occurring from January 
1, 2024 through December 31, 2024 (the previous calendar year).
Cost and Loss Calculation for the Breakeven Standard (Sec. Sec.  
1026.62(d)(2) and 1026.62(d)(3))
    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 proposed to add Sec.  
1026.62(d)(2). Proposed Sec.  1026.62(d)(2) provided 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.
    As discussed above, various commenters asked the CFPB to provide 
greater clarity regarding the breakeven standard. Most of these 
commenters asked the CFPB to provide additional guidance regarding the 
types of costs and charge-off losses that are considered specifically 
traceable costs and charge-off losses under the breakeven standard.
    As the CFPB explained in its proposal, when calculating its costs 
and charge-off losses under the breakeven standard, a very large 
financial institution can consider costs and charge-off losses that are 
specifically traceable to its provision of non-covered overdraft 
credit. The CFPB proposed this specifically traceable standard in order 
to prevent very large financial institutions from employing the 
breakeven standard in a manner that would have circumvented Sec.  
1026.62(b)(1). Without such a restriction, very large financial 
institutions might have included costs and charge-off losses in their 
average cost and loss calculations that are more appropriately 
attributable either to other segments of their deposits business or to 
their deposits business overhead.
    The proposed rule also provided an example of how the specifically 
traceable test would work in practice. In that example, if a very large 
financial institution had used issue tagging in its call center to 
reasonably and accurately gauge the number of customer service calls it 
received 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. This example demonstrates that the specifically 
traceable test consists of two questions. First, does the cost or 
charge-off loss have a direct relationship to the provision of non-
covered overdraft services? Second, can the very large financial 
institution provide evidence to demonstrate that direct relationship? 
If a very large financial institution can answer both questions in the 
affirmative, then the cost or charge-off loss is specifically 
traceable, and the very large financial institution may consider the 
cost or charge-off loss for purposes of the breakeven standard.
    As discussed above, some commenters stated that the formula for 
calculating costs and charge-off losses under the breakeven standard 
should include general overhead costs and charge-off losses resulting 
from unauthorized use, EFT errors, billing errors, returned deposit 
items, or rescinded provisional credit. However, as other commenters 
noted, such costs and losses do not have a direct

[[Page 106802]]

relationship to the provision of non-covered overdraft services. This 
is true because very large financial institutions incur those costs and 
losses even if they do not extend non-covered overdraft credit to the 
consumer. As a result, such costs and charge-off losses fail the first 
part of the specifically traceable test and cannot be included in the 
breakeven standard's cost and charge-off calculation formula.
    Very large financial institutions should employ a similar analysis 
when considering whether costs such as communication costs, branch 
servicing costs, collection costs, core provider/vendor costs, 
compliance costs, and technology costs are specifically traceable to 
the provision of non-covered overdraft credit. For example, a commenter 
asked whether the final rule would permit a very large financial 
institution to allocate a portion of its call center expenses to 
overdraft transactions if it did not have a method to track the calls 
it received relating to non-covered overdraft credit. As demonstrated 
by the example above, because the institution could not satisfy the 
second part of the specifically traceable test by producing evidence to 
substantiate the cost, the cost would not be specifically traceable and 
the very large financial institution could not include the cost under 
the breakeven standard.
    After considering the comments received, and for the reasons stated 
above, the CFPB adopts Sec.  1026.62(d)(2) as proposed. For clarity, 
the CFPB is amending its proposal by adding Sec.  1026.62(d)(3) to 
describe the two-part test discussed above. Specifically, Sec.  
1026.62(d)(3) provides that, for purposes of Sec.  1026.62(d)(2), a 
cost or charge-off loss is specifically traceable if it has a direct 
relationship to the provision of non-covered overdraft services and the 
very large financial institution can provide evidence to demonstrate 
that direct relationship.
Benchmark Fee (Sec.  1026.62(d)(1)(ii))
    Section 1026.62(d)(1)(ii) establishes the benchmark fee. In its 
proposal, the CFPB suggested four potential benchmark fee amounts--$3, 
$6, $7, and $14--based on data collected from five very large financial 
institutions (the sample) and sought comment on whether to finalize one 
of these or some other fee amount. The CFPB used the same formula (the 
benchmark formula) to calculate all four of these proposed alternative 
benchmark fees but relied on different datapoints from the sample to 
derive each fee amount.
    The proposed benchmark formula used a methodology that was similar 
to the methodology that a very large financial institution would use to 
calculate its costs and losses under the breakeven standard provided in 
Sec.  1026.62(d)(2) (the breakeven formula). The CFPB sought comment on 
this approach. At least one commenter stated that the methodology used 
to calculate the benchmark fee should track the breakeven formula. The 
commenter further underscored that both methodologies should treat the 
issue of uncharged transactions consistently.
    Consistent with its proposal, the CFPB uses a calculation 
methodology for the benchmark fee that is similar to the calculation 
methodology that a very large financial institution uses to calculate 
its cost and losses under the final rule's breakeven standard. The CFPB 
considers this approach appropriate because the benchmark fee is meant 
to serve as a proxy for a financial institution's own breakeven 
calculation. The CFPB finds that providing such a proxy will facilitate 
compliance by decreasing compliance costs for very large financial 
institutions and by accommodating those institutions that lack the 
ability to determine their average costs and charge-off losses for 
providing non-covered overdraft credit under the breakeven standard. To 
advance these goals, the CFPB conducted its own calculation under the 
breakeven standard using cost and loss data from a sample of very large 
financial institutions. The results of this calculation reflect the 
average costs and charge-off losses for providing non-covered overdraft 
credit under the breakeven standard for the financial institutions in 
its sample. The CFPB anticipates that many very large financial 
institutions will be able to rely on the benchmark fee in lieu of 
performing their own calculation under the breakeven standard. 
Furthermore, as discussed above, the final rule requires a very large 
financial institution to include all non-covered overdraft transactions 
in the transaction totals used to calculate the breakeven threshold. 
For the same reasons, the CFPB uses the same approach to calculate the 
benchmark fee.
    In the proposal, the CFPB also considered whether it should 
calculate the benchmark fee based on data from all five institutions in 
its sample or just the financial institution in its sample with the 
highest charge-off losses. Commenters in favor of using data from all 
five institutions generally stated that the CFPB should not calculate 
the benchmark fee using the data of a single outlier financial 
institution and that the average from the entire sample provides a more 
accurate benchmark fee estimate. These commenters also expressed 
concern that relying on data from the outlier institution might 
discourage very large financial institutions from adopting practices 
that reduce charge-offs, which could result in greater consumer harm in 
the form of account closures and negative reporting than otherwise 
would occur if the CFPB calculated the benchmark fee based on the 
average charge-off losses from all five institutions in its sample.
    Commenters in favor of using data from the outlier institution 
stated that the CFPB's sample was small and that the average may not be 
probative of the appropriate benchmark fee amount. They further noted 
that, even if the CFPB adopted its highest proposed benchmark fee of 
$14, the benchmark fee would reflect a significant reduction in the 
average market price for non-covered overdraft. As a result, these 
commenters thought that basing the benchmark fee on data from the 
outlier institution was the sounder approach.
    The CFPB has considered these comments and determined that it 
should calculate the benchmark fee based on data from all five 
institutions in its sample. The CFPB shares the concerns expressed by 
commenters who noted that relying on data from the outlier institution 
might result in greater consumer harm than otherwise would occur if the 
CFPB calculated the benchmark fee based on the average charge-off 
losses from all five institutions in its sample. In addition, the 
outlier institution's losses were significantly higher than losses for 
other institutions in the sample and for institutions that provided 
loss information in their comments, which suggests that using the 
outlier institution's losses to set the benchmark would overestimate 
the losses incurred by many institutions. Moreover, to the extent the 
benchmark fee amount is insufficient for a given institution to recoup 
its costs and losses, it may calculate its own costs and losses using 
the breakeven standard.
    By applying a calculation methodology similar to the breakeven 
formula to all transaction data taken from all five of the very large 
financial institutions, the CFPB is using the same approach it used to 
derive the proposed $3 benchmark fee. As discussed above, the CFPB 
received numerous comments regarding the amount of the benchmark fee. 
These comments fell into three general categories--support for the $3 
benchmark fee, support for a benchmark fee falling in between the $3 
and $14 range, and support for a benchmark fee

[[Page 106803]]

of $14 or more. Proponents of the $3 benchmark fee stated that a $3 
benchmark fee would benefit consumers. They also viewed a $3 benchmark 
fee as generous because they believed that the CFPB overestimated the 
cost of funds and operational costs faced by very large financial 
institutions. At least two commenters supported a benchmark fee falling 
between the $3 and $14 range. One of these commenters explained that 
their financial institution conducted a review of its costs for 
overdraft credit and determined that a $5 fee would be sustainable for 
their institution. The other commenter stated that the CFPB should set 
the benchmark fee at $6, but only if the rule also mandated additional 
consumer protections, such as grace periods, caps on the number of 
overdraft fees per day, and de minimis thresholds. This commenter 
explained that it wanted the CFPB to adopt the approach it used to 
derive the proposed $6 benchmark fee, but with additional consumer 
protections in order to prevent very large financial institutions from 
changing waiver policies in order to increase revenues. Proponents of a 
benchmark fee of $14 or more stated either that their costs were closer 
to $14 or that the CFPB's estimates of very large financial 
institutions' costs were too low. These commenters also criticized the 
analysis used to establish the proposed benchmark fee amounts. First, 
they stated that the sample used for the analysis was too small and was 
unrepresentative of the broader market. Additionally, they criticized 
the sample because it did not include data from financial institutions 
that fell under the threshold for very large financial institutions.
    No commenters representing very large financial institutions 
provided the CFPB with additional data that would impact the findings 
of its original analysis establishing the proposed benchmark fee 
amounts. One commenter representing a bank with $1.6 billion in assets 
provided a breakdown of known costs and losses associated with the 
operation of their bank's overdraft program. This commenter determined 
that the known costs and losses associated with their bank's overdraft 
program represented roughly 39 percent of its overdraft fee of $25, 
which equates to $9.75. However, this estimate likely overstates the 
costs and losses attributable to a very large financial institution's 
overdraft program for several reasons. First, the commenter's cost 
estimates included costs for manual review of overdraft payment 
decisions by bank employees. These review costs represented $1 of the 
$9.75, or approximately ten percent of its costs. The CFPB expects that 
many very large financial institutions have automated such reviews, 
making them significantly less costly. Second, the commenter's cost 
estimates included costs associated with mailing overdraft notices. 
These mail-related costs represented $1.75 of the $9.75, or 
approximately 18 percent of its costs. The CFPB expects that many very 
large financial institutions provide such notices electronically, 
significantly lowering the cost of providing such notices. Accounting 
for these and other efficiencies gained by scale at very large 
financial institutions, the CFPB expects the costs and losses of many 
very large financial institutions to be lower than this bank's 
estimated costs and losses. An additional commenter representing a 
credit union with $4.8 billion in assets stated that based on a recent 
review of costs conducted by the credit union, a $5 fee would be 
sustainable for their institution.
    Both commenters referenced in the preceding paragraph represented 
financial institutions with less than $10 billion in assets. It stands 
to reason that many very large financial institutions, which have the 
advantage of scale, could continue to operate overdraft programs at the 
proposed $3 benchmark fee. As noted above, the benchmark fee is not a 
regulatory obligation; it is a proxy for a financial institution's own 
breakeven calculation and is being adopted to ease the compliance 
burden of implementing the breakeven standard. To the extent the 
benchmark fee amount is insufficient for a given institution to recoup 
its costs and losses, that institution may calculate its own costs and 
losses using the breakeven standard. However, to help ensure that the 
benchmark fee covers additional costs noted by commenters, such as 
costs relating to branch servicing, collections, core provider/vendor 
services, compliance, technology, and the provision of overdraft 
notices, the CFPB will increase its cost estimates for its proposed $3 
benchmark fee by $2 per transaction. Therefore, the CFPB finalizes 
Sec.  1026.62(d)(1)(ii) to set the benchmark fee at $5.
    Industry commenters also expressed concern that, if the CFPB 
finalized any of the proposed benchmark fees, consumers would increase 
their use of overdraft credit. These commenters contended that, as 
consumers increased their use of overdraft credit, more consumers would 
default on such credit, increasing charge-off costs as well as 
increasing the frequency of involuntary account closures and negative 
credit reporting. The commenters further anticipated that, as more 
consumers defaulted on non-covered overdraft credit, very large 
financial institutions would increase restrictions on such credit.
    Both the proposed rule's 1022(b) analysis and the final rule's 
1022(b) analysis have considered how lower prices might impact consumer 
behavior.\195\ For consumers who overdraft by mistake, both 1022(b) 
analyses determined that a lower price for non-covered overdraft credit 
would be unlikely to change consumer behavior because those consumers 
did not intend to overdraft in the first place. This view is consistent 
with the views expressed by consumer advocates who commented that 
overdraft fees are not an effective deterrent and that lowering the 
amount of overdraft fees likely will not significantly impact whether 
or not a consumer overdraws their account. For consumers who use non-
covered overdraft credit deliberately, both 1022(b) analyses determined 
that a lower price for non-covered overdraft credit would lead some 
consumers to use such credit more frequently on the margin. 
Nonetheless, very large financial institutions could take proactive 
measures to reduce such use, should they prefer that--such as by 
managing overdraft credit limits.
---------------------------------------------------------------------------

    \195\ See 89 FR 13852, 13893 (Feb. 22, 2024); part VII.E.1.iii 
of this rule.
---------------------------------------------------------------------------

    Commenters also stated that the analysis used to establish the 
proposed benchmark fee amounts failed to consider changes in market 
conditions. Specifically, these commenters noted that the analysis 
failed to consider how charge-off costs could increase during an 
economic downturn. At least one of these commenters also expressed 
concern that neither the benchmark fee nor the breakeven fee would be 
sufficient for very large financial institutions to recover losses 
incurred during an economic downturn. Additionally, several commenters 
noted that the proposed benchmark fee amounts failed to adjust for 
inflation.
    To the extent that a very large financial institution determines 
that changes in market conditions, such as an economic downturn or 
inflation, make the benchmark fee too low, the final rule provides very 
large financial institutions with the flexibility to calculate their 
own breakeven pricing or to offer covered overdraft credit in 
compliance with the requirements of Regulation Z. The CFPB expects that 
very large financial institutions employing the breakeven standard 
during an economic downturn should

[[Page 106804]]

be able to effectively manage their credit risk through traditional 
credit risk management practices, such as adjusting underwriting 
standards. Nevertheless, the CFPB will continue to monitor the market 
to determine whether adjustments to the benchmark fee or the breakeven 
standard are warranted.

E. Changes To Covered Overdraft Credit Offered by Very Large Financial 
Institutions

    As discussed below, the CFPB is updating 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 proposed 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 and to 
require the institution to structure covered overdraft credit as a 
separate credit account. The CFPB preliminarily determined that this 
structural requirement would make it easier for creditors and consumers 
to implement and understand, respectively, covered overdraft credit. 
For the reasons discussed below, the CFPB is finalizing Sec.  
1026.62(c) as proposed.
Comments Received
    Several industry commenters opposed the CFPB's proposal. They 
argued that the requirement to structure overdraft as a separate 
account would substantially increase the cost of providing overdraft 
credit relative to the current cost of providing non-covered overdraft 
as a negative balance on the asset account. Some argued that the 
requirement was unreasonable or impractical in connection with most 
overdrafts, which are of small duration and amount.
    Several consumer advocate commenters supported the CFPB's proposal. 
They argued that important TILA consumer protections, including the 
offset prohibition and the periodic statement disclosure and billing 
error resolution requirements, would be difficult or impossible for 
creditors to implement without separating a consumer's asset account 
from the consumer's linked covered overdraft credit. They also argued 
that the separate account structure would improve consumers' ability to 
know when they are accessing, and to decide whether they want to 
access, covered overdraft credit, as well as their ability to know when 
they are repaying, and to decide whether they want to repay, the 
overdraft credit. They argued that the current high cost of overdraft 
credit makes such consumer understanding and control particularly 
important. One nonprofit commenter observed that structuring covered 
overdraft as a credit account separate from the asset account is the 
way that overdraft lines of credit have worked since TILA's enactment 
in 1968 and is the way that checking accounts with linked credit card 
accounts work. This commenter agreed with the CFPB's proposal because, 
this commenter stated, the separation of the credit account from the 
asset account is a core element of TILA.
Final Rule
    For the reasons discussed below, the CFPB is finalizing Sec.  
1026.62(c) as proposed. Final Sec.  1026.62(c) prohibits a very large 
financial institution from structuring covered overdraft credit as a 
negative balance on a checking or other transaction account and 
requires the institution to structure covered overdraft credit as a 
separate credit account. The CFPB has 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.
    The separate account structure requirement will enable institutions 
to comply with the requirements of TILA and Regulation Z, including, 
for example, the offset prohibition. It is not possible for an 
institution to maintain both a credit balance and an asset balance at 
the same time for a consumer within a single asset account that has no 
tied credit account or subaccount. It is therefore also not possible 
for the institution to provide overdraft credit to the consumer in a 
manner that complies with the Regulation Z offset prohibition without 
providing the consumer with a credit account or subaccount that is 
separate from the tied asset account.
    Further, Regulation Z's open-end rules are generally drafted with 
the assumption that the product in question is a pure credit product, 
without substantial positive funds. For example, existing Sec.  
1026.11(a) generally provides that creditors must refund any positive 
balances on the credit account to the consumer within six months. As 
another example, the rules for defining finance charges in the credit 
card context generally treat all transaction charges as finance 
charges, which makes sense when all transactions are generally assumed 
to involve use of credit.
    The separate account structure requirement will also avoid the 
uninformed use of credit by enabling consumers to better understand and 
monitor their asset and credit balances and trace how their funds are 
being used through more informative periodic statement disclosures, 
both for the asset account as required by Regulations E and DD and for 
the linked separate covered overdraft credit account as required by 
Regulation Z. The separate account structure will protect consumers 
from unfair credit billing and credit card practices by enabling them 
to control their funds. Specifically, the requirement will empower 
consumers to use funds from incoming deposits to their accounts for 
purposes other than immediately repaying an overdraft balance, as the 
offset prohibition requires institutions to permit consumers to do.
    The CFPB has determined that the separate credit account structure 
by itself will not materially increase the cost of providing non-
covered overdraft credit that will become covered overdraft credit 
under this final rule. This structure is demonstrably feasible today 
because very large financial institutions already have it in place for 
their overdraft lines of credit and for their credit cards linked to 
checking accounts. Indeed, creditors have structured their overdraft 
lines of credit in this manner since TILA's enactment. If a very large 
financial institution that today does not offer such lines of credit or 
linked credit cards seeks to provide above breakeven overdraft credit, 
the institution will be required to implement the separate account 
structure as part of doing so, when they will already be incurring 
costs for implementing other operational changes

[[Page 106805]]

to offer covered overdraft credit. The expected costs and benefits of 
these changes are discussed in part VII below. The CFPB has also 
determined that it will not be impractical for institutions to comply 
with the separate account requirement in connection with overdrafts of 
small duration and amount because these characteristics have nothing to 
do with the cost of the separate account structure requirement. For 
example, many credit card purchases are of small dollar amounts. These 
small purchases simply get incremented to the credit card account 
balance at virtually zero marginal cost. At some later time, funds are 
transferred from the consumer's asset account to repay the credit 
balance, again at virtually zero marginal cost.
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 (1) is a ``credit card account 
under an open-end (not home-secured) consumer credit plan'' under 
Regulation Z; or (2) can be accessed by a ``credit card'' or ``charge 
card,'' as those terms are defined 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, however, 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.'' The CFPB proposed applying all credit card provisions 
generally to covered overdraft credit accounts if the credit account 
can be accessed by a hybrid debit-credit card, as defined in the 
proposal, namely a debit card offered by a very large financial 
institution. As discussed further below, the CFPB is finalizing these 
changes as proposed, such that the final rule applies all the credit 
card provisions to covered overdraft credit accounts if the credit 
account can be accessed by a hybrid debit-credit card.
i. Applying CARD Act Provisions of Regulation Z To Covered Overdraft 
Credit
    The CFPB proposed subjecting all covered overdraft credit to the 
CARD Act provisions of Regulation Z in subparts B and G (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, a debit card that can access covered overdraft credit 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, the overdraft credit is not subject to 
the CARD Act provisions.\196\ The final rule subjects such credit to 
the CARD Act provisions when it is offered by very large financial 
institutions. To implement these changes, the rule adds a new 
definition of ``hybrid debit-credit card,'' amends the definitions of 
``credit card'' and ``credit card account under an open-end (not home-
secured) consumer credit plan,'' and makes other clarifying changes to 
the rule text and associated commentary.
---------------------------------------------------------------------------

    \196\ 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 
existing 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 final rule amends 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 will be 
considered covered overdraft credit when this rule becomes 
effective. Like other covered overdraft credit, this newly covered 
overdraft credit will be generally 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 final rule updates these non-statutory exceptions, 
which subjects certain covered overdraft credit, including certain 
newly covered overdraft credit, to the CARD Act provisions.
---------------------------------------------------------------------------

Background on the CARD Act and Overdraft
    As discussed in the proposed rule, 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.\197\ 
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 applies to open-end covered overdraft credit 
that is accessed by a credit card, including a debit card.
---------------------------------------------------------------------------

    \197\ Section 2 of the CARD Act expressly granted authority to 
the Federal Reserve Board to issue such rules as it considers 
necessary to the carry out the Act, and the CFPB now has that 
authority pursuant to the CFPA.
---------------------------------------------------------------------------

    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.'' \198\ That term is defined in 
existing 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 B and subpart G 
that were promulgated or amended to implement the CARD Act. Like the 
statutory definition, 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.
---------------------------------------------------------------------------

    \198\ 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 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 B and subpart G that apply to a ``credit card 
account under an open-end (not home-secured) consumer credit plan'' 
because the Board adopted two non-statutory exceptions that exclude 
overdraft lines of credit from that definition. The exceptions in 
existing Sec.  1026.2(a)(15)(ii)(B) and (C), respectively, are (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 that can 
access a covered separate credit feature as defined in Sec.  1026.61. 
Although Regulation Z does not explicitly 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 available in the asset account.
    Aside from the CARD Act provisions in subpart B and subpart G, 
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. The existing

[[Page 106806]]

overdraft-related exclusion in 12 CFR 1026.4(c)(3), which the CFPB is 
narrowing in this rulemaking, does not exclude overdraft products where 
``the payment of [overdrawing] items and the imposition of the charge 
were previously agreed upon in writing.'' To the extent these overdraft 
line of credit products can be accessed by a debit card or other single 
credit device, the debit card or other single credit device is a 
``credit card'' and is generally subject to provisions in Regulation Z 
that apply to a ``credit card.'' \199\
---------------------------------------------------------------------------

    \199\ See Regulation Z comment 2(a)(15)-2.i.B.
---------------------------------------------------------------------------

    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.\200\ The 
Board also acknowledged that a debit card that accesses an overdraft 
line of credit is a ``credit card.'' \201\
---------------------------------------------------------------------------

    \200\ See 75 FR 7658, 7664 (Feb. 22, 2010).
    \201\ 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 
B and subpart G 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.\202\ 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, over-the-limit 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.\203\
---------------------------------------------------------------------------

    \202\ Id. at 7665.
    \203\ Id.
---------------------------------------------------------------------------

Hybrid Debit-Credit Card (Sec.  1026.62(b)(5)), Credit Card (Sec.  
1026.2(a)(15)(i)), and Credit Card Account Under an Open-End (Not Home-
Secured) Consumer Credit Plan (Sec.  1026.2(a)(15)(ii))
    In Sec.  1026.62(b)(5), the CFPB proposed defining the new term 
``hybrid debit-credit card'' for clarity and ease of reference. It also 
proposed amending the definition of ``credit card'' in Sec.  
1026.2(a)(15)(i) and related commentary in 2(a)(15) to clarify what is 
and is not a credit card when certain credit devices can access covered 
overdraft credit. Under current Regulation Z, a debit card that can 
access an overdraft line of credit is a credit card.\204\ The CFPB also 
proposed amending 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 B 
and subpart G. 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 because it 
is above breakeven overdraft credit.
---------------------------------------------------------------------------

    \204\ See existing Regulation Z comment 2(a)(15)-2.i.B (stating 
that examples of credit cards include a debit card that also 
accesses a credit account).
---------------------------------------------------------------------------

Comments Received
    Various commenters provided general feedback on the application of 
the credit card provisions. With regard to adding a new definition of 
``hybrid debit-credit card,'' and amending the definitions of ``credit 
card,'' and ``credit card account under an open-end (not home-secured) 
consumer credit plan,'' several commenters, including consumer 
advocates as well as a trade group, wrote in support of these changes, 
with the consumer advocate commenters noting that the CFPB has 
authority under TILA and the CARD Act to make these changes, these 
changes are consistent with Regulation Z, and finance charges or four 
installments are not necessary for there to be a credit card. Some 
commenters, including a consumer advocate, a think tank, and a member 
of Congress, noted that debit cards that can access overdraft credit 
are credit cards under TILA and the CARD Act. At least one consumer 
advocate commenter also noted that the CFPB has the authority to bring 
all overdraft credit accessed through a device within the definition of 
credit card, regardless of the size of the fee or even the presence of 
any fee at all. These and other consumer advocate commenters support 
the CFPB eliminating the regulatory exceptions to bring the regulatory 
scheme closer to the plain meaning of the CARD Act, and to fulfill the 
consumer protection purposes of the CARD Act.
    Many industry commenters opposed the application of the credit card 
rules to overdrafts, stating that there would be additional costs, 
complexity, and risk involved for very large financial institutions 
offering above breakeven overdraft credit. Industry commenters said 
consumers would also be harmed because they would be denied overdraft 
credit because of the CARD Act requirements, would see the cost of 
their asset accounts go up due to the cost of the credit card 
provisions, and would be confused by receiving periodic disclosures 
under both Regulation Z and Regulation E. One noted that while stronger 
regulations for overdraft lines of credit are needed, regulatory 
flexibility in the application of the credit card rules also was needed 
so as not to stifle innovation. This commenter and consumer advocate 
commenters questioned whether certain credit card provisions should not 
apply to or should be more flexible for overdrafts.
    With regard to comments about using CFPB's statutory authority to 
expand Regulation Z credit card coverage to overdrafts that would be 
non-covered overdrafts under the final rule, for the reasons discussed 
further above, the CFPB declines to do so. The CFPB recognizes that the 
credit card provisions may result in additional costs, complexity and 
risk to very large financial institutions depending on how a very large 
financial institution chooses to price and structure its overdraft 
credit in response to this rule. However, the CFPB has determined that 
the regulatory exceptions from the statutory credit card provisions 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 determined that the prevalence or nature of a 
particular type of credit card should not render it

[[Page 106807]]

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, includes 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 changes 
in this rule in several ways, including by offering covered overdraft 
lines of credit to many consumers who currently receive non-covered 
overdraft credit, including subprime consumers.
    Very large financial institutions could also react to this rule by 
offering covered overdraft credit on different terms than those that 
have historically been offered. 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 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, whom the CFPB has in the past referred to as ``frequent 
overdrafters,'' incur most overdraft fees. In light of the final rule's 
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 may have reduced incentive to provide non-
covered overdraft credit to the frequent overdraft consumers who 
typically have lower credit scores \205\ 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 rule would 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.
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    \205\ See CFPB 2017 Data Point at 16 tbl.2; see also CFPB 2014 
Data Point at 12 (showing non-overdrafters had a median credit score 
of 747, infrequent overdrafters had a median credit score of 654, 
occasional overdrafters had a median credit score of 610, moderately 
frequent overdrafters had a median credit score of 585, and very 
frequent overdrafters had a median credit score of 563.)
---------------------------------------------------------------------------

    The CFPB also has determined that applying the CARD Act provisions 
could provide important benefits to economically vulnerable consumers 
such as ``subprime'' consumers. Many of the provisions of the CARD Act 
target credit card practices affecting these consumers.\206\ To the 
extent that some financial institutions would offer covered overdraft 
credit to more economically vulnerable consumers in response to the 
final rule, 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 vulnerable consumer--receiving the 
same protections that a subprime credit card consumer receives today, 
consistent with the broad statutory language in the CARD Act.
---------------------------------------------------------------------------

    \206\ See, e.g., CARD Act section 105, entitled ``Standards 
applicable to initial issuance of subprime or `fee harvester' 
cards.''
---------------------------------------------------------------------------

    With respect to comments about possible consumer confusion due to 
consumers receiving both monthly credit account disclosures and monthly 
asset account disclosures, Regulations Z, E and DD permit the required 
disclosures to be combined in one communication as long as the 
disclosures comply with the regulatory requirements.\207\ As discussed 
further above, the addition of credit disclosures will further 
facilitate consumers' understanding of the cost of overdraft credit.
---------------------------------------------------------------------------

    \207\ See Regulation Z comment 5(a)(1)-2, Regulation E Sec.  
1005.4(b), and Regulation DD Sec.  1030.3(a).
---------------------------------------------------------------------------

Final Rule
    To prevent the market for Regulation Z-covered overdraft from 
posing consumer risks after the rule goes into effect, 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 carry out the CARD Act pursuant to section 2 of the CARD 
Act, the final rule subjects all covered overdraft credit to the CARD 
Act provisions in subpart B and subpart G if that credit is (1) open-
end credit; (2) accessible by a credit card; and (3) offered by a very 
large financial institution.
    The final rule defines ``hybrid debit-credit card'' in Sec.  
1026.62 to mean any card, plate, or other single credit device that a 
consumer may use from time to time to obtain covered overdraft credit 
from a very large financial institution. This definition 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.
    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.'' \208\ 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 ``a hybrid prepaid-credit card as defined in 
Sec.  1026.61.'' The final rule revises Sec.  1026.2(a)(15)(i) to 
clarify that a debit card that can access a covered overdraft credit 
account is a credit card. Thus, under the rule, 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. As 
noted, under the extant regulation a debit card that can access an 
overdraft line of credit is a credit card. Consistent with these 
changes and to clarify what is not a credit card, the final rule amends 
comments 2(a)(15)-2.i.B, 2(a)(15)-2.i.A, 2(a)(15)-2.ii.C, and 2(a)(15)-
2.ii.A and adds comment 2(a)(15)-2.ii.E. As proposed, and under current 
law, the final rule clarifies in comment 2(a)(15)-2.ii.C 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. For example, if an institution permits a consumer 
to use the account number to initiate ACH transactions that can access 
credit to purchase goods and services, the account number is a credit 
card. This is so even if the institution declines the consumer's debit 
card transactions that would access credit if authorized.
---------------------------------------------------------------------------

    \208\ 15 U.S.C. 1602(l).
---------------------------------------------------------------------------

    The final rule also amends the definition of a ``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 card-accessible 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 B and subpart G.

[[Page 106808]]

Discussion of the Effect of Applying Regulation Z's CARD Act Provisions 
To Covered Overdraft Credit Accounts Accessed by a Hybrid Debit-Credit 
Card
    The changes discussed above subject covered overdraft credit to the 
CARD Act provisions in subpart B and subpart G if that credit is 
accessible by a debit card and offered by a very large financial 
institution. In addition to the changes discussed above, the CFPB also 
proposed 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 proposed 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 proposed 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. The CFPB is finalizing those changes as 
proposed.
    As mentioned, various commenters provided general feedback on the 
application of the credit card provisions. A consumer advocate 
commenter noted its support and reasoning for applying each of the 
credit card provisions to hybrid debit-credit cards, including (but not 
limited to) provisions related to limitations on penalty fees (Sec.  
1026.52(b)(1) and (b)(2)), the prohibition on increases in any APR, 
fee, or finance charge applicable to any outstanding balance on a 
credit card account (Sec.  1026.55), the requirement that card issuers 
reevaluate rate increases (Sec.  1026.59), and the requirement that 
institutions of higher education publicly disclose agreements with card 
issuers and limit the marketing of credit cards on or near college 
campuses (Sec.  1026.57). This commenter noted that other credit card 
provisions may not be applicable to debit cards that access overdraft 
credit as they are currently structured but that the provisions should 
apply as these cards or overdraft practices change. The commenter 
mentioned provisions including those regarding how a card issuer must 
allocate payments in excess of the minimum periodic payment (Sec.  
1026.53), the limitation on card issuers imposing a finance charge as a 
result of the loss of a grace period (Sec.  1026.54), and the 
restriction 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 (Sec.  1026.56).
    To the extent that commenters provided substantive comments on 
specific credit card provisions, they are discussed below.
Ability To Pay (Sec.  1026.51)
    The ability to pay requirement in Sec.  1026.51 requires assessment 
of the consumer's ability to pay the credit extended, such as covered 
overdraft credit, based on the consumer's income or assets and the 
consumer's current obligations.\209\ It requires reasonable written 
policies and procedures to consider the consumer's ability to make the 
required minimum payments under the terms of the account based on a 
consumer's income or assets and a consumer's current obligations.\210\ 
Reasonable policies and procedures also include consideration of at 
least one of the following: The ratio of debt obligations to income; 
the ratio of debt obligations to assets; or the income the consumer 
will have after paying debt obligations.\211\ It would be unreasonable 
for a card issuer not to review any information about a consumer's 
income or assets and current obligations.\212\ With regards to sources 
of information about a consumer's income or assets, the commentary 
states that the financial institution may consider information provided 
by the consumer in connection with the account, provided by the 
consumer in connection with any other financial relationship the card 
issuer or its affiliates have with the consumer, obtained through third 
parties, or obtained through any empirically derived, demonstrably and 
statistically sound model that reasonably estimates a consumer's income 
or assets.\213\ The commentary also states that current or reasonably 
expected income also includes income that is deposited regularly into 
an account on which the consumer is an accountholder (e.g., an 
individual deposit account or joint account).\214\ With regard to 
sources of information about a consumer's obligations, the commentary 
states that the financial institution may consider the consumer's 
current obligations based on information provided by the consumer or in 
a consumer report.\215\
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    \209\ See 12 CFR 1026.51(a)(1)(i).
    \210\ 12 CFR 1026.51(a)(1)(ii).
    \211\ Id.
    \212\ Id.
    \213\ See Regulation Z comment 51(a)(1)(i)-5; see also comments 
-4 and -6.
    \214\ See Regulation Z comment 51(a)(1)(i)-4(ii).
    \215\ Regulation Z comment 51(a)(1)(i)-7.
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    Some industry commenters, and an academic commenter, argued that 
applying the ability to pay provision to hybrid debit-credit cards 
would result in a pullback of overdraft credit for those consumers who 
need it the most. On the other hand, a consumer advocate commenter 
noted that the ability to pay requirement may be too weak and this 
minimal requirement would not result in consumers being denied 
overdraft credit.
    While the ability to pay requirement provides important 
protections, this requirement is flexible. It requires the ability to 
repay the required minimum periodic payments, and does not set 
mandatory minimum ratios, such as a minimum debt to income ratio.\216\ 
Furthermore, application of this provision will provide an incentive 
for financial institutions to structure and price covered overdraft 
credit such that consumers are better able to repay it, relative to 
current non-covered overdraft credit. To the extent that a consumer 
does not have the ability to repay covered overdraft credit, not 
extending overdraft credit to such a consumer is an important consumer 
protection because a consumer defaulting on the overdraft credit may 
mean losing their asset account.
---------------------------------------------------------------------------

    \216\ See 12 CFR 1026.51.
---------------------------------------------------------------------------

    One industry commenter noted that it was impractical to comply with 
the ability to pay provision for an overdraft credit extension of short 
duration and small amount. Another industry commenter stated that 
conducting the ability to pay analysis before each pay/no pay decision 
is unworkable. These comments appear to misunderstand the ability to 
pay requirement. This provision does not require an ability to pay 
analysis at the time of each transaction that may result in an 
extension of overdraft funds, just as it does not require an ability to 
pay analysis with each credit card transaction. Nor is the analysis 
based on the amount of time it actually takes the consumer to repay the 
transaction. In the credit card context, the ability to pay provision 
requires the ability to pay analysis to be conducted before the credit 
card account is opened, and the analysis be based on whether the 
consumer can make required minimum periodic payments.\217\ As such, the 
same

[[Page 106809]]

ability to pay analysis is conducted in the context of the opening of a 
hybrid debit-credit card, which is in advance of any transaction 
requiring an extension of overdraft funds.\218\
---------------------------------------------------------------------------

    \217\ See 12 CFR 1026.51(a)(i) (stating that ``[a] card issuer 
must not open a credit card account for a consumer under an open-end 
(not home-secured) consumer credit plan . . . unless the card issuer 
considers the consumer's ability to make the required minimum 
periodic payments . . . .'' (emphasis added)).
    \218\ The ability to pay analysis is also required prior to a 
credit line increase. See 12 CFR 1026.51(a)(i).
---------------------------------------------------------------------------

    Several industry commenters noted that it would cost time and money 
to perform an ability to pay analysis, which may include obtaining a 
credit report, asking a consumer for information about their income/
assets and obligations, and obtaining other information on income and 
expenses for each customer account. Commenters also stated that there 
would be a reduction in the consumer's credit score resulting from 
pulling the consumer's credit report, and that consumers would be 
confused about being asked for debt and income information by an 
institution seeking to provide a consumer with covered overdraft credit 
when the consumer is opening a deposit account. An industry commenter 
and a consumer advocate commenter stated that a source of income/asset 
or obligation information may include transaction data from asset or 
others accounts that a financial institution may already have for the 
particular consumer. In addition, a nonprofit commenter asked that the 
CFPB clarify that underwriting based on transactions in asset accounts 
connected to overdraft lines of credit would satisfy the ability to pay 
requirement even if the creditor does not specifically identify 
obligations from the account.
    The ability to pay analysis is currently conducted for traditional 
credit cards. As such, consumers have familiarity with, and very large 
financial institutions that issue credit cards have policies and 
procedures to handle, the ability to pay process. The fact that asset 
account consumers may now go through the ability to pay process may 
underline for consumers that covered overdraft credit is a credit 
product and encourage comparison with other credit products and an 
intentional upfront decision whether to obtain overdraft credit. While 
there are costs associated with conducting an ability to pay analysis 
where a very large financial institution has not had to conduct such 
analysis, as some commenters noted, the ability to pay provision does 
not require the use of a credit report or the consumer as sources of 
information regarding income, assets, or obligations. The commentary 
lists sources of information that the financial institution may use but 
does not indicate that permissible sources are limited to those 
listed.\219\ For example, for income or asset information, comment 
51(a)(1)(i)-4(ii) contemplates consideration of income that is being 
deposited regularly into an account on which the consumer is an 
accountholder (e.g., an individual deposit account or joint account). 
However, with any source of income, asset, or obligation information, 
Regulation Z requires that the financial institution have reasonable 
written policies and procedures in place to consider the consumer's 
ability to pay.\220\ As such, the source of information must be 
reasonable.
---------------------------------------------------------------------------

    \219\ See Regulation Z comments 51(a)(1)(i)-5 and -7.
    \220\ See 12 CFR 1026.51(a)(1)(ii).
---------------------------------------------------------------------------

    If the consumer's asset account reflects the consumer's income and 
expenses, such an asset account, alone, may be a reasonable source of 
information about the consumer's income, assets, and obligations for 
the purpose of analyzing the consumer's ability to make the required 
minimum payments under the terms of the hybrid debit-credit card. In 
this circumstance, a financial institution would not have to obtain a 
credit report or ask the consumer for this information. To comply with 
the ability to pay requirements, a financial institution could use this 
kind of transaction data from the accounts it maintains on behalf of 
the consumer, and/or it could use transaction data provided by a 
different financial institution if the consumer authorized its 
transmittal using the rights recently finalized in the Personal 
Financial Data Rights Rule.\221\ The ability to pay provision requires 
that the financial institution use this transaction data to consider 
the ratio of debt obligations to income, the ratio of debt obligations 
to assets, or the income the consumer will have after paying debt 
obligations.\222\
---------------------------------------------------------------------------

    \221\ See 89 FR 90838 (Nov. 18, 2024).
    \222\ Id.
---------------------------------------------------------------------------

Limitation on Fees During First Year After Account Opening (Sec.  
1026.52(a))
    Section 1026.52(a) limits 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. An account is considered 
open no earlier than the date on which the account may first be used by 
the consumer to engage in transactions.
    One industry commenter opposed application of this provision, 
stating that this provision was meant for low-limit high-fee credit 
cards and not for overdraft credit. This commenter along with an 
academic commenter stated that application to overdraft credit would 
make it difficult for financial institutions to offer overdraft credit 
to consumers who would not qualify for a high credit limit. A consumer 
advocate commenter wrote in support of applying this provision, noting 
that application of this provision would prevent high fees from 
consuming a large portion of the credit line and would likely result in 
financial institutions moving costs into the interest rate and hence 
the disclosed APR. This commenter asked for clarification that this 
provision applies to asset accounts that are more than one year old at 
the time of the effective date. It also asked that the CFPB extend the 
limitation to beyond one year for hybrid debit-credit cards.
    Regulation Z applies the first-year-fee limitation to all credit 
cards out of a concern that the practice of charging fees that are more 
than 25 percent of the credit limit would spread beyond subprime 
cards.\223\ To be consistent with other credit cards, the final rule 
also applies this limitation to hybrid debit-credit cards.
---------------------------------------------------------------------------

    \223\ See Board's Regulation Z final rule implementing the CARD 
Act, 75 FR 7658, 7724-25 (Feb. 22, 2010) discussing this particular 
provision, stating ``However, while new TILA Section 127(n) is 
titled `Standards Applicable to Initial Issuance of Subprime or `Fee 
Harvester' Cards,' nothing in the statutory text limits its 
application to a particular type of credit card. Instead . . . it 
appears that Congress intended Section 127(n) to apply to a broad 
range of fees regardless of the type of credit card account. 
Although the practice of charging fees that represent a high 
percentage of the credit limit is generally limited to subprime 
cards at present, it appears that Congress intended Section 127(n) 
to prevent this practice from spreading to other types of credit 
card products. Accordingly, although the Board understands that 
complying with Section 127(n) may impose a significant burden on 
card issuers, the Board does not believe that this burden warrants a 
different interpretation of Section 127(n).''
---------------------------------------------------------------------------

    With respect to concerns about credit availability for consumers 
who do not qualify for a high credit limit, the first-year-fee 
limitation may provide an incentive for financial institutions to 
reduce or eliminate flat fees for overdraft and to instead apply 
periodic rates that must be disclosed as APRs. Doing so may improve 
consumers' ability to understand the price of the overdraft credit, and 
to compare it to the pricing of other forms of credit that the 
consumers might wish to consider.
    With regard to when to start measuring the one year, the fee 
limitation applies starting no earlier than the date on which a credit 
card

[[Page 106810]]

account may first be used by a consumer to engage in transactions.\224\ 
The date on which an asset account is opened is not relevant to the 
determination of when a tied credit account may first be used by the 
consumer to engage in transactions. For asset accounts with debit cards 
in existence prior to the effective date of this final rule that 
include non-covered overdraft credit (but not covered overdraft 
credit), the one year period starts no earlier than when that debit 
card becomes a hybrid debit-credit card for the consumer. The debit 
card becomes a hybrid debit-credit card when the consumer may first 
engage in a transaction that accesses a tied covered overdraft credit 
account.
---------------------------------------------------------------------------

    \224\ See 12 CFR 1026.52(a)(1).
---------------------------------------------------------------------------

    For example, assume that prior to the effective date of the CFPB's 
rule, a very large financial institution provides non-covered overdraft 
credit that is considered above breakeven debit card overdraft credit. 
Assume further that the institution seeks to continue to provide the 
consumer above breakeven overdraft credit via the card subsequent to 
the effective date. Because such debit card will legally be a hybrid 
debit-credit card on the effective date of this rule, to charge above 
breakeven overdraft fees beyond that date, the institution must comply 
with the Regulation Z credit card requirements, including the fee 
limitation requirement for one year from the date of credit card 
account opening. However, if prior to the effective date of the CFPB's 
rule a very large financial institution is providing a covered 
overdraft credit account--i.e., an overdraft line of credit--accessible 
by a credit card, such institution would not be required to comply with 
the credit account opening requirements (e.g., account opening 
disclosures, the ability to pay requirement, and the limitation on fees 
during the first year after account opening) solely because this rule 
goes into effect, as discussed in the Effective Date section below. 
Nonetheless, the institution must comply with ongoing credit account 
requirements (e.g., the requirements that the ability to pay analysis 
be conducted prior to a credit line increase, that the payment due date 
be the same each month, that disclosures be delivered 21 days before 
due date, and that card agreements be submitted to the CFPB on a 
quarterly basis).
    The CFPB does not currently see a reason to introduce inconsistency 
into the credit card provisions by applying this limitation on fees 
beyond one year from credit card account opening for hybrid debit-
credit cards.
Limitations on Penalty Fees (Sec.  1026.52(b))
    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.'' \225\ 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.'' 
\226\ 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.\227\ 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.\228\ In 
particular, Sec.  1026.52(b)(2)(i)(B)(1) prohibits any fee charged in 
connection with a credit card account for a ``transaction that a card 
issuer declines to authorize.'' As a result of this overdraft rule, the 
CARD Act's penalty fee provision will prohibit fees for declined 
transactions when a very large financial institution provides a covered 
overdraft credit account that is accessible by a hybrid debit-credit 
card or other credit card--i.e., a credit card account.
---------------------------------------------------------------------------

    \225\ CARD Act section 102, TILA section 149, 15 U.S.C. 
1665d(a).
    \226\ Regulation Z comment 52(b)-1.
    \227\ 12 CFR 1026.52(b)(1)(i)-(ii).
    \228\ 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 determined that a fee imposed when a 
potentially overdrafting transaction is declined, such as a 
nonsufficient funds (NSF) fee, is a penalty fee.
    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 or other 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.'' \229\ The CFPB has determined that applying Sec.  1026.52(b) 
to a covered overdraft 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).
---------------------------------------------------------------------------

    \229\ Regulation Z comment 52(b)(2)(i)-4.
---------------------------------------------------------------------------

    With respect to declined transactions other than declined check 
transactions, the CFPB has 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 
that 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 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. Nonetheless, the CFPB is not at this time 
reconsidering the Board's prior decision to permit some amount of a fee 
in connection with

[[Page 106811]]

declining to pay a check that accesses a credit card account. This rule 
applies the same approach to checks issued in connection with a covered 
asset account tied to a covered overdraft credit account accessible by 
a hybrid debit-credit card.
    Only one commenter provided comment on this provision, and did so 
in support of its application to a covered overdraft credit account 
accessed by a hybrid debit-credit card. After considering the comments 
and the factors in 15 U.S.C. 1665d(c), the CFPB is not amending Sec.  
1026.52(b) and is finalizing the rule to apply Sec.  1026.52(b) to 
covered overdraft credit accounts accessed by hybrid debit-credit 
cards.
Submission of Card Agreements (Sec.  1026.58)
    Section 1026.58 requires financial institutions to submit credit 
card agreements to the CFPB on a quarterly basis. An industry commenter 
questioned whether including covered overdraft credit account 
agreements in a credit card account agreement database would create 
more confusion than value. On the other hand, a consumer advocate 
commenter stated that collecting the agreements and making them public 
would promote transparency and a better understanding of the hybrid 
debit-credit card market. For consistency with other credit cards and 
for transparency to the benefit of consumers, the CFPB has determined 
to apply this provision to covered overdraft credit accounts accessible 
by hybrid debit-credit cards.
Disclosure-Related Requirements
    The CARD Act also applies special rules to disclosure-related 
requirements in subpart B and subpart G with respect to covered 
overdraft credit accounts accessed by a hybrid debit-credit card. These 
provisions include disclosure requirements for account opening 
disclosures (Sec.  1026.6(b)), periodic statements (Sec.  1026.7(b)), 
and timing for disclosures (Sec.  1026.5(b)).
    One industry commenter suggested that the CFPB consider whether all 
credit card-specific disclosure requirements are appropriate for 
overdraft lines of credit or whether exceptions or modifications are 
appropriate. Another industry commenter said that calculating the APR 
for each overdraft fee would be impractical for an overdraft fee of 
short duration and small amount, apparently inaccurately assuming that, 
under Regulation Z, the APR for open-end credit includes charges other 
than the periodic rate. A consumer advocate commenter supported 
application of the solicitation and application disclosure requirements 
to hybrid debit-credit cards to promote meaningful and uniform 
disclosure of credit terms.
    The CFPB has determined that Regulation Z and its commentary 
provide sufficient flexibility and instructions for a financial 
institution to meet the disclosure requirements in a manner appropriate 
for the particular credit card product the institution is offering. 
Regulation Z subpart B and subpart G, the related commentary, and the 
appendix G model and sample disclosures provide extensive instructions 
and guidance on the disclosure requirements. As such, modifications or 
exceptions to the disclosure requirements for hybrid debit-credit cards 
and additional guidance for complying with the requirements are not 
necessary. Consistency in the credit card disclosure requirements, 
including the APR and fee disclosures, will assist consumers in 
comparing the cost of various credit cards and various credit products.
    Section 1026.7(b)(11) requires that the payment due date be the 
same day of the month for each billing cycle. As such the interval 
between due dates can be no shorter than monthly. In addition, Sec.  
1026.5(b)(2)(ii) requires that periodic statements be mailed or 
delivered at least 21 days prior to the payment due date disclosed on 
the periodic statement. One industry commenter noted that application 
of these requirements and the offset prohibition increase the credit 
risk to financial institutions of offering overdraft credit. Another 
industry commenter suggested that payments for small dollar lines of 
credit be permitted to be scheduled bi-weekly or semi-monthly and for 
the repayment period to be less than 21 days after a statement is 
delivered or mailed. On the other hand, a consumer advocate commenter 
supported application of the existing repayment requirement at 21 days 
and same-day due date each month (as well as the offset prohibition) 
because it would give consumers a reasonable time period to pay their 
hybrid debit-credit card and give the consumers certainty on their 
payment due date for budgeting purposes.
    The CFPB has determined that a special exception to the credit card 
timing requirements for billing cycles, periodic statements, and due 
dates is not warranted for covered overdraft credit accounts accessed 
by hybrid debit-credit cards. Hybrid debit-credit card consumers should 
have these same consumer protections as other credit card consumers.
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, the liability of 
cardholders for unauthorized use, cardholder rights to assert against 
the card issuer claims and defenses that the cardholder has against the 
merchant, and the prohibition on offsets by issuers. Existing Sec.  
1026.12(a) and (b) are exceptions to the general rule that Regulation Z 
applies only to consumer credit. The CFPB did not propose to change the 
regulatory text of existing Sec.  1026.12.
    However, the CFPB proposed to revise comment 12-1 on the scope of 
Sec.  1026.12 to clarify that the provisions of Sec.  1026.12 relating 
to card issuance and liability apply to hybrid debit-credit cards. 
Specifically, the CFPB proposed to 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) of Sec.  
1026.12. Paragraph (g) addresses whether Regulation Z or Regulation E 
controls in instances where a transaction involves both credit and 
electronic fund transfer aspects.
    The CFPB received few comments on the proposed changes to Sec.  
1026.12 and its commentary and no comments indicating a need to adjust 
the proposed language in comment 12-1. A consumer advocate commenter 
supported the revised comment, stating that the attendant protections 
are equally important for consumers who use overdraft credit on hybrid 
debit-credit cards. Therefore, for the reasons discussed in the 
proposal and above, the CFPB is finalizing comment 12-1 as proposed but 
with the addition of a cite to the definition of hybrid debit-credit 
cards, for convenience. Proposed changes to 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) 
are discussed below.
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.\230\ Section 1026.12(a) of Regulation Z implements TILA 
section 132 and

[[Page 106812]]

provides that regardless 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.
---------------------------------------------------------------------------

    \230\ 15 U.S.C. 1642.
---------------------------------------------------------------------------

    The CFPB did not propose changes to the existing regulatory text 
for Sec.  1026.12(a). It did, however, propose certain revisions to 
related commentary to clarify how the prohibition on issuing 
unsolicited credit cards applies to hybrid debit-credit cards.
Clarifications to Explicit Request Requirement (Sec.  1026.12(a)(1))
    As discussed above, under the proposal and as finalized in this 
rule, a hybrid debit-credit card is a credit card that a consumer may 
use from time to time to obtain covered overdraft credit from a very 
large financial institution. To the extent that covered overdraft 
credit from a very large financial institution would be accessible 
through a hybrid debit-credit card, a request for such credit would 
constitute an application for a credit card with overdraft features. 
Therefore, the prohibition set forth in Sec.  1026.12(a)(1) on issuing 
a credit card except in response to an oral or written request or 
application for the card applies to hybrid debit-credit cards.
    Existing comment 12(a)(1)-1 states that the 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. The CFPB proposed to 
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.
    A consumer advocate commenter supported the proposed clarification, 
stating that it promotes TILA's purposes of ensuring the informed use 
of credit and prevents creditors from pushing on people credit that 
they may not want. The commenter further asserted that unwanted or 
unsolicited credit could lead to problems managing finances, damage to 
credit reports, debt collection harassment, and other harms, and that 
ensuring the informed and desired use of overdraft credit is important 
for hybrid debit-credit cards just as it is for other credit cards.
    For the same reasons, the consumer advocate commenter supported the 
changes the CFPB proposed to existing comment 12(a)(1)-2, which 
explains that the addition of a credit feature or plan to a non-credit 
card that would turn that card into a credit card under Sec.  
1026.2(a)(15)(i) constitutes issuance of a credit card. The commenter 
further noted that consumers should not have overdraft credit features 
added to their asset accounts without their request. Comment 12(a)(1)-2 
currently provides two examples of when the addition of credit features 
constitutes issuance of a credit card. Proposed comment 12(a)(1)-2.iii 
set out the scenario of extending covered overdraft credit through a 
hybrid debit-credit card as a third example of an action that would 
constitute issuance of a credit card.
    Because the clarification promotes TILA's purposes of ensuring the 
informed use of credit and for the reasons discussed above, the CFPB is 
finalizing the proposed changes to the commentary for paragraph 
12(a)(1) with only nonsubstantive changes. As explained in the proposed 
rule, 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 illustration, the debit card would convert into a 
hybrid debit-credit card that is a credit card under Sec.  
1026.2(a)(15)(i) and is subject to the issuance limitations in Sec.  
1026.12(a).
Clarifications to Replacement Card Requirements (Sec.  1026.12(a)(2))
    As an additional exception to the general prohibition on the 
unsolicited issuance of a credit card, Sec.  1026.12(a)(2) allows the 
issuance of a credit card to a person when the card is issued as a 
renewal of, or substitute for, an already accepted credit card. 
Existing 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 currently provides three exceptions to the 
one-for-one rule. In particular, existing 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 single card that is both a 
debit card and a credit card with a credit card and separate card with 
only debit functions (or debit functions plus an associated overdraft 
capability), since the card with only debit functions could be issued 
on an unsolicited basis under Regulation E.
    The CFPB proposed to revise comment 12(a)(2)-6.i in two respects. 
First, a revision would add a clarification that a hybrid debit-credit 
card is an example of a single card that is both a debit card and a 
credit card. Second, language in an existing parenthetical that 
addresses debit functions and associated access to overdraft credit 
would be revised to align terminology relating to overdraft credit 
across Regulation Z, in light of the proposed amendments. Specifically, 
the CFPB proposed to remove the phrase ``an associated overdraft 
capability'' 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 revision to the terminology in the 
parenthetical would not change how the provision applies to card 
issuers. Rather, the purpose of these proposed revisions 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).
    The CFPB received no comments on the proposed revision of comment 
12(a)(2)-6.i and, because the clarification promotes TILA's purposes of 
ensuring the informed use of credit, is finalizing the revision as 
proposed. The CFPB did not propose, and has not made, changes to the 
two other existing exceptions to the one-for-one rule in comments 
12(a)(2)-6.ii and -6.iii.
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.\231\ Regulation Z Sec.  
1026.12(c) implements this section of TILA.
---------------------------------------------------------------------------

    \231\ 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.\232\ 
This

[[Page 106813]]

exception is in existing comment 12(c)-3.
---------------------------------------------------------------------------

    \232\ 46 FR 20848, 20865 (Apr. 7, 1981).
---------------------------------------------------------------------------

    As discussed above, the CFPB proposed to update exceptions in 
Regulation Z and thus increase consumer protections that apply to 
covered overdraft credit offered by very large financial institutions. 
Accordingly, the CFPB proposed to narrow the overdraft exception in 
comment 12(c)-3 such that a ``hybrid debit-credit card'' would be 
covered by the consumer protections in Sec.  1026.12(c). As discussed 
above, under Sec.  1026.62(b)(5) a ``hybrid debit-credit card'' 
includes a debit card that a consumer may use from time to time to 
obtain covered overdraft credit from a very large financial 
institution. The CFPB further proposed conforming revisions to the 
commentary for Sec.  1026.12(c)(1).
    The CFPB received few comments on the proposal to apply the 
consumer protections in Sec.  1026.12(c) to hybrid debit-credit cards. 
A consumer advocate commenter supported the proposal and stated that 
these consumer protections are important whether the payment is made by 
a credit card drawing on overdraft credit or on other credit. The 
commenter asserted that these consumer protections give card issuers 
greater incentive to vet and monitor the merchants who they authorize 
to accept their cards because it makes the card issuers more 
accountable for the merchants' conduct. The commenter further asserted 
that both credit and debit cards are issued on the same major networks 
and vetting and monitoring of the merchants that card issuers authorize 
to accept their cards already takes place and applies to both debit and 
credit cards. The commenter stated that the existing exception for 
hybrid debit-credit cards in comment 12(c)-3 is not in the TILA statute 
and the CFPB has the authority to remove or narrow the exception. The 
commenter further stated that, while the Board noted operational 
problems cited by commenters in 1981 when the Board added the exception 
in existing comment 12(c)-3, card issuers--particularly very large 
financial institutions covered by the definition of ``hybrid debit-
credit card''--have far greater technology and resources today to 
address operational issues than they did over 40 years ago.
    A nonprofit commenter suggested without explanation that a Sec.  
1026.12(c) exception for hybrid debit-credit cards could provide room 
for innovative and affordable small dollar overdraft line of credit 
products.
    For the reasons stated below, the CFPB is finalizing comment 12(c)-
3, as well as the conforming revisions to the commentary for Sec.  
1026.12(c)(1), as proposed. Consistent with TILA, the CFPB has 
determined that the consumer protections in Sec.  1026.12(c) are 
important whether a credit card accesses covered overdraft credit or 
another type of credit from a very large financial institution. 
Moreover, the CFPB has determined that the rule provides room for 
innovative and affordable overdraft credit and that operational 
concerns alluded to by the Board in 1981 no longer justify the 
overdraft exception that the Board added in comment 12(c)-3, 
particularly for very large financial institutions, given advances in 
information technology systems over the last 40 years. The existing 
exception would not change for financial institutions with total assets 
of $10 billion or less.
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 CFPB proposed 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 defining 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.
    For the reasons stated below, the CFPB is finalizing the changes to 
Sec.  1026.60 as proposed.
Comments Received
    As discussed in the disclosure-related requirements discussion in 
the CARD Act section above, the CFPB received several comments about 
the application of disclosure-related requirements to covered overdraft 
credit that can be accessed by a hybrid debit-credit card. With respect 
to Sec.  1026.60, for example, an industry commenter said that more 
guidance is needed. For example, this industry commenter noted that 
many of the APR and fee disclosures would show ``$0'' for all except 
the overdraft fee. The commenter noted that the commentary states that 
disclosures need only be given as applicable but the proposed rule did 
not state how financial institutions should adapt the forms for 
overdraft credit.
Final Rule
    For the reasons discussed below, the CFPB is finalizing amendments 
to Sec.  1026.60 as proposed. The requirements in Sec.  1026.60 
implement provisions of the Fair Credit and Charge Card Disclosure Act 
of 1988.\233\ 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.\234\
---------------------------------------------------------------------------

    \233\ Public Law 100-583, 102 Stat. 2960 (Nov. 3, 1988).
    \234\ 54 FR 13855, 13856-57 (Apr. 6, 1989).
---------------------------------------------------------------------------

    The CFPB has determined that, as with the CARD Act provisions, 
covered overdraft offered by a very large financial institution that is 
accessible by a hybrid debit-credit 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

[[Page 106814]]

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 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.
    As noted in the discussion of the CARD Act disclosure requirements 
above, with respect to comments that more guidance is needed, the CFPB 
reviewed the credit card disclosure requirements and determined that 
Regulation Z and its staff commentary provide sufficient flexibility 
and instructions for a financial institution to meet the disclosure 
requirements in a manner appropriate for the particular credit card 
product the institution is offering. As one of the industry commenters 
accurately noted, for Sec.  1026.60's application and solicitation 
disclosures, comment 60(a)(2)-4 states that generally, disclosures need 
only be given as applicable. In addition, Regulation Z subpart B and 
subpart G, the related staff commentary, and appendix G model and 
sample disclosures provide extensive instructions and guidance on the 
disclosure requirements. As such, modifications or exceptions to the 
disclosure requirements for hybrid debit-credit cards and additional 
guidance for complying with the requirements are not necessary. 
Consistency in the credit card disclosure requirements, including the 
APR and fee disclosures, will assist consumers in comparing the cost of 
various credit cards and various credit products.
vi. ``Charge Card'' (Sec.  1026.2(a)(15)(iii))
    The CFPB proposed 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 
proposed the amendment because it preliminarily determined that 
consumers using hybrid debit-credit cards would benefit from the TILA 
and Regulation Z provisions that apply to credit cards generally.
    The CFPB did not receive any comments on the proposed change to the 
definition of charge card and is finalizing this definition as proposed 
for the reasons stated below.
    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.'' \235\ 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).\236\ 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.\237\ 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.
---------------------------------------------------------------------------

    \235\ 15 U.S.C. 1637(c)(4)(E).
    \236\ See Public Law 100-583, sec. 2, 102 Stat. 2960 (Nov. 3, 
1988).
    \237\ 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 generally 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.\238\ The CFPB has 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 excluding hybrid debit-credit cards from the Regulation 
Z definition of charge card. This approach is consistent with TILA; in 
applying 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.
---------------------------------------------------------------------------

    \238\ See Sec.  1026.7(b)(11)(ii)(A); see also 75 FR 7658, 7672-
73 (Feb. 22, 2010).
---------------------------------------------------------------------------

    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.\239\ In contrast, current users of non-
covered overdraft credit often are lower-income consumers with lower 
credit scores.\240\ Subsequent to the CFPB's proposal, many of these 
consumers may be offered hybrid debit-credit cards, which will access 
covered overdraft credit that typically will be subject to finance 
charges, and therefore do not fit the statutory definition of a 
``charge card.'' Accordingly, consistent with TILA, and to ensure that 
consumers who use covered overdraft credit benefit from the full 
protection of the Regulation Z credit card rules, the CFPB is amending 
the regulatory definition of ``charge card'' such that a `hybrid debit-
credit card' will not be within the credit card subset ``charge card'' 
but will nonetheless remain in the larger set ``credit card.'' This 
will ensure that a hybrid debit-credit card that accesses covered 
overdraft credit offered by a very large financial institution will be 
subject to the same disclosure and other rules as other credit cards, 
including the Sec.  1026.7(b)(11) requirements discussed above.
---------------------------------------------------------------------------

    \239\ 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.
    \240\ See CFPB 2017 Data Point at 6.
---------------------------------------------------------------------------

3. Compulsory Use of Preauthorized Transfers (Sec.  1005.10(e)(1))
    The CFPB proposed to apply the Regulation E compulsory use 
prohibition to covered overdraft credit extended by very large 
financial institutions. 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.\241\ However, the Board in 1981 adopted in Regulation E Sec.  
1005.10(e)(1) a non-statutory exception to that prohibition for 
overdraft credit plans.\242\ The CFPB proposed to eliminate that 
exception when covered overdraft credit is provided by a very large 
financial

[[Page 106815]]

institution. As a result, a very large financial institution providing 
covered overdraft credit 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 an 
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. For the reasons discussed below, the CFPB is finalizing as 
proposed the application of the compulsory use prohibition to covered 
overdraft credit extended by very large financial institutions.
---------------------------------------------------------------------------

    \241\ 15 U.S.C. 1693k(1).
    \242\ 46 FR 2972 (Jan. 13, 1981).
---------------------------------------------------------------------------

    Many industry commenters opposed the CFPB's proposal. They argued 
that the requirement to offer consumers a repayment option other than 
automatic repayment would impose costs that would not have commensurate 
consumer benefit. Specifically, they argued that the requirement would 
result in one-time costs to implement an alternative repayment method 
and a process for obtaining consumers' decisions whether to use 
automatic repayment or the alternative, and ongoing costs of 
maintaining the alternative and handling the higher costs associated 
with those consumers who choose the alternative, including the cost of 
higher risk of non-repayment. They asserted that if institutions cannot 
guarantee themselves the repayment method of automatic transfers, the 
result would be a higher underwriting bar than is currently in place. 
They also asserted that these costs would not result in any material 
consumer benefit because almost all consumers will choose automatic 
repayment. Further, they stated, it is appropriate for consumers to 
choose automatic repayment because it ensures consumers do not miss 
repayments and thereby incur concomitant costs such as late fees and 
higher interest rates.
    Many consumer advocate commenters supported the CFPB's proposal. 
They argued that improvements in technology have reduced institutions' 
costs associated with providing alternative means of repayment and that 
any costs in this area have not inhibited the credit card market (where 
the compulsory use prohibition has long applied). They also stated that 
the requirement would benefit consumers by improving their control over 
their funds. Further, they stated, any increased risk of non-repayment 
would appropriately incentivize institutions to offer overdraft credit 
that is affordable.
    The CFPB has determined that advances in information technology in 
the decades since the Board's 1981 adoption of 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--repayment of a monthly credit balance.
    For similar reasons, the CFPB has also determined that application 
of the prohibition will not inappropriately increase institutions' risk 
of nonrepayment. Specifically, the CFPB finds that technology makes it 
virtually costless for institutions to remind consumers of their 
repayment obligation, such as through app notifications on smartphones 
as well as text and email messages. The CFPB also finds that technology 
makes it virtually costless for consumers to act in response to those 
notifications, such as by clicking on a notification and then making 
one or a few clicks (depending on the details of the repayment process 
the institution establishes) to specify the amount to repay, identify 
the funding source, and initiate the repayment. This ease of 
notification and consumer response helps increase the likelihood that 
those who can repay the credit will do so. As a result, any increased 
nonrepayment risk to institutions resulting from application of the 
compulsory use prohibition will serve as an appropriate incentive to 
institutions to offer covered overdraft credit to those consumers who 
can and will repay it, i.e., to offer covered overdraft credit to those 
consumers who will not be harmed by it.
    For these reasons, the CFPB has 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 EFT systems. This determination is 
consistent with Congress's original intent in adopting the prohibition.
Offset Prohibition in 12 CFR 1026.12(d)(1)
    While the CFPB did not propose to amend the Regulation Z 
prohibition against offset, it is closely related to the Regulation E 
compulsory use prohibition discussed above. Further, commenters 
provided feedback on application of the offset prohibition. Below the 
CFPB summarizes the substance of the prohibition and addresses the 
comments that the CFPB received.
    ``Offset'' is a term used to describe a practice whereby an 
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 outstanding overdraft 
balance in the asset account. TILA and Regulation Z prohibit that 
practice with respect to credit card accounts. Specifically, TILA 
section 169(a) (15 U.S.C. 1666h(a)) and 12 CFR 1026.12(d)(1) prohibit 
an institution from using funds in a consumer's asset account at the 
institution to offset consumer debt arising from a credit card plan the 
institution provides to the consumer. Thus, when a financial 
institution ties a consumer's asset account (i.e., a covered asset 
account) to covered overdraft credit accessible by credit card (i.e., a 
hybrid debit-credit card), the institution may not use funds in the 
consumer's asset account to offset the consumer's overdraft credit 
balance.
    Periodic deductions are a different practice than offset. TILA 
section 169(a)(1) (15 U.S.C. 1666h(a)(1)) permits an institution 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), which the CFPB 
did not propose to amend. Thus, when a very large financial institution 
provides covered overdraft credit that is accessible by a card, the 
institution must comply with the offset prohibition, 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. Pursuant to the Regulation E compulsory use 
prohibition (discussed above), the institution must also provide the 
consumer with a repayment option other than periodic deduction.
    Many industry commenters opposed application of the offset 
prohibition. They argued that the offset prohibition would increase 
risk of nonrepayment and result in higher underwriting standards 
relative to institutions' standards today for non-covered overdraft 
credit, thereby eliminating access to overdraft credit for those 
subprime or deeply subprime consumers (or those without any credit 
history) who use it today. As a result, they argued, these consumers 
would have no choice but to use alternative credit products such as 
payday loans.

[[Page 106816]]

    Many consumer advocate commenters supported application of the 
offset prohibition. They observed that Congress adopted the prohibition 
because it was concerned about an institution's power to collect credit 
card debt by offsetting against money in a consumer's asset account at 
the institution, thereby causing other consumer payments from the 
account to go unpaid. They argued that the same concerns apply to 
covered overdraft credit, i.e., that an institution's offset of 
overdraft credit reduces a consumer's ability to prioritize which 
obligations to repay and can cause consumer obligations other than 
overdraft to go unpaid. Consumer advocates argued that that effect is 
exacerbated by the high fees that typically accompany overdraft credit, 
because those fees increase the loss of consumer control and the amount 
that is offset and thus the amount of other consumer obligations that 
go unpaid. In light of these current consumer harms and costs from 
overdraft credit, consumer advocates supported higher underwriting 
standards for overdraft credit relative to today.
    The CFPB has determined that application of the offset prohibition 
to above breakeven overdraft credit provided by very large financial 
institutions will serve the consumer protection purposes for which 
Congress adopted the prohibition (avoiding the uninformed use of credit 
and protecting consumers against inaccurate and unfair credit billing 
and credit card practices). To the extent the prohibition increases 
risk of nonrepayment and thereby causes institutions to decline some 
overdraft credit transactions that they currently authorize, the CFPB 
finds that these changes will not result in lost benefit for many of 
the consumers who use overdraft credit today, because the credit is 
often of little or no benefit for these consumers. Further, many of 
these consumers will be able to find other forms of consumer credit 
(should they think it necessary to do so). In sum, when a hybrid debit-
credit card can access covered overdraft credit, the card is a type of 
credit card and the CFPB finds that consumers using such a card should 
receive the same TILA protections, including those of the offset 
prohibition, that any other credit card consumer receives.
Defining ``Periodically''
    The CFPB requested comment on whether 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. The CFPB received very few comments and 
no specific information in response. The CFPB is not taking any action 
at this time pursuant to this request for comment. The CFPB notes that 
Sec.  1026.7(b)(11) requires the payment due date for credit card 
accounts under an open-end (not home-secured) consumer credit plan to 
be the same every month.
4. Definition of Overdraft Services in Regulation E (Sec.  1005.17(a))
    The CFPB proposed to add comment 17(a)-2 to clarify that the added 
defined terms in Regulation Z regarding covered overdraft credit do not 
change the scope of the definition of overdraft services under 
Regulation E Sec.  1005.17(a). The proposed comment clarified 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.
    Very few commenters addressed this aspect of the CFPB's proposal 
and those that did supported it. The CFPB adopts comment 17(a)-2 as 
proposed.

V. Effective and Compliance Date

    Consistent with TILA section 105(d), the CFPB proposed that the 
final rule have an effective date of the October 1 that follows by at 
least six months the date it is published in the Federal Register.\243\ 
The CFPB sought comment on the proposed effective date including 
whether such date should be different, and if so, when and why. For the 
reasons discussed below, the effective date is finalized as proposed. 
As a result, this rule will become effective on October 1, 2025.
---------------------------------------------------------------------------

    \243\ 15 U.S.C. 1604(d).
---------------------------------------------------------------------------

    Consumer advocates generally supported the proposed effective date. 
Industry commenters opposed the effective date because they stated it 
would not be sufficient time to implement required changes, 
particularly with respect to covered overdraft credit. They stated that 
they would need anywhere from 12 to 24 months to comply with the rule. 
These commenters explained that the rule would require a comprehensive 
review and restructuring of every aspect of their overdraft programs, 
from operations to technology to customer service. One commenter stated 
that it will need to perform an impact analysis to determine how to 
change its programs and then implement those changes, which will 
require working with third party vendors, training employees, testing, 
and communicating changes to consumers. With respect to communicating 
changes to consumers, the commenter stated that a change in terms 
notice is unlikely to be sufficient and it would need to engage in an 
extended campaign to inform consumers about the changes and effects. 
One industry commenter noted that for existing debit cards on asset 
accounts, institutions would need to determine whether to continue 
offering debit cards on overdraft credit, informing their consumers 
about the change in card status, giving consumers time to accept the 
new card status, and possibly changing the card number.\244\
---------------------------------------------------------------------------

    \244\ Whether the debit card number must change under these 
circumstances is not governed by the CFPB under any of its rules.
---------------------------------------------------------------------------

    As discussed further above, the CFPB's rule would apply only to 
very large financial institutions. Accordingly, financial institutions 
that are not very large financial institutions would not need to make 
any changes in response to the rule.
    With respect to very large financial institutions, the changes that 
the rule would require vary depending on the institution's current 
activities. If a very large financial institution already offers non-
covered overdraft services in compliance with existing regulations and, 
in response to the rule, chooses 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 the rule's breakeven standard provisions if the financial 
institution chooses to use that method. Alternatively, using the $5 
benchmark may further simplify compliance with the rule. If a financial 
institution needs extra time to convert to the breakeven method, they 
could charge $5 fees on October 1, 2025, and then convert to the 
breakeven amount at its own pace.
    If a very large financial institution currently offers non-covered 
overdraft services in compliance with existing regulations, and, in 
response to the rule, chooses to provide above breakeven overdraft 
credit, it would need to ensure that such credit complies with 
Regulation Z. If the very large financial institution is unable to 
bring to market by the rule's effective date an above breakeven 
overdraft credit program that complies with Regulation Z, including the 
credit card rules, the institution still could comply with the rule by 
charging breakeven or $5 overdraft fees in the interim.
    If a very large financial institution currently offers covered 
overdraft credit

[[Page 106817]]

in compliance with Regulation Z and, in response to the rule, chooses 
to continue offering such credit, the very large financial institution 
would need to comply with the rule by: (1) beginning to comply with the 
newly applicable Regulation Z provisions including, if applicable, 
changes to the examples of finance charges and the credit card 
provisions that would newly apply to certain types of covered overdraft 
credit; and (2) offering consumers a means of repaying their overdrafts 
other than by preauthorized EFTs.
    Many very large financial institutions currently provide overdraft 
lines of credit subject to Regulation Z. Subsequent to the effective 
date of the rule, these lines of credit would be covered overdraft 
credit accounts, regardless of whether they are above or below 
breakeven pricing. However, 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 rule. 
Thus, Regulation Z requirements triggered by credit-account opening 
(such as Sec. Sec.  1026.5, 1026.6, 1026.51, and 1026.52(a) mentioned 
above) would not apply to these previously existing overdraft lines of 
credit.\245\ However, other Regulation Z requirements such as change-
in-terms requirements would continue to apply to them.\246\
---------------------------------------------------------------------------

    \245\ The ability to pay analysis is also required prior to a 
credit line increase. See 12 CFR 1026.51(a)(i). This requirement is 
applicable upon the effective date of the rule.
    \246\ As noted, if a very large financial institution currently 
provides overdraft lines of credit in compliance with Regulation Z 
and chooses to continue providing them after the effective date (at 
which point the lines would be covered overdraft credit accounts), 
the institution would need to begin to provide consumers a repayment 
option other than preauthorized EFTs. For overdraft lines of credit 
(i.e., covered overdraft credit accounts) extant as of the effective 
date where agreements are in place for preauthorized EFTs, beginning 
to provide the option would not trigger change-in-terms notice 
requirements under Sec.  1026.9(c)(2) or Sec.  1005.8(a)(1). 
However, when a card issuer opens a covered overdraft credit account 
on or after the effective date, section 1026.12(d)(3) requires the 
card issuer to clearly disclose the fact that the option exists. See 
comment 12(d)(3)-1.iii.
---------------------------------------------------------------------------

    In general, financial institution commenters were more concerned 
about implementing the rule where they do not currently provide covered 
overdraft credit accounts. Many such institutions do already offer 
credit cards and therefore have in place a compliance framework that 
meets applicable Regulation Z requirements. Those that do not could 
prioritize ensuring that their pricing of non-covered overdraft credit 
complies with the rule's breakeven or benchmark provisions, as 
described above. If needed, those institutions could delay offering new 
covered overdraft credit accounts to ensure compliance with Regulation 
Z requirements, including those tied to credit account opening.
    For these reasons, the proposed effective date is sufficient for a 
very large financial institution to make appropriate changes necessary 
to comply with the rule. Accordingly, this rule has an effective date 
of October 1, 2025.

VI. Other Comments

A. Possible Alternative or Additional Requirements

    Some commenters proposed various exemptions from the rule such as 
exempting credit unions and exempting check transactions. As to the 
credit union exemption, commenters raised that there are differences 
between credit unions large enough to be covered by this rule and other 
very large financial institutions covered by the proposed rule, 
including noting that credit unions are member-focused and are subject 
to different market incentives. Also, as discussed below regarding the 
implications for other laws, commenters stated that Federal credit 
unions are generally subject to a usury limit under the Federal Credit 
Union Act and asserted that it would be economically unfeasible for 
them to provide covered overdraft credit. These commenters also noted 
the small number of credit unions that would be directly covered at 
this time but argued that the rule could nevertheless have broad 
impact. As to the check exemption, one commenter argued that checks and 
debit cards are used by consumers in different ways and for differently 
sized purchases and that there may be a greater consumer impact when a 
check is not honored, including but not limited to possible NSF fees.
    The CFPB has considered these requests for exemptions but declines 
to add exemptions at this time. While credit unions may operate 
differently from banks in some respects, those differences are 
generally not material in the context of overdraft credit. In addition, 
the relatively small number of credit unions that will be covered by 
the very large financial institution designation and therefore subject 
to the final rule represent large entities with significant market 
impact. The CFPB has determined that any institution, including a 
Federal credit union, that qualifies as a very large financial 
institution should not be excluded from the rule solely because other 
applicable laws may limit the amount that they can charge consumers. 
The potential impact of other laws on institutions' overdraft credit 
products is discussed in parts VI.E and VII below. Applying the same 
rule to overdraft credit provided by all VLFIs is consistent with the 
policy goal of applying the same consumer protections to overdraft 
credit that apply to other types of consumer credit. The CFPB, as 
discussed further below, intends to monitor the impact of this final 
rule, including the potential impact on non-covered entities, which may 
include smaller credit unions. As to the check exemption, the CFPB did 
not propose such an exemption and does not believe that consumers 
should receive less protection for checks than for other transaction 
types such as debit card or ACH transactions. The CFPB also notes that 
consumer usage of checks has been and continues to decline, such that 
any exemption would have declining impact.\247\
---------------------------------------------------------------------------

    \247\ See FRS, The Federal Reserve Payments Study: 2022 
Triennial Initial Data Release, https://www.federalreserve.gov/paymentsystems/2023-April-The-Federal-Reserve-Payments-Study.htm 
(last updated Nov. 13, 2024). There were 18.1 billion check payments 
in the U.S. in 2015, 14.0 billion in 2018, and 11.2 billion in 2021.
---------------------------------------------------------------------------

    Many industry commenters argued that instead of applying Regulation 
Z to above breakeven overdraft credit, the CFPB should have proposed a 
different rule that retains overdraft credit's current exclusions from 
the regulation and that encourages or mandates changes in practice for 
overdraft credit that some institutions have already implemented, 
including, for example: grace periods between when a consumer overdraws 
(or further overdraws) their account and when an institution assesses a 
fee; not assessing fees on de minimis overdraft balance amounts and 
overdraft transaction amounts; and processing transactions in an order 
that benefits consumers all else equal. Many of these commenters also 
suggested that the CFPB propose changes to the opt-in disclosure 
requirements in Sec.  1005.17. In general, industry commenters argued 
that the CFPB's chosen approach of applying Regulation Z--and applying 
coverage under Regulation Z based on the price of the overdraft 
credit--would result in increased prices for other deposit account 
features, including for consumers who do not currently use overdraft 
credit.
    The CFPB considered alternatives such as these prior to its 
issuance of the NPRM. The CFPB has determined that these alternative 
approaches would not adequately protect consumers who today use non-
covered overdraft credit as an expensive short-term loan.

[[Page 106818]]

Because these consumers use overdraft credit in this way, the CFPB has 
determined that regulating overdraft credit as credit--i.e., applying 
to that credit the congressionally chosen statutory framework for 
consumer credit--will better protect these consumers than would the 
alternatives suggested by industry commenters. For example, the TILA 
framework will facilitate consumers' ability to shop between 
institutions on the basis of the price institutions charge for 
providing covered overdraft credit. In contrast, consumers today 
generally do not shop between deposit accounts on the basis of 
institutions' fees for non-covered overdraft credit, which may explain, 
at least in part, why institutions' fees for non-covered overdraft 
credit persistently remain so high and consumers sometimes overdraw 
their accounts even though they have less expensive credit available 
elsewhere, such as through a credit card. Further, the TILA framework 
will require institutions to refrain from immediately taking consumers' 
incoming deposits to repay their outstanding overdraft balances, which 
will facilitate consumers' ability to control how their asset funds are 
used. In contrast, consumers today do not have a choice about their 
incoming deposits immediately being taken to repay overdrafts and the 
high fees. Moreover, the TILA framework will require institutions to 
provide separate periodic statements, and other required disclosures, 
for the covered overdraft credit account and for the covered asset 
account, which will facilitate consumers' ability to know when they are 
accessing overdraft credit and how much they are being charged for it.
    In addition, nothing in the CFPB's rule precludes institutions from 
providing the consumer protective features that they provide today for 
non-covered overdraft credit, such as those described above, in the 
context of covered overdraft credit (or from continuing to provide them 
in the context of non-covered overdraft credit). For example, nothing 
in Regulation Z precludes an institution from: providing a grace period 
between when the institution extends covered overdraft credit and when 
the institution assesses a finance charge (whether a fee or a periodic 
rate) on the credit; providing de minimis amounts of covered overdraft 
credit without assessing a finance charge for the credit; or, 
processing covered overdraft credit transactions in an order that 
benefits consumers by minimizing the associated finance charges.
    Regarding comments that the CFPB's chosen approach could increase 
prices for other deposit account features, the CFPB discusses in the 
``Offsetting changes to other deposit account prices'' section of the 
CFPA section 1022(b) Analysis below the possibility of potential 
increases to other deposit account prices as a result of this rule, and 
concludes that there is uncertainty about whether lost overdraft 
revenue would be replaced by increases to fees on deposit accounts, 
taking into account the fact that the lost revenue would be relatively 
low if divided by account per month, and that the CFPB has not observed 
offsetting price increases when financial institutions recently reduced 
a comparable amount of overdraft revenue voluntarily. And even if 
financial institutions wish to do so, these prices are likely to be 
more salient to consumers than overdraft fees, and so the CFPB expects 
there to be more efficient competition over those prices, which will 
limit the extent to which financial institutions are able to increase 
those prices.
    Many commenters other than industry commenters--including academic, 
nonprofit, and consumer advocate commenters--argued that in addition to 
the breakeven standard for the dollar amount of an overdraft fee for 
non-covered overdraft credit, the CFPB should restrict the number of 
overdraft fees for such credit that an institution may assess in a 
given time period (such as a day, week, month, or year). The CFPB is 
not adopting this additional restriction at the present time. The CFPB 
believes that its breakeven standard for the dollar amount of a fee for 
non-covered overdraft credit will provide sufficient consumer 
protection and that an additional restriction on the number of such 
fees that may be assessed is not necessary at the present time. The 
CFPB also believes that this additional restriction could result in 
increased implementation cost and complexity for institutions that 
might not be justified by the increased consumer benefit it would 
achieve.
    Other commenters encouraged the CFPB to pursue disclosure-type 
alternatives or additions to the rulemaking, such as increased 
financial education. These commenters felt that better financial 
education could empower consumers, which may reduce reliance on 
overdraft programs. Other commenters suggested revised consumer opt-in 
disclosures, more comprehensive, upfront disclosure of fee structures, 
or requiring an annual opt-out notice to consumers who previously 
opted-into overdraft programs. Another commenter suggested new 
disclosures to prevent misleading advertising. One industry commenter 
stated that whether a product or a service is a courtesy depends on 
more than whether the bank makes a reasonable profit, and encouraged 
the CFPB to consider the full suite of features surrounding an 
overdraft program in determining whether to exempt the program from 
Regulation Z. Two commenters suggested enhanced regulatory reporting 
for overdraft fees while a consumer advocate commenter suggested 
imposing fines for banks that abuse overdraft practices.
    Before issuing the proposal, the CFPB also considered changes such 
as these, including modifying the opt-in disclosure requirements at 
Sec.  1005.17 of Regulation E. The CFPB did not propose such disclosure 
interventions and declines to pursue them at this time. After 
considering the comments, the CFPB has determined, as it preliminarily 
concluded in the proposal, 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 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 rule will ensure 
that financial institutions confirm that consumers can 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 rule will give consumers more time to 
repay overdraft credit and greater control over how to structure those 
repayments.

[[Page 106819]]

    The CFPB also observes that the Truth in Savings Act already 
prohibits misleading deposit account advertisements, including 
misleading deposit account advertisements related to overdraft.\248\ 
The CFPB's analysis of whether and when overdraft is or is not a 
courtesy is discussed elsewhere in this notice. As noted, the CFPB 
intends to monitor the impact of the final rule and may consider 
additional interventions as necessary in the future.
---------------------------------------------------------------------------

    \248\ See 12 U.S.C. 4302(d); see also 12 CFR 1030.8(a) and 12 
CFR 707.8(a).
---------------------------------------------------------------------------

B. Usury Limits

    Many industry commenters asserted under various bases that the 
CFPB's proposed rule would constitute an impermissible usury limit. 
Some asserted that the proposal to apply TILA and Regulation Z to above 
breakeven overdraft credit would constitute a usury limit in 
contravention of CFPA section 1027(o) because VLFIs would no longer be 
permitted to provide non-covered overdraft credit at a price above that 
amount. Other industry commenters conceded that section 1027(o) does 
not apply. Some asserted that TILA is a disclosure statute limited to 
ensuring adequate disclosure of credit terms and that the CFPB exceeded 
its authority by attempting to apply substantive limits to 
institutions' pricing of overdraft credit. Some asserted that the 
application of TILA's substantive protections, including the 
protections of the CARD Act, to covered overdraft credit would 
constitute an effective usury limit because, they argued, it would be 
infeasible for very large financial institutions to provide overdraft 
credit in compliance with those substantive protections. Some asserted 
that the proposed rule would constitute an impermissible usury limit 
because the application of Regulation Z to covered overdraft credit--
i.e., the shift in the legal status of overdraft credit from being not 
subject to Regulation Z (non-covered overdraft credit) to being subject 
to Regulation Z (covered overdraft credit)--would result in the 
application of usury limits in other laws to covered overdraft credit, 
including limits in the Military Lending Act (10 U.S.C. 987), the 
Federal Credit Union Act (12 U.S.C. 1751 et seq.), and States' laws.
    Applying TILA to above breakeven overdraft credit does not create a 
usury limit under CFPA section 1027(o). That section states that the 
CFPB has no authority ``to establish a usury limit applicable to an 
extension of credit offered or made by a covered person to a consumer, 
unless explicitly authorized by law.'' This CFPB rule applying 
Regulation Z to above breakeven overdraft credit does not ``establish a 
usury limit'': it does not impose a fee or rate cap or ban fees above a 
certain threshold, and, under the rule, an institution may charge any 
price it wishes for overdraft credit so long as it complies with 
Regulation Z.\249\
---------------------------------------------------------------------------

    \249\ No provision in Regulation Z limits the price that an 
institution may charge for credit, including covered overdraft 
credit. The fee harvester provision in Sec.  1026.52(a), which 
implements TILA section 127(n) (15 U.S.C. 1637(n)), limits to 25 
percent of the credit limit the amount of fees, other than penalty 
fees (which are addressed in Sec.  1026.52(b)), that may be charged 
during the first year of a credit card account. However, the fee 
harvester provision does not limit charges that are assessed as 
periodic rates.
---------------------------------------------------------------------------

    It is true that the shift in the legal status of overdraft credit 
as a result of the CFPB's rule, from not being subject to Regulation Z 
(non-covered overdraft credit) to being subject to Regulation Z 
(covered overdraft credit), may result in other laws' usury limits 
applying to certain instances of covered overdraft credit, such as the 
limits found in the Military Lending Act (MLA), the Federal Credit 
Union Act (FCUA), and States' laws. Nonetheless, the CFPB's rule 
applying Regulation Z to covered overdraft credit is not thereby 
``establish[ing] a usury limit'' because the CFPB's rule does not 
establish any applicable usury limit. Instead, the legislatures that 
adopted those laws--e.g., the U.S. Congress and State legislatures--
established those usury limits. The potential impact of the usury 
limits in those other laws on covered overdraft credit is discussed 
elsewhere in this notice.
    Moreover, commenters appear to mischaracterize the benchmark and 
breakeven thresholds to suggest that they create regulatory obligations 
and apply them to credit priced above those thresholds. Overdraft 
services are credit and overdraft fees are finance charges under TILA, 
but for the existing regulatory exception in Regulation Z. The CFPB is 
narrowing that exception in this final rule to the breakeven or 
benchmark level. This means the breakeven and benchmark thresholds do 
not apply heightened regulatory obligations on more expensive credit. 
TILA does that. The failure to shield credit above a certain threshold 
from Congressionally created consumer protections is not the creation 
of a usury rate.
    Regardless, TILA's requirements, which the CFPB's rule applies to 
covered overdraft credit, are not so onerous as to constitute an 
effective usury limit. As noted, TILA includes numerous substantive 
consumer protections that are implemented in Regulation Z and that the 
CFPB is applying to covered overdraft credit. Many very large financial 
institutions already provide credit cards, including subprime credit 
cards, that comply with all of Regulation Z's substantive protections. 
Consumers of subprime credit cards share the same general 
characteristics as many consumers who use overdraft credit. The CFPB 
fully expects that covered overdraft credit can and will comply with 
the same substantive Regulation Z protections that subprime credit 
cards do. Accordingly, applying those Regulation Z protections to 
covered overdraft credit is not so onerous as to constitute an 
effective usury limit.
    Finally, some commenters asserted that the proposed rule would 
constitute an unlawful taking prohibited by the Fifth Amendment to the 
U.S. Constitution. The rule is not a limitation on Constitutionally 
protected private property that renders property unusable and is not an 
unlawful taking under the Fifth Amendment.

C. Other Comments Regarding Statutory Authority

    One commenter asserted that the CFPB lacked authority to issue this 
Rule, arguing that the rule constituted a matter of vast economic and 
political significance subject to the ``major questions'' doctrine. 
Another contended that the CFPB lacked the authority to establish rules 
for overdraft services based on the price of the service because the 
TILA statutory provisions at issue do not reference credit price, 
whereas other credit laws (such as the Home Ownership and Equity 
Protection Act and the Military Lending Act) do.
    Consistent with the discussion above, the CFPB has the statutory 
authority to implement this rule. First, this rule does not implicate 
the ``major questions'' doctrine. This rule updates existing regulatory 
exceptions for overdraft credit offered by very large financial 
institutions and does not rely on a novel interpretation of the CFPB's 
statutory authority. As discussed above, the plain meaning of TILA's 
statutory definition of ``credit'' encompasses overdraft credit. 
Overdraft credit has only been partially excluded from TILA coverage by 
the operation of preexisting regulatory exceptions, including from the 
definition of ``finance charge.'' The major questions doctrine is a 
canon of judicial interpretation used to determine whether Congress 
delegated authority to an agency. This final rule does not create new 
obligations, but rather, it partially removes portions of existing 
regulation that act to relieve industry of

[[Page 106820]]

certain obligations Congress created by statute. It would be illogical 
to conclude an agency does not have delegated authority to remove a 
regulatory exception from a statute, but that the regulatory exception 
was nonetheless issued based on a valid delegation. Instead, both the 
Federal Reserve's original rule creating the exception and this rule 
partially removing it are pursuant to authority granted to the agencies 
by Congress, as described herein. Furthermore, the economic impact of 
this rule, as discussed elsewhere in this notice, is significantly 
lower than any level that would implicate the major questions doctrine.
    Second, nothing in the relevant provisions of TILA precludes the 
CFPB from considering the price of a credit product when partially 
rescinding a regulatory exception to TILA's coverage. For the reasons 
described above, the rule's changes to Sec.  1026.4(c)(3) are 
consistent with TILA and reasonable. The fact that Congress has 
regulated other credit products based in part on their price does not 
render these considerations forbidden in this context.

D. Data Supporting Application of Regulation Z to Overdraft

    Some industry commenters asserted that the data the CFPB cited for 
its proposal to apply Regulation Z to above breakeven overdraft credit 
provided by very large financial institutions is outdated and therefore 
unreliable because some of the data predates the pandemic and some 
large institutions' reduction or elimination of overdraft and NSF fees 
during the pandemic timeframe. As a result, these commenters assert, 
the CFPB is using insufficient and flawed data to justify its policy 
change of now applying Regulation Z to above breakeven deposit account 
overdraft credit provided by these institutions. These commenters 
stated, in particular, that the CFPB is relying primarily on its own 
2012 data to identify and analyze consumers who overdraft, including 
``frequent overdrafters'' (more than 10 overdraft fees in a year), 
which are the consumers that will be most affected by the rule. The 
CFPB's 2012 data identified about 9 percent of checking accounts as 
belonging to frequent overdrafters, whereas commenters argued that more 
recent survey research has found that only roughly 1.5 percent to 3 
percent of banked households report more than 10 overdraft fees in a 
year.\250\
---------------------------------------------------------------------------

    \250\ These commenters point to the following three examples of 
more recent survey research. In survey research by FHN, 9 percent of 
overdrafters, representing roughly 1.5 percent of all banked 
households, reported having incurred more than 10 overdraft fees in 
2022 (FHN Brief 2023). In survey research by the Federal Reserve 
Bank of New York, less than 1 percent of individuals reported 
overdrafting more than 10 times (see Donald P. Morgan & Wilbert van 
der Klaauw, Learning by Bouncing: Overdraft Experience and Salience, 
Liberty Street Econ. (Apr. 2024), https://libertystreeteconomics.newyorkfed.org/2024/04/learning-by-bouncing-overdraft-experience-and-salience/). In survey research by the 
Consumer Bankers Association, 3 percent of consumers reported 
overdrafting 10 or more times in the past 12 months. CBA, Nationwide 
Survey of Consumer Overdraft Services Use and Sentiment: Post COVID-
19 Pandemic (Mar. 2024), https://consumerbankers.com/wp-content/uploads/2024/04/2024.03.21-CBA-Overdraft-Survey.pdf.
---------------------------------------------------------------------------

    The CFPB did not primarily rely on the 2012 data and assessed a 
number of evidentiary sources including more recent studies, but it was 
appropriate to include all of the data cited in the proposal. The CFPB 
is finalizing this rule not because of the precise percentage of 
overdrafters or frequent overdrafters but because the CFPB has 
concluded that above breakeven overdraft credit offered by very large 
financial institutions should no longer be exempt from TILA's consumer 
credit protection for the reasons discussed above. Even were one to 
assume that the difference between recent surveys and CFPB data is due 
in whole or in part to an actual and permanent change in overdrafting 
frequency, the CFPB's rule would remain justified for the reasons 
discussed herein.
    Moreover, it remains true and uncontroverted that overdraft is 
inordinately profitable for institutions and that this profit is made 
off consumers who are financially disadvantaged.\251\ Specifically, 
evidence provided by the CFPB shows that net losses from overdraft were 
only 14 percent of overdraft fees.\252\ And in 2024 the CFPB found that 
five large institutions' average net losses from overdraft were only 
about 6 percent of overdraft fees across all overdraft transactions, 
and about 16 percent of overdraft fees across only fee-assessed 
transactions.\253\ Also, recent uncontroverted evidence reaffirms that 
financially vulnerable households continue to be more likely to pay 
overdraft fees than are other households. Specifically, about 17 
percent of all households with a checking account--i.e., households 
across all levels of financial health--reported incurring at least one 
overdraft or NSF fee in 2022 \254\ and 2023.\255\ In contrast, over 
that same time period, forty-six percent of financially vulnerable 
households reported incurring at least one overdraft fee and just 4 
percent of financially healthy households reported incurring at least 
one overdraft fee.\256\ Commenters did not offer data to contradict 
these figures. Accordingly, the CFPB finds both that the overdraft fees 
consumers pay are about seven times higher than large institutions' 
losses from overdraft and that financially vulnerable consumers are 
more likely to pay overdraft fees than are other consumers.
---------------------------------------------------------------------------

    \251\ CFPB 2017 Data Point.
    \252\ CFPB 2013 White Paper at 17.
    \253\ The CFPB found the average overdraft fee at these 
institutions to be $32.50 and the average amount attributable to 
losses to be $2.00 per overdraft transaction regardless of whether a 
fee was assessed, and $5.34 per fee-assessed transaction. CFPB 
Overdraft and NSF Practices Report.
    \254\ FHN Brief 2023.
    \255\ FHN, FinHealth Spend Report 2024, at 16 (Aug. 2024), 
https://finhealthnetwork.org/wp-content/uploads/2024/08/FinHealth-Spend-Report-2024-FHN.pdf.
    \256\ FHN Brief 2023.
---------------------------------------------------------------------------

    Applying Regulation Z to above breakeven overdraft credit offered 
by VLFIs will benefit the financially vulnerable consumers who 
currently pay the preponderance of overdraft fees. The CFPB does not 
predict exactly how very large financial institutions will react to 
this final rule. Nonetheless, the CFPB notes that some very large 
financial institutions already offer overdraft credit at prices well 
below the median marketwide price. Whether very large institutions 
offer consumers non-covered, below-breakeven (courtesy) overdraft 
credit or covered overdraft credit that complies with the requirements 
of Regulation Z, the CFPB believes that such overdraft credit will be 
provided to these consumers on terms that are more beneficial to them 
than the terms on which non-covered overdraft credit currently is 
provided. Those disadvantaged consumers who are not offered any 
overdraft credit at all will benefit from avoiding the harms associated 
with today's non-covered overdraft credit and from using alternative 
forms of credit that are more beneficial (less harmful) to them to the 
extent available.

E. Implications for Other Laws

    Commenters noted the cumulative effect of the proposed rule and 
other Federal and State regulatory actions would result in higher costs 
for financial institutions, and higher costs and limited account 
availability for consumers. Industry commenters identified regulatory 
actions by the CFPB, the Board, FDIC, OCC, FTC, SEC, and various State 
agencies, such as the CFPB's credit card late fee rule,\257\ the 
Board's Regulation II,\258\ and the prudential regulators' Basel III 
endgame

[[Page 106821]]

proposal.\259\ In addressing the changes to overdraft products and 
practices with this rule, the CFPB is aware of these other regulatory 
changes and proposals. As noted above, in the course of developing this 
rule, the CFPB met with other regulators to better understand the 
interaction of this rule with other laws and has determined that 
proceeding with the rule is appropriate to effectuate the purposes of 
TILA.
---------------------------------------------------------------------------

    \257\ 89 FR 19128 (Mar. 15, 2024).
    \258\ 88 FR 78100 (Nov. 14, 2023).
    \259\ 88 FR 64028 (Sept. 18, 2023).
---------------------------------------------------------------------------

    Commenters also discussed the interaction of the rule with other 
statutes, regulations, and guidance. For example, industry commenters 
stated that the rule would result in the Equal Credit Opportunity Act 
(ECOA) and Regulation B applying to all financial institutions at any 
overdraft fee level. These commenters also stated that the CFPB did not 
consider the procedural burdens that applying ECOA to overdraft credit 
would impose on banks, such as keeping records and providing adverse 
action notices.
    The CFPB has considered the costs of applying the ECOA and 
Regulation B to overdraft credit. The ECOA prohibition against 
discrimination already applies to covered and non-covered overdraft 
credit regardless of the overdraft fee amount and regardless of the 
size of the creditor.\260\ The 2005 Joint Guidance on Overdraft 
Protection Programs makes that point in its discussion of the 
application of ECOA and Regulation B to overdrafts.\261\ However, non-
covered overdraft credit is likely exempt from certain Regulation B 
requirements such as the requirement regarding adverse action notices 
\262\ due to the Regulation B exemption for incidental credit.\263\ 
Covered overdraft credit, such as an overdraft line of credit, does not 
qualify for that exemption and thus must comply with certain Regulation 
B requirements such as the requirement regarding adverse action 
notices. With this final rule and its change to the definition of 
finance charge, previously non-covered overdraft credit will become 
covered overdraft credit (i.e., above breakeven overdraft credit) and 
will no longer qualify for the Regulation B exemption for incidental 
credit. Such newly covered overdraft credit must comply with Regulation 
B requirements such as the requirement regarding adverse action 
notices. Commenters provided no compelling reasons why financial 
institutions should not have to comply with these provisions of ECOA 
when they provide covered overdraft credit.
---------------------------------------------------------------------------

    \260\ See 15 U.S.C. 1691(a); 12 CFR 1002.4(a) which prohibits a 
creditor from discriminating on the basis of race, color, religion, 
national origin, sex, marital status, or age (provided the applicant 
has the capacity to contract); to the fact that all or part of the 
applicant's income derives from a public assistance program; or to 
the fact that the applicant has in good faith exercised any right 
under the Consumer Credit Protection Act. See 12 CFR 1002.2(l) 
defining a creditor as a person who, in the ordinary course of 
business, regularly participates in a credit decision, including 
setting the terms of the credit. See 12 CFR 1002.2(j) which defines 
credit as the right granted by a creditor to an applicant to defer 
payment of a debt, incur debt and defer its payment.
    \261\ The 2005 Joint Guidance on Overdraft Protection Programs 
states that under ECOA and Regulation B, creditors are prohibited 
from discriminating against an applicant on a prohibited basis in 
any aspect of a credit transaction. This prohibition applies to 
overdraft protection programs. Thus steering or targeting certain 
consumers on a prohibited basis for overdraft protection programs 
while offering other consumers overdraft lines of credit or other 
more favorable credit products or overdraft services, will raise 
concerns under the ECOA. 70 FR 9127, 9131 (Feb. 24, 2005).
    \262\ See 12 CFR 1002.2(c) and 1002.9.
    \263\ 12 CFR 1002.3(c)(1) defines incidental credit as consumer 
credit not made pursuant to the terms of a credit card account; not 
subject to a finance charge (as defined in Regulation Z, 12 CFR 
1026.4); and not payable by agreement in more than four 
installments.
---------------------------------------------------------------------------

    Commenters also noted the impact of the proposed rule on the effect 
of certain statutes and regulations promulgated and administered by 
other Federal or State actors due to those statutes and regulations 
incorporating the Regulation Z definition of finance charge. State 
Attorneys General commenters stated that the rule would benefit States' 
enforcement of their own consumer protection laws, especially in States 
where a practice that violates Federal law also violates the State's 
consumer protection law. As discussed above, industry commenters noted 
that deeming fees for above breakeven overdraft credit to be finance 
charges would result in above breakeven overdraft credit exceeding 
usury limits under the MLA, the FCUA, and State usury laws. Consumer 
advocates noted that the impact of the rule on other laws benefits 
consumers, and that Congress and applicable agencies or other 
government entities have the authority to amend the statutes or 
implementing regulations and guidance as they see fit. Assuming the 
commenters are correct about the interaction of this rule with price 
caps under the MLA, FCUA and State usury laws, Congress or other 
Federal or State agencies and government entities are the appropriate 
entities to address the effects of those laws on the overdraft credit 
market.
    An industry commenter also stated that the proposal conflicts with 
OCC guidance and with the prudential regulators' capital requirements. 
Citing the OCC 2001 proposal to amend its rules governing investment 
securities, bank activities and operations, and leasing,\264\ and the 
2007 Interpretive Letter 1082 on overdraft practices,\265\ the 
commenter stated that the OCC does not treat overdrafts as credit nor 
treat the overdraft charges as interest. Even assuming the industry 
commenter's statements are accurate, the CFPB and OCC are interpreting 
and acting under different statues, the CFPB under TILA and the OCC 
under the National Bank Act. With respect to TILA, a consumer advocate 
commenter noted that the 2001 OCC interpretive letter states that an 
``overdraft would be `credit,' as defined by the Truth in Lending Act 
and Regulation Z.'' \266\
---------------------------------------------------------------------------

    \264\ See 66 FR 8178, 8180 (Jan. 30, 2001) (stating that the 
OCC's proposed rule amends Sec.  7.4001(a) to clarify that the term 
``NSF fees'' includes only those fees imposed by a creditor bank 
when a borrower attempts to pay an obligation to that bank with a 
check drawn on nonsufficient funds. Fees that a bank charges for its 
deposit account services--including overdraft and returned check 
charges--are not covered by the term ``NSF fees.'' These fees are 
therefore not ``interest'' but, rather, are charges covered by 12 
CFR 7.4002); see also 66 FR 34784, 34786 (July 2, 2001) (adopting 
the proposed change in the final rule).
    \265\ See OCC Interpretive Letter 1082 (May 17, 2007) (stating 
that a bank ``is not creating a `debt' that it then `collects' by 
recovering the overdraft and the overdraft fee from the account'' 
and that, ``[u]nder these circumstances, the [b]ank's rights to 
collect debts under [S]tate law . . . are not implicated'').
    \266\ OCC Interpretive Letter No. 914 (Aug. 3, 2001). See also 
70 FR 9127, 9129 (Feb. 24, 2005) (stating that ``[w]hen overdrafts 
are paid, credit is extended'').
---------------------------------------------------------------------------

    State regulators commented that applying Regulation Z to above 
breakeven overdraft credit would trigger additional capital 
requirements and that the additional capital requirements in 
combination with higher compliance costs and higher risks for financial 
institutions would render offering above breakeven overdraft credit 
impractical. The CFPB understands that, unrelated to whether the credit 
is subject to Regulation Z, (1) all extensions of overdraft credit--
whether covered or non-covered--trigger capital requirements; and (2) 
it is a fact-specific analysis as to whether a particular overdraft 
credit contract would trigger capital requirements for credit not yet 
extended, including an analysis of whether there is a ``commitment,'' 
whether it is ``unconditionally cancelable,'' and what the resulting 
capital requirement would be.\267\
---------------------------------------------------------------------------

    \267\ See 12 CFR parts 3, 217 and 324.
---------------------------------------------------------------------------

    After considering comments about the cumulative impact of and 
interaction with other laws and after consulting with other agencies, 
the CFPB has determined to issue this final rule in order to effectuate 
the purposes of TILA.

[[Page 106822]]

The CFPB acknowledges that these other laws may impose additional 
obligations and could affect a very large financial institution's 
decision whether to offer covered overdraft credit. Institutions must 
consider the interaction of various laws when considering whether to 
offer any consumer credit product.

VII. CFPA Section 1022(b) Analysis

A. Overview

    In developing this final rule, the CFPB has considered the final 
rule's potential benefits, costs, and impacts per section 1022(b)(2)(A) 
of the Consumer Financial Protection Act of 2010 (CFPA). The CFPB 
requested comment on the preliminary analysis in the 2024 proposal as 
well as submissions of more data that could have informed the CFPB's 
analysis of the potential benefits, costs, and impacts. In developing 
the final rule, the CFPB has consulted with the appropriate prudential 
regulators and other Federal agencies, including about the consistency 
of this final 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 final rule is to allow 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 summarizes comments received and the CFPB's responses. Fourth, it 
goes through the potential benefits and costs, first to consumers and 
then to covered persons. 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 Limitation and Quantification of Benefits, Costs, and Impacts

    The discussion below relies on information that the CFPB has 
obtained from industry, other regulatory agencies, comments received, 
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 final rule. The CFPB provides estimates, to the 
extent possible, of the potential benefits and costs to consumers and 
covered persons of this final rule 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 
will 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 
impact from delaying or forgoing some transactions. Similarly, the CFPB 
has found 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 
quantitative data and research available to the CFPB provide an 
important basis for understanding the likely effects of the final rule, 
the data and research are insufficient to fully quantify the potential 
effects of the final rule for consumers and very large financial 
institutions. This reflects, in part, the fact that the effects of the 
final rule will depend on choices made by independent actors in 
response to the final rule, and the data and research available to the 
CFPB do not 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 final 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 2024 
proposal requested additional data or studies that could help quantify 
the benefits and costs to consumers and covered persons of the final 
rule. The CFPB received little new informative data from commenters in 
response to this request; this information is discussed in part VII.E.

C. Baseline for Analysis

    To evaluate the final rule's benefits, costs, and impacts, the CFPB 
measures the final rule's benefits, costs, and impacts against a 
baseline in which the CFPB takes 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.
    Some changes, including 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 is not responsible for 
interpreting those laws and regulations, and therefore has imperfect 
insight as to how they might interact with the final rule. 
Nevertheless, the ensuing analysis discusses some interactions as the 
CFPB understands them under current rules, as of September 2024.
    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 both the market and the regulatory environment 
are changing rapidly and might continue to do so absent the rule, but 
for purposes of the baseline the CFPB generally uses data from 2022 and 
established law at the time of drafting to characterize the status quo.

D. Comments Received

1. General Comments on the 1022(b)(2)(A) Analysis
    Several academic and policy research groups argued that the CFPB's 
consideration of the proposed rule's potential benefits and costs in 
the 1022(b)(2)(A) section of the proposal lacked sufficient rigor. They 
contended the CFPB failed to quantify many of the tangible costs it 
identified as likely

[[Page 106823]]

resulting from the proposed rule. The CFPB acknowledged certain 
limitations in part VIII.B of the proposal and considered all the 
available data and evidence. In the 2024 proposal, the CFPB requested 
that commenters provide additional data that could help inform the 
rule. While few comments contained relevant empirical information, the 
CFPB also considered the qualitative information provided by commenters 
in analyzing the potential benefits and costs of the rule. 
Nevertheless, the CFPB does not have sufficient data to precisely 
estimate every potential benefit and cost of the rule. The CFPB has 
reasonably evaluated all available data and evidence to provide 
quantitative benefit and cost estimates when possible and relied on 
economic principles and its subject matter expertise to provide 
qualitative benefit and cost estimates when suitable quantitative data 
were not available.
    Multiple industry trade groups claimed the CFPB did not 
appropriately consider the proposal's potential to reduce consumer 
access to overdraft services as required by the CFPA. The CFPB did 
consider access to credit in the proposal and in this final rule, as 
mandated. The trade groups also said this outcome would cause 
significant harm to consumers who rely on overdraft as a short-term 
liquidity tool. The CFPB has considered the full effects of the rule on 
consumers, including of any potential loss of access, as part of its 
analysis in parts VII.E and VII.F. If covered financial institutions 
opt to comply with the final rule by lowering their non-covered 
overdraft fees and charging consumers the benchmark fee, they may also 
choose to use tighter underwriting standards for the non-covered 
overdraft credit that they extend. This could result in less non-
covered overdraft credit access for some consumers. Given the evidence 
discussed in parts VII.E and VII.F below, a reduction in non-covered 
overdraft could also be beneficial to some affected consumers, and 
covered financial institutions may have incentives to offer other 
products in place of non-covered overdraft to help consumers cover 
potential deposit account shortfalls. Covered financial institutions 
that opt to use the breakeven standard will not have the same incentive 
to reduce non-covered overdraft credit access.
    Some industry commenters, including banks and credit unions, stated 
that the CFPB's sample of institutions used to determine the benchmark 
overdraft fees was small and not representative of the broader market. 
On the contrary, the CFPB considers its recent relevant data from some 
major market participants together with the comment record, sufficient 
to establish a benchmark fee that allows a reasonable number of firms 
to break even while providing greater transparency and less 
administrative burden. Some of these commenters stated that each 
institution should be allowed to determine its own costs of providing 
overdraft services. The CFPB highlights that the benchmark fee is not a 
regulatory obligation and that the breakeven standard allows for any 
institution that prefers not to use the benchmark fee to calculate 
their own costs and losses to determine the appropriate fee.
2. Comments Concerning the Proposal's Impact on Consumers
    Numerous consumer advocates, nonprofits, and academic commenters 
expressed strong support for the proposal. They felt it would provide 
important new protections for vulnerable consumers who bear a 
disproportionate share of overdraft fees. Low-income Americans, 
communities of color, and students were highlighted as groups that 
would particularly benefit. Commenters cited statistics showing these 
populations are substantially more likely to incur multiple overdraft 
charges. Any resulting lower fees would therefore be seen as beneficial 
for these populations. The CFPB is in general agreement with these 
statements.
    Many individual commenters and consumer advocates shared personal 
stories illustrating the financial distress caused by overdraft fees. 
Examples included people going hungry because an unexpected overdraft 
charge deprived them of money for food or having to forgo needed 
medication because of fee-induced cash shortfalls. Several commenters 
said high overdraft charges had pushed them out of the banking system 
altogether. Commenters indicated that by curtailing institutions' 
ability to impose onerous fees, the proposal was seen as promoting 
greater financial inclusion and access. These comments illustrate some 
of the consumer benefits the CFPB expects from potentially lower 
charges for overdraft credit.
    However, some industry groups, along with a few academic and 
individual commenters, stated that significantly lowering overdraft 
fees could restrict access to short-term liquidity for consumers who 
need it most. These commenters argued that if banks and credit unions 
can no longer profitably provide this service, these cash-strapped 
consumers may be pushed toward predatory payday lenders and other high-
cost credit alternatives. Or they may be cut off from credit entirely 
and forced to forego the consumption that higher-priced overdraft 
credit might have funded. Further, some commenters argued that 
consumers generally value overdraft services because such services 
allow them to avoid the inconvenience and embarrassment of having 
transactions declined. The CFPB notes that the impact analysis of the 
proposal discussed possible effects on credit access in part VIII.D and 
VIII.G of the proposal and expects that credit is most likely to be 
withheld in situations where the borrower may be better off not 
accessing overdraft credit because of risks like default, account 
closure, collections, losses of future deposit account access, and the 
availability of cheaper alternative sources of liquidity.
    Several industry commenters also expressed concern that the 
proposal would lead to higher costs for other basic banking services or 
that institutions may reduce the banking services they provide to low-
income households. They predicted that institutions may introduce new 
maintenance fees or balance requirements on checking accounts to 
compensate for lost overdraft revenue. Some asserted that this outcome 
could prompt more low-income consumers to become unbanked. However, 
consumer advocate commenters generally disagreed, arguing competitive 
pressures would prevent any drastic increases in account costs. They 
also noted that underserved consumers would still come out ahead 
financially even if modest new fees were introduced, given the outsize 
impact that overdraft charges currently have on lower-income consumer 
households. The CFPB understands that maintenance fees may already be 
as high as the market can bear (depository institutions are unlikely to 
be foregoing potential profits from higher deposit account maintenance 
fee pricing in the current market), but any small increase in the use 
of maintenance fees would introduce predictable, transparent, equal, 
and fair pricing for widely used deposit services and would replace a 
cross-subsidy from supernormal profits on a product used primarily by 
more resource constrained consumers. The CFPB includes a more detailed 
discussion of these potential responses by covered financial 
institutions in part VII.E.1.
3. Comments Concerning the Proposal's Impact on Covered Persons
    Several commenters expressed concern that applying Regulation Z to 
above breakeven overdraft credit would

[[Page 106824]]

have a negative impact on the market for financial services, stating, 
for example, that the proposed changes are a one-size-fits-all approach 
that would stifle competition and innovation. The CFPB notes that the 
final rule allows covered financial institutions the flexibility to 
determine whether providing non-covered overdraft at the benchmark fee, 
using the breakeven standard, or, alternatively, providing consumers 
with covered overdraft credit makes the most sense for their 
institution. To the extent that covered financial institutions elect to 
substitute towards offering more covered overdraft credit, if anything, 
market competition should be enhanced by the rule as market 
participants compete through more transparent prices, and disclosures 
improve the salience of prices for different available credit options 
to consumers. Numerous industry commenters strongly objected to the 
CFPB's calculation of the benchmark fees for non-covered overdraft. 
They said the proposed benchmarks failed to account for all of the 
costs institutions incur to maintain overdraft programs. In addition to 
losses from unpaid overdrafts, banks and credit unions described 
substantial expenses related to compliance, disclosure, technology, and 
customer service that would not be recouped under the proposed 
potential benchmarks. While some portion of such costs may be directly 
traceable to providing overdraft coverage, generally these costs are 
more appropriately classified as costs of providing deposit services to 
consumers as opposed to costs of providing overdraft coverage to 
deposit account customers. Requiring that the costs of providing 
deposit accounts be borne primarily by the low-balance consumers most 
likely to be charged overdraft fees is cross-subsidizing deposit 
account use for higher-balance accounts through fees assessed primarily 
on low-balance accounts. The CFPB acknowledges that some covered 
institutions may have overdraft costs that exceed the $5 benchmark fee. 
For this impact analysis, the CFPB reiterates that institutions will be 
able to break even on non-covered overdraft even if the $5 benchmark is 
too low to cover their traceable costs, whether enumerated in the non-
exhaustive examples of section 1026.62(d)(2) or not, by resorting to 
the breakeven standard. Many industry commenters stated that if the 
rule were finalized as proposed, they would be forced to stop offering 
overdraft services altogether. Several smaller institutions said it 
would be impossible for them to profitably provide these services under 
market pressure from very large financial institutions. Even if some 
larger banks continued overdraft programs, commenters anticipated they 
would significantly tighten eligibility standards. The CFPB notes again 
that non-covered overdraft will not generate losses to institutions 
offering it as any covered financial institution has the option to use 
the breakeven standard, and some other expected responses have been 
detailed in the sections below. Restricting access to only a subset of 
customers will not make non-covered overdraft any more profitable for 
institutions using the breakeven standard. Institutions using the 
benchmark fee may have a short-term incentive to stop paying overdraft 
transactions when the expected cost of doing so is higher than the 
benchmark fee and they choose not to apply the breakeven standard. Some 
industry groups claimed that shifting current overdrafts to a 
Regulation Z model (of covered overdraft) would entail significant new 
compliance costs and restrictions that would make the products 
unprofitable and impractical. The CFPB disagrees, as mass market credit 
products offered under Regulation Z are prevalent, including subprime 
credit cards in particular. The CFPB includes a more detailed 
discussion of the potential for increased covered overdraft credit 
access in response to the final rule in part VII.E and VII.H below. 
Several industry commenters claimed the proposal would 
disproportionately harm smaller community banks and credit unions, 
asserting that these institutions often derive a greater share of their 
overall revenue from overdraft fees compared to large national banks 
and typically have a higher share of low-income customers who rely on 
overdraft. If the rule curtails this income stream, commenters warned 
it could threaten the viability of some smaller institutions, spurring 
further industry consolidation. The comments stated that this outcome 
would be detrimental to traditionally underserved communities that 
depend on local banks and credit unions for access to basic financial 
services. The CFPB notes that the rule will only apply to very large 
financial institutions and therefore will not have any direct impact on 
smaller financial institutions. To the extent that very large financial 
institutions respond to the rule by offering overdraft credit to 
consumers at more favorable rates, the rule could generate some 
competitive pressure that may indirectly affect smaller financial 
institutions. However, the CFPB notes that some very large financial 
institutions already offer overdraft at prices well below the median 
market price, or without assessing any fee at all. The CFPB does not 
expect overdraft price reductions in response to the rule to exert 
different competitive pressures for smaller financial institutions than 
past price reductions that some very large financial institutions have 
already implemented. In particular, the CFPB does not expect the final 
rule to make overdraft prices more salient for consumers at small 
financial institutions, and thus the final rule is unlikely to increase 
shopping for deposit accounts based on overdraft prices.
    A number of credit unions argued the proposal failed to account for 
their unique structure and constraints. They argued that as not-for-
profit cooperatives, credit unions use overdraft fees to support 
services and programs that benefit their membership as a whole, and 
that curtailing this revenue could force them to cut back on financial 
education, community development efforts, and other initiatives. The 
CFPB acknowledges that its impact analysis does not attempt to estimate 
how much of prior supernormal profits were invested in prosocial 
activities or cross-subsidies to consumers in even greater need than 
typical overdrafters. Commenters also noted that most credit unions are 
subject to an 18 percent interest rate cap, which they asserted would 
make it very difficult to offer overdrafts as a Regulation Z line of 
credit. They said this limit puts credit unions at a competitive 
disadvantage to banks, which are not subject to the same restriction. 
The CFPB acknowledges that the few credit unions among very large 
financial institutions subject to the rule may face additional 
constraints on their covered overdraft programs in accordance with the 
requirements of the Federal Credit Union Act and associated 
regulations. The CFPB also understands that the nonprofit nature of 
credit unions makes changes offsetting the lost overdraft revenue more 
likely, or as much as lower profits will manifest as lower yields on 
deposits (as dividends to members), even mechanical. There was also 
widespread concern among industry commenters that while the proposal 
only directly applies to financial institutions with over $10 billion 
in assets, smaller entities would be under pressure to reduce their 
fees in order to remain competitive. Community banks and credit unions 
said they simply do not have the economies of scale to absorb the same 
loss of overdraft income that large

[[Page 106825]]

national banks can withstand. Several commenters urged the CFPB to 
exempt small institutions from the rule entirely in recognition of this 
dynamic. The CFPB does not expect that applying the rule to very large 
financial institutions will materially change market conditions for 
smaller market participants not subject to such constraints, including 
the large majority of credit unions not subject to this rule. The 
existence of a wide range of fees and product offerings under the 
baseline suggests that there are unlikely to be large changes in the 
rate of consumers that are currently served by small financial 
institutions not covered by the final rule shopping for or switching 
between banks due to the rule. To the extent that some consumers become 
more sensitive to overdraft fees when choosing a financial institution, 
the CFPB expects that small institutions will find ways to offer these 
consumers value that convinces them to stay.

E. Potential Benefits and Costs to Consumers and Covered Persons

1. Potential Benefits and Costs to Consumers
    In addition to other changes discussed later in this section and 
the further changes discussed in the following section, the final rule 
will 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 final rule) 
or the benchmark fee published by the CFPB. The CFPB anticipates that 
its final rule generally will 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 will 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 will 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 
final rule's benefits to consumers depending on how various market 
participants, such as financial institutions covered by the final rule, 
entities not covered by the final rule, and consumers, respond to the 
final rule. The discussion below begins with an analysis of the final 
rule's direct benefits to consumers assuming that very large financial 
institutions comply with the final rule 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 final rule's direct benefits to consumers. Next, the discussion 
considers how the final rule 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 final 
rule may respond to the final rule.
i. Estimated Savings to Consumers if All Very Large Financial 
Institutions Use the CFPB's Proposed Benchmark Fee or Breakeven 
Standard
    Under the final rule, 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 $5 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 
final rule'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 will pay if non-covered overdraft credit were 
priced at the $5 benchmark fee. Today, fees for non-covered overdraft 
credit are generally greater than $30 per transaction.\268\ Under the 
final rule, fees for any non-covered overdraft product provided by a 
very large financial institution will 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.\269\ 
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.\270\ 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.\271\ 
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 are an estimated 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 did not include data on overdraft fee 
revenue in 2022.\272\ 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

[[Page 106826]]

such revenue).\273\ Banks with more than $1 billion in assets reported 
$7.72 billion in overdraft/NSF revenue in 2022, 90.55 percent or $7 
billion of which the CFPB estimates is overdraft revenue for reasons 
explained above. Assuming this $7 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.\274\ From information collections by the CFPB, it 
estimates the average overdraft fee amount to be $32.50.\275\ The CFPB 
initially assumes that a reduction in the fee for non-covered overdraft 
credit will affect neither the quantity of credit demanded nor the 
quantity supplied, meaning that the application of the benchmark fee 
across the entire market will imply mechanical savings for consumers, 
unaffected by behavioral responses.\276\ As discussed in part IV.D.3, 
the CFPB has finalized $5 as the benchmark fee. Assuming $5 will be the 
new average fee across the market, the decline in market total revenue 
will be proportional to the decline in the average fee amount. Thus, 
using a 2022 baseline, a $5 fee will save consumers $5.2 billion (84.6 
percent of the 2022 total) annually. Savings from lower fees will 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 will permit 
more consumption. Current users of non-covered overdraft credit will 
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 will 
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 $5 
benchmark fee will 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 will be less as their fee will not drop all the way 
to $5. The gains for consumers will 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. Data produced in 
response to the CFPB's supervisory information collections on 2022 
overdraft practices suggest that at least some very large financial 
institutions will 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

[[Page 106827]]

in its supervisory information 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 
may change in response to the final rule, current cost and loss levels 
may not be a reliable indicator of future cost and loss levels under 
the final rule. Overdraft fees are incurred by consumers in an 
estimated 17 percent of households annually.\277\ Among these, the 
consumers who will benefit most from the final rule are those that 
incur the largest number of overdraft fees. Thus, a change in fee 
amounts will have an outsized impact on specific groups of consumers. 
The CFPB collected 2022 calendar year information from entities it 
supervises (the group that will be affected by the final rule), which 
reinforced patterns of disparity that prior CFPB research and others 
have established: \278\ 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 overdraft fees per year on average. Therefore, 
the benefits of any fee changes driven by the final rule will be 
predominantly experienced by accountholders who had either opted-in 
accounts or lower-balance accounts. 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 (12 
or more overdraft fees per year) were nearly five times as prevalent 
among opted-in accounts than not-opted-in accounts. 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.\279\
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    \268\ 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.
    \269\ 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.
    \270\ CFPB 2014 Data Point at 10 tbl.2.
    \271\ CFPB October 2023 Data Spotlight.
    \272\ Some State-charted credit unions reported substantial 
overdraft revenue under California's Financial Code sec. 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).
    \273\ 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, 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.
    \274\ The CFPB used FFIEC call report data on overdraft and NSF 
fee revenue from 2022 rather than 2023 to estimate benefits and 
costs to ensure consistency with the overdraft-related cost data the 
CFPB collected and used to inform the benchmark fee, which are only 
available from 2022. Total overdraft and NSF fee revenue paid by 
consumers at banks with more than $1 billion in total assets was 
somewhat lower in 2023 than in 2022--$5.83 billion in 2023 as 
compared to $7.61 billion in 2022 (As in 2022, data on banks below 
$1 billion in assets are not available for 2023.) This would suggest 
that the estimated benefits, costs, and impacts on consumers and 
covered persons could be somewhat smaller if the analysis relied on 
data from 2023 rather than 2022. See CFPB Data Spotlight, Overdraft/
NSF Revenue in 2023 down more than 50% versus pre-pandemic levels, 
saving consumers over $6 billion annually (Apr. 2024), https://www.consumerfinance.gov/data-research/research-reports/data-spotlight-overdraft-nsf-revenue-in-2023-down-more-than-50-versus-pre-pandemic-levels-saving-consumers-over-6-billion-annually/ (2024 
CFPB Data Spotlight).
    \275\ The CFPB collected 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 average fee recently reported by the New York 
State Department of Financial Services for 2022 based on surveyed 
entities, most of which would not be subject to this final rule. 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. See Karen Bennet et al., Survey: ATM fees 
reach 26-year high while overdraft fees inch back up, Bankrate.com 
(Aug. 21, 2024) https://www.bankrate.com/banking/checking/checking-account-survey/.
    \276\ 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.
    \277\ 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 12 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 Dec. 3, 2024).
    \278\ See CFPB Fall 2023 Highlight; see also CFPB 2014 Data; 
CFPB 2017 Data Point.
    \279\ 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 Very Large Financial Institutions Covered by the Final 
Rule
    Consumer gains will likely differ from the mechanical effect of 
lower fees on non-covered overdraft as described in the section above 
if some very large financial institutions tailor their offering to the 
new environment as the final rule allows. The discussion in this part 
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, this part discusses repricing of 
financial products, like maintenance fees on the underlying checking 
account.
Availability of Non-Covered Overdraft Credit
    Assuming that very large financial institutions comply with the 
final rule 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.\280\ 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 
the financial institution's reputation.\281\ 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 will 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. In principle, very large financial institutions 
could respond to the final 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, the firms may offer other products 
instead. To the extent that very large financial institutions opt to 
reduce access to non-covered overdraft, it could result in an increased 
likelihood that transactions are declined for some consumers. The CFPB 
understands that depository institutions rarely charge NSF fees on 
declined ATM or one-time debit card transactions when there were 
nonsufficient funds at the time the transaction was attempted. The CFPB 
expects that this will somewhat

[[Page 106828]]

attenuate any increase in likelihood that institutions decline these 
transactions since their expected revenue from the decline is 
negligible. While assessing NSF fees when declining ATM or one-time 
debit card transactions may make this response more likely, doing so 
would harm customers, damage consumer goodwill by charging a fee in 
return for no service, and, as noted by the Board in its preamble to 
the 2009 Opt-In Rule, ``could raise significant fairness issues'' under 
the Federal Trade Commission (FTC) Act because ``the institution bears 
little, if any, risk or cost to decline authorization of an ATM or one-
time debit card transaction.'' \282\
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    \280\ 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.
    \281\ 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.
    \282\ 74 FR 59033, 59041 (Nov. 17, 2009). In 2010, card issuers 
reported that their median per-transaction cost of nonsufficient 
funds handling was one cent. 76 FR 43394, 43398 (July 20, 2011). 
Since then, the transacted weighted average cost of nonsufficient 
funds handling has fallen to $0.005. FRS, 2021 Interchange Fee 
Revenue, Covered Issuer Costs, and Covered Issuer and Merchant Fraud 
Losses Related to Debit Card Transactions, at 39 tbl.14A (Oct. 
2023), https://www.federalreserve.gov/paymentsystems/files/debitfees_costs_2021.pdf. Nonsufficient funds handling costs were 
described in the survey as ``[c]osts of handling of events in which 
an account does not have enough funds to settle an authorized debit 
card transaction between the time of authorization of that 
transaction and the settlement of that transaction.'' Id. at 28 
n.25. Based on this description, the cost of handling events in 
which the debit card transaction was not authorized is likely even 
lower.
---------------------------------------------------------------------------

    Limited access to non-covered overdraft could be beneficial to 
consumers with access to cheaper credit options they mistakenly forgo 
or who would have preferred that a transaction was declined rather than 
incurring an overdraft fee. Some consumers who would not have repaid 
the overdraft credit may avoid the negative effects of default, 
including account closures, debt collection calls and litigation, and 
reporting to account screening consumer reporting agencies (which are 
specialty deposit credit reporting agencies) that can make it difficult 
to open a checking account at another financial institution. 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.\283\ Contrary to some 
commenters' claims, the CFPB considered this study carefully in its 
proposal and reconsidered it for the final rule.\284\ The work 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. 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 survey data the study uses, 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.\285\ The estimates 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 suffered worse financial health, and 
they suggest that this is consistent with welfare improvements for 
these consumers in the short run. These estimates do not make the CFPB 
expect substantial consumer harm from this final rule. 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's causal reasoning requires 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 exemption from State fee caps, and evaluating these 
assumptions is difficult given the five-year window for which the study 
has data.\286\ Assuming the internal validity of the findings, 
differences in both the economic context and the nature of the 
regulatory change make it unlikely that the study's findings will apply 
directly in the context of this final rule. The study authors suggest 
that relaxing caps may have been beneficial to consumers without bank 
accounts in 2001, but this is difficult to conclude without strong 
assumptions about how consumers value deposit account access, overdraft 
credit, and overdraft fees. In addressing which of the four proposed 
benchmark fees the CFPB should adopt in this final rule, an academic 
commenter urged the CFPB to adopt one of the lower proposed benchmarks 
fees while acknowledging that these would be more likely to result in 
reduced overdraft credit limits for some consumers. The commenter 
asserted that ensuring consumers can make better-informed borrowing 
choices or that they would face substantially lower per-episode non-
covered overdraft fees would be preferrable to permitting higher non-
covered overdraft fees, even if those fees were less than half of the 
prevailing fees charged in today's market. The CFPB also notes that the 
final rule will not impose limits on all overdraft fees but rather will 
require very large financial institutions to comply with Regulation Z 
when offering covered overdraft credit.
---------------------------------------------------------------------------

    \283\ See Jennifer L. Dlugosz et al., Who Pays the Price? 
Overdraft Fee Ceilings and the Unbanked (Fed. Rsrv. Bank of N.Y., 
Staff Rep. No. 973, June 2021), https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr973.pdf (revised July 
2023) (Dlugosz 2021 Study).
    \284\ Comments citing this study generally overlooked the CFPB's 
consideration of some negative consequences of unpaid overdraft or 
declined transactions. The CFPB has not ruled out and does not rule 
out decreased overdraft credit or checking account access for some 
consumers, but does not expect consumer harm from such potential 
outcomes to necessarily outweigh consumer gains from lesser charges, 
more transparent pricing, and more efficient competition in 
overdraft credit and deposit account markets.
    \285\ The study cites three possible reasons why the share with 
checking accounts might be lower in their data than other surveys or 
administrative records: their focus on checking accounts and 
exclusion of savings and money market accounts, the nearly 10 year 
difference in timing between their survey and other available survey 
evidence, and the known underreporting of bank account ownership in 
survey data relative to administrative records shown in a 2021 study 
by Yogo, Cox, and Whitten. See Dlugosz 2021 Study at 17 n.19; see 
also Yogo et al., Financial Inclusion Across the United States (Dec. 
6, 2021), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3934498 (last revised Nov. 25, 2024) (Cox 
2021 Study).
    \286\ An academic discussant of an earlier draft of the study 
recommended further analysis to allay similar concerns. See 
Christopher Palmer, MIT Sloan & NBER, Who Pays the Price? Overdraft 
Fee Ceilings and the Unbanked, Presentation at the Boston Fed Day 
Ahead Conference, at 9 (Jan. 6, 2022), https://web.mit.edu/cjpalmer/www/discussions/Palmer%20Discussion%20of%20DMM.pdf.
---------------------------------------------------------------------------

    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

[[Page 106829]]

a smaller decrease in total service charges, which suggests less than 
fully offsetting price responses.\287\ 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.\288\ 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.\289\ 
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.\290\ In some cases, in response to the final 
rule, the above referenced more conservative underwriting may lead 
lenders to reject transactions they would not have rejected under the 
baseline where consumers do not have other viable options. In such 
cases, those consumers will no longer have the option to use non-
covered overdraft as credit, which means transactions will be declined, 
but also, the consumers will 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.\291\ Financial institutions will 
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.
---------------------------------------------------------------------------

    \287\ As discussed in part I.B 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.
    \288\ 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.
    \289\ See Paola Boel & Peter Zimmerman. Unbanked in America: A 
Review of the Literature. Econ. Comment Number 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.
    \290\ See CFPB May 2023 Data Spotlight.
    \291\ 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 (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. See Sule Alan et al., Unshrouding: Evidence from 
Bank Overdrafts in Turkey, 73 J. Fin. 481 (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. 
See Michael D. Grubb, Consumer Inattention and Bill-Shock 
Regulation, 82 Rev. Econ. Stud. 219 (2015), https://academic.oup.com/restud/article/82/1/219/1543467. Grubb et al. 
indeed report on field experiments in the U.K. where timely text 
message alerts saved consumers 11 to 27 percent of overdraft fees, 
which also shows that many had available funds elsewhere. See 
Michael D. Grubb et al., Sending Out an SOS: Automatic Enrollment 
Experiments for Overdraft Alerts (forthcoming in the Journal of 
Finance, accepted May 8, 2024), https://sites.google.com/bc.edu/michael-grubb/research. Heidhues and K[ouml]szegi use overdraft as 
their prime example of markets where providers exploit the mistakes 
of some consumers. See Paul Heidhues & Botond K[ouml]szegi, 
Na[iuml]vet[eacute]-Based Discrimination, 132 The Q. J. Econ. 1019 
(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. See John Gathergood & Arna Olafsson, The Co-holding 
Puzzle: New Evidence from Transaction-Level Data (Oct 10, 2023), 
https://ssrn.com/abstract=3607560.
---------------------------------------------------------------------------

    One industry trade commenter summarized responses from 21 member 
banks answering its survey about their overdraft practices in 2023 to 
support its assertion that the CFPB could quantify the impact of the 
rule on availability of non-covered overdraft, and asserted that the 
survey results show that the final rule would lead to a significant 
reduction in the amount of credit available to customers through non-
covered overdraft, which the commenter stated was not accounted for in 
the proposal. The commenter provided results for 13 of the 21 member 
banks that responded to the survey, excluding responses for banks that 
did not offer overdraft or did not meet the definition of a very large 
financial institution. Among these 13 respondents, the reported average 
amount of non-covered overdraft credit available to overdraft customers 
in 2023 was $756, and on average overdraft consumers ``used'' about 
half of the available credit in 2023. Respondents reported that they 
would reduce the amount of available non-covered overdraft credit under 
different potential benchmark fee amounts. Furthermore, the survey's 
methodology provides an insufficient basis to credibly quantify 
potential impacts of the rule. For example, the study's description of 
its methodology does not make clear how the measure of credit used is 
calculated, making it difficult to evaluate if the calculation captures 
the relevant economic concept.\292\ In any event, at the $7 benchmark 
fee amount, five out of ten respondents reported that the reduction in 
average available overdraft credit would not exceed 50 percent. Even at 
the $3 benchmark, two out of ten claimed the available overdraft credit 
would be reduced by 50 percent or less. Either scenario is consistent 
with an expectation that only heavy users of overdraft would face an 
effective reduction in their overdraft credit available to cover 
transactions; respondents stated that, on average, overdrafters used 
only half of their available credit line and currently extended 
liquidity also covers the excess overdraft fees that the final rule 
will reduce.\293\ The survey thus suggests that many financial 
institutions will be able to use the $5 benchmark fee without 
meaningfully reducing overdraft access or use for many consumers.
---------------------------------------------------------------------------

    \292\ For example, it is not clear if the credit used as 
calculated in the study reflects the highest overdraft balance a 
consumer had during the year, the sum of all overdraft transactions 
during the year, average monthly overdraft balances within the year, 
or some other measure.
    \293\ At the commenter's ``average amount of overdraft liquidity 
available per customer'' of $756, this would be expected to cover 
nine overdraft transactions at an average overdraft transaction 
amount of $50 (see FHN Brief 2024) and an average overdraft fee of 
$32.50 (see CFPB 2024 Overdraft NSF Report at 13). Under the 
benchmark fee of $5, available overdraft liquidity close to half the 
current average among the survey respondents ($385) would still 
cover seven overdraft transactions at the average transaction 
amount.
---------------------------------------------------------------------------

Waiver Policies
    Currently, a substantial fraction of overdraft fees is waived by 
financial institutions, either because regulation

[[Page 106830]]

does not allow fees on transactions that are paid 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 
will 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 will affect both 
parts of this tradeoff. Lower potential fee revenue will mean that 
depository institutions will 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 the Overdraft and NSF Practices Report, 
the $5 benchmark fee would not have covered the average charge-off 
losses across the institutions in the CFPB's data for 2022 if they had 
applied their current waiver policies (charging $5 only in instances 
where they actually charged their current higher fee in 2022).\294\ 
This suggests that institutions that currently waive or reverse fees 
might reconsider their policies if the 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. If an 
institution was to adopt the breakeven standard, it will charge higher 
fees but may still have an incentive to tailor its 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 
will shift the consumer experience from higher overdraft fees (as much 
as $35) that might be waived discretionarily, to lower overdraft fees 
(as low as $5) that are more predictable. On net, the CFPB expects that 
this shift will 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 amounts to what has been called 
``contractual inequality.'' \295\ A substantial decrease in 
discretionary waivers is likely to move towards more equality of waiver 
rates across underprivileged and more privileged groups.
---------------------------------------------------------------------------

    \294\ CFPB Overdraft and NSF Practices Report at 6.
    \295\ Manisha Padi, Contractual Inequality, 120 Mich. L. Rev. 
825, 834-40 (2021), https://repository.law.umich.edu/cgi/viewcontent.cgi?article=8399&context=mlr.
---------------------------------------------------------------------------

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 will choose to apply for and use covered overdraft products, 
and whether very large financial institutions will 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 will develop. In particular, it will 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 will require 
extensions of existing systems or new installations at many 
institutions, transitioning a new customer base to covered overdraft 
credit will 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 will have 
experience underwriting such small lines of credit covered by 
Regulation Z for this population (either for a credit card or extant 
overdraft lines of credit). The effective date will 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 will 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 financial institutions will 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.\296\ 
Institutions may find it harder to quickly adjust credit limits for 
covered overdraft credit than for non-covered overdraft credit, and 
this difference may be more pronounced when extending overdraft credit 
that is less likely to be repaid.
---------------------------------------------------------------------------

    \296\ 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/publication/corporate/ep23-1.pdf (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 prevalent in the United States.
---------------------------------------------------------------------------

    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 will be less expensive than existing non-covered overdraft 
products for the same consumers and coverage.\297\
---------------------------------------------------------------------------

    \297\ 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.
---------------------------------------------------------------------------

    Consumers will also stand to gain from the availability of covered 
overdraft credit because meeting periodic minimum payments, which are 
generally lower than the full balance, will 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, will cover more 
transactions while the credit account

[[Page 106831]]

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 will 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 account screening 
consumer reporting agencies (which are specialty deposit credit 
reporting agencies) 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 final rule.
    When consumers at very large financial institutions are offered 
covered overdraft credit, that covered overdraft credit will not be 
subject to the Regulation E opt-in requirement for non-covered debit 
card overdraft. However, it will 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. Financial institutions will not be required to permit consumers 
to consent separately to overdraft charges on one-time debit card and 
ATM transactions, versus overdraft on other transaction types, the way 
Regulation E requires. A very large financial institution will be 
permitted, instead, to simply give the consumer the choice to apply for 
covered overdraft credit that will 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 will 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 final rule. Where a financial institution 
only offers covered overdraft credit bundled for all transaction types, 
consumers who are not opted in today will gain the right to, 
effectively, refrain from opting into overdraft on transactions other 
than one-time debit and ATMs. They will 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 
Regulation E opt-in right is low.\298\
---------------------------------------------------------------------------

    \298\ See Pew 2017 Chartbook at 1, 6 fig. 5 (three out of four 
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 will 
not be subject to the substantive protections discussed above. Instead, 
it will be subject to the disclosure requirements that apply to closed-
end credit. The CFPB believes it is unlikely that this product will be 
provided.
    With non-covered overdraft credit less profitable for financial 
institutions and available to fewer consumers, both institutions and 
consumers will 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 will 
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 final rule. 
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.\299\
---------------------------------------------------------------------------

    \299\ 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.
---------------------------------------------------------------------------

Offsetting Changes to Other Deposit Account Prices
    As discussed above, the final rule will lead to reductions in non-
covered overdraft revenue at many very large financial institutions, 
and it is uncertain whether that revenue will be replaced, potentially 
by revenue from covered overdraft or other substitute products. 
Overdraft provider responses to this lost revenue will 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 through increasing other checking 
account prices or decreasing rates paid on deposit accounts. Whether 
financial institutions will offset lost overdraft fee revenue in this 
way for some or all deposit accounts will depend on a number of 
factors, including overall profitability of deposit accounts and the 
nature of competition among financial institutions. Without predicting 
exactly how firms will respond, the CFPB believes a reduction in 
overdraft fee revenue need not translate into increased maintenance 
fees, especially for high-balance consumers.\300\ In addition, as 
discussed in this section, very large financial institutions will 
generate revenue by assessing charges on covered overdraft credit or 
other credit products that substitute for non-covered overdraft.
---------------------------------------------------------------------------

    \300\ Today's market features checking accounts with neither 
maintenance nor overdraft fees.
---------------------------------------------------------------------------

    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 final rule will not 
eliminate all non-covered overdraft fee revenue. With the $5 benchmark 
(and again, assuming for analytical purposes full adoption of the 
benchmark), financial institutions will lose approximately 84.6 percent 
in weighted average fee revenue (from $32.50 average fees to the $5 
benchmark), totaling a revenue loss of $3.19 per account per month.
    The magnitude of this extreme upper bound on lost revenue per 
account

[[Page 106832]]

reassures the CFPB that any potential losses to banking access can 
remain limited. In fact, there are large financial institutions for 
which this final rule is unlikely to result in substantial reductions 
in revenue.\301\ 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.\302\ 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.\303\
---------------------------------------------------------------------------

    \301\ 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.
    \302\ See CFPB May 2023 Data Spotlight.
    \303\ See FCA 2023.
---------------------------------------------------------------------------

    Offsetting changes in prices, if any, will limit the benefits to 
consumers from the final rule (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 
will 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, will incur only modest losses under the final rule relative 
to the baseline. Thus, to the extent that covered financial 
institutions respond to the rule by increasing deposit account 
maintenance fees or decreasing net interest paid for deposit accounts, 
this will decrease the total benefit to consumers from the final rule. 
However, as these prices are likely to be more salient to consumers, 
the CFPB expects there to be more efficient competition which will 
limit the extent to which covered financial institutions are able to 
pass along price increases (or net interest decreases) to consumers. 
Furthermore, and as mentioned above, any offsetting changes in prices 
are likely to be less regressive than overdraft fee revenue and thereby 
would replace a cross-subsidy from supernormal profits on a product 
used primarily by more resource constrained consumers.\304\
---------------------------------------------------------------------------

    \304\ Minimum balance requirements typically affect fee waivers 
and not overall account access. To the extent that fees are 
introduced for consumers that fail to satisfy minimum balance 
requirements, the resulting fees will also disproportionately be 
assessed on more resource-constrained consumers. A discussion on the 
availability of non-covered overdraft credit is above. Upon opening, 
some accounts might require a larger balance to limit adverse 
selection. The CFPB expects non-covered overdraft access to be 
determined separately from basic checking and deposit account 
access, with limited changes to the supply of the latter. A 
discussion on potential demand responses to more transparent price 
changes is below.
---------------------------------------------------------------------------

    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. Thus, consumers that end up with less 
access to overdraft credit due to this final rule (and therefore more 
declined transactions) are not likely to pay fees on these types of 
transactions that they attempted but that were not authorized. Other 
types of declined transactions might trigger NSF fees to the extent 
those fees are not subject to the penalty fees limitation in Sec.  
1026.52(b), although, as noted earlier, a significant majority of 
supervised entities subject to this final rule eliminated NSF fees 
during 2022 and early 2023.
iii. Responses by Consumers
    A lower price for non-covered overdraft credit will 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 will likely provide net benefits. Inattentive 
consumers, for whom overdraft has already often been a mistake, will 
continue to be unlikely to pay attention to and rationally consider the 
lower cost of overdrawing their balance, and will 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 \305\ 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 final 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 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.
---------------------------------------------------------------------------

    \305\ 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.
---------------------------------------------------------------------------

    While the rate of consumers switching depository institutions is 
relatively low, some consumers may also choose different depository 
institutions as account terms change as a result of the final 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 final rule.
    To the extent that marginal consumers could expect to pay a 
predictable and lower amount for checking overall, the final rule will 
encourage unbanked or underbanked customers to return to the banking 
system and gain access to deposit insurance and the low-cost payments 
system banks provide.
    Overdraft use might also change because very large financial 
institutions will need to disclose newly covered overdraft credit to 
consumers as a credit product, which can only help them. For consumers 
who will use overdraft more because of this, their increased use may 
suggest that they will be deliberately taking advantage of a product 
worth its price for them. For consumers who will use overdraft less 
after these changes, better information might correct prior

[[Page 106833]]

misunderstandings and prevent further mistakes.
    Disclosure as a credit product will 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 will bring 
down prices among competitors. For example, Regulation Z requires 
disclosure of annual percentage rates, which aid consumers in comparing 
the cost of credit across products.
    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 less attentive consumers and are thus 
more likely to benefit from the final rule.
iv. Responses by Financial Institutions Not Covered by the Final Rule
    The final rule will only apply to very large financial institutions 
and will not lead to any new compliance costs for financial 
institutions not covered by the final rule.
    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 final rule 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 it is difficult to predict with 
certainty as to how very large financial institutions will 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 final rule will 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. As it did for 
consumers, the CFPB has carefully considered the various causes, 
mediating channels and modulating responses affecting costs and 
benefits to covered persons, 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 final rule for covered persons.
    In particular, the final rule will 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 final 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. 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 
will need to update these systems to make sure they accurately disclose 
and charge the new lower fees. If they decide to offer covered 
overdraft credit instead to any customer, then the disclosures will 
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 
will 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 $5.2 billion. This 
revenue impact on covered persons is limited by the final rule's 
design, which allows depository institutions to collect their costs and 
losses in overdraft fees. part IV.D.3 details why the CFPB believes 
that the $5 benchmark fee will allow some very large financial 
institutions to cover their costs and losses. Where the benchmark fee 
will not allow this, fees set based on the breakeven standard will 
allow institutions to recover their costs and losses over time. This 
mechanism ensures that even entities that will see less revenue due to 
this final rule need not take losses on overdraft credit, unless they 
charge lower fees than the final rule will 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 final rule will have 
broader implications on counterparties, competitors, or new entrants, 
or elsewhere in the economy. Such considerations are too speculative 
for this impact analysis.

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

    The final rule will also apply the Regulation E compulsory use 
prohibition to covered overdraft credit provided by a very large 
financial institution. The rule does not amend the Regulation Z 
prohibition against offset, nor the Regulation Z provision permitting 
periodic deductions. The final rule's approach to these provisions will 
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 will 
give them additional control over their finances, though they might be 
overoptimistic about their future repayment discipline, and mistakenly 
turn down automatic

[[Page 106834]]

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 will 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 will 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.
1. Applying CARD Act Provisions of Regulation Z to Covered Overdraft 
Credit
    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 will 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 using hybrid debit-credit cards that 
access covered overdraft credit will also benefit from the final 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 final rule will also 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 
will clarify that a very large financial institution must treat 
existing deposit accounts with above breakeven overdraft credit that is 
currently non-covered overdraft credit, but that the institution 
chooses to provide as 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, will then be subject to the CARD Act protections in subpart G 
of Regulation Z.
    Section 1026.51 will 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 benefitting from the 
ability-to-pay regulation's 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 overdrawn amounts every month.
    Section 1026.52(a) will 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 Sec.  1026.52(a) 
will 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 will 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) 
will 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, 
will benefit by not being charged these fees. Similarly, financial 
institutions that would have received NSF fee revenue from these 
transactions will 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 will 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. 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 final rule will impose some costs on the depository institution.
    Under the final rule, above breakeven overdraft credit will no 
longer qualify as ``incidental credit'' under Sec.  1002.3 and thus 
will be newly subject to certain requirements under Regulation B, 
including with respect to providing notice and record-keeping. These 
obligations will have costs to covered persons which are detailed in 
the Regulation B Supporting Statement that has been filed with OMB in 
connection with this final rule and are available as part of its public 
docket.
2. Potential Interactions With Other Regulations
    The final rule, including 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. Under the baseline, 
covered overdraft will be particularly affordable at Federal credit

[[Page 106835]]

unions and whenever MLA caps and other potential usury limits apply. As 
much as covered overdraft credit remains or becomes available in these 
scenarios under the final rule, it will be particularly beneficial to 
consumers and will entail a loss of revenue for covered persons as 
these regulations will restrict the interest rates at which credit can 
be extended to covered consumers. Due to the effects of these laws, 
covered overdraft may be less frequently offered to affected consumers. 
The CFPB has not attempted to quantify the effects of such changes 
because 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.

G. Potential Impacts on Depository Institutions and Credit Unions With 
$10 Billion or Less in Total Assets, as Described in CFPA Section 1026

    As this final rule applies only to financial institutions with more 
than $10 billion in total assets, the CFPB expects no specific impact 
on small entities directly. Part VII.D.3 above discusses how the CFPB 
understands the final rule's indirect impact on these entities.

H. Potential Impacts on Consumer Access to Credit and on Consumers in 
Rural Areas

    As discussed above, the final rule may 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 final 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.\306\ 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 will likely experience similar impacts from the final rule.
---------------------------------------------------------------------------

    \306\ Cox et al. (2021) identified the unbanked in the universe 
of tax records as those not listing an account for rebates or 
payment over a 10 year period, focusing on the 50-59 age group in 
2019. See Cox 2021 Study. 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 Board. 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 will have as much access to newly underwritten covered 
overdraft credit as the rest of the United States.

VIII. 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 
final rule because the final rule, if adopted, will 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.\307\
---------------------------------------------------------------------------

    \307\ See U.S. Small Bus. Admin., Table of size standards, 
https://www.sba.gov/document/support-table-size-standards (last 
updated June 4, 2024).
---------------------------------------------------------------------------

    As this final 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 the final rule will not 
have a significant economic impact on a substantial number of small 
entities. Thus, a FRFA is not required for this rule.
    In the notice of proposed rulemaking, the Director certified that 
the final rule, 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 was required for this final rule. The 
CFPB requested comment on its analysis and any relevant data.
    The CFPB received a number of comments on its RFA analysis from 
industry trade groups, financial institutions that would not be 
considered ``very large financial institutions,'' and at least one 
consumer advocate commenter. The industry trade groups and financial 
institutions asserted that the CFPB should have convened a SBREFA panel 
for the rule and that the RFA in the 2024 proposal did not have a 
sufficient factual basis. These industry commenters generally stated 
that the rule would substantially affect small and mid-sized financial 
institutions as they would face competitive market pressure to decrease 
overdraft prices if very large financial institutions decrease 
overdraft prices to comply with the rule. The consumer advocate 
commenter stated that the rule would not have a significant impact on a 
substantial number of small entities even if the CFPB lowered the 
threshold to $850 million or more in assets.
    Any change in overdraft pricing by small and mid-sized financial 
institutions due to competitive pressures would be an indirect effect 
of this final rule. Indirect effects fall outside the scope of the RFA.

IX. 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 final rule amends 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, as well as 12 CFR 1005 (Regulation E), which 
implements the Electronic Fund Transfer Act, which is assigned OMB 
control number 3170-0014, which expires 5/31/2025. However, this final 
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 final rule and are 
available as part of its public docket.

[[Page 106836]]

    The CFPB has a continuing interest in the public's opinions 
regarding this determination. At any time, comments regarding this 
determination may be sent to: The Consumer Financial Protection Bureau 
(Attention: PRA Office), 1700 G Street NW, Washington, DC 20552, or by 
email to [email protected].

X. Congressional Review Act

    Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), 
the CFPB will submit a report containing this rule and other required 
information to the U.S. Senate, the U.S. House of Representatives, and 
the Comptroller General of the United States at least 60 days prior to 
the rule's published effective date. The Office of Information and 
Regulatory Affairs has designated this rule as a ``major rule'' as 
defined by 5 U.S.C. 804(2).

XI. Severability

    The CFPB proposed the following statement regarding severability 
and received no comments. Accordingly, the CFPB is finalizing it as 
proposed.\308\
---------------------------------------------------------------------------

    \308\ The CFPB notes that this severability clause is not 
codified but forms an operative part of the rule.
---------------------------------------------------------------------------

    If any provision of this rule, 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. For example, 
if the $5 benchmark in Sec.  1026.62(d)(1)(ii) is overturned, the 
breakeven method under Sec.  1026.62(d)(1)(i) will remain in effect, 
meaning very large financial institutions could charge overdraft fees 
in compliance with TILA, or use the breakeven exemption, but would not 
be able to use the $5 safe-harbor benchmark.

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 amends 12 parts 
1005 and 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, revise 10(e)(1) 
Credit; and
0
b. Under Section 1005.17--Requirements for Overdraft Services, revise 
17(a) Definition.
    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

[[Page 106837]]

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.
* * * * *

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, a 
charge or combination of charges, including a per transaction fee, 
imposed on a covered asset account when overdraft credit is extended is 
not comparable to the following fees or charges imposed on a checking 
or other transaction account that does not have overdraft credit:
    (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.
* * * * *

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.

[[Page 106838]]

    (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 paragraph (d) of 
this section.
    (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 paragraph (a)(2) of 
this section.
    (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 (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) $5.
    (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.
    (3) For purposes of paragraph (d)(2) of this section, a cost or 
charge-off loss is specifically traceable if it has a direct 
relationship to the provision of non-covered overdraft services and the 
very large financial institution can provide evidence to demonstrate 
that direct relationship.
    (4) For purposes of paragraph (d)(1) of this section, a charge or 
combination of charges includes all revenue received in connection with 
an overdraft transaction, including, but not limited to, 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.
    (5) When calculating the pro rata share of its total direct costs 
and charge-off losses for providing non-covered overdraft credit in the 
previous year, a very large financial institution must include all non-
covered overdraft transactions from the previous year in its 
calculation.
    (6) For purposes of paragraph (d)(1)(i) of this section, the term 
``previous year'' means a period that encompasses, at the very large 
financial institution's option, any of the following periods:
    (i) The prior calendar year,
    (ii) Any 365-day period that begins within the prior calendar year,
    (iii) The prior four financial quarters, or
    (iv) The very large financial institution's prior accounting year.

0
9. In Supplement I to Part 1026--Official Interpretations:
0
a. Under Section 1026.2--Definitions and Rules of Construction revise 
2(a)(14) Credit, Paragraph 2(a)(15), and 2(a)(20) Open-End Credit;
0
b. Under Section 1026.4--Finance Charge revise Paragraph 4(b)(2) and 
4(c)(3);
0
c. Under Section 1026.12--Special Credit Card Provisions revise the 
introductory text, and Paragraph 12(a)(1), Paragraph 12(a)(2), 12(c) 
Right of Cardholder To Assert Claims or Defenses Against Card Issuer, 
and 12(c)(1) General Rule;
0
d. Under Section 1026.55--Limitations on Increasing Annual Percentage 
Rates, Fees, and Charges, revise 55(a) General Rule; and
0
e. Under Section 1026.57--Reporting and Marketing Rules for College 
Student Open-End Credit, revise 57(a)(1) College student credit card.
    The revisions 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

[[Page 106839]]

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.
    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. Credit includes, for example, 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 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 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

[[Page 106840]]

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 a covered asset account as defined in Sec.  
1026.62, a plan includes, for example, 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 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 a financial institution assesses such 
charges on a covered asset account as defined in Sec.  1026.62 or a 
separate credit account, any service, transaction, activity, or 
carrying charges imposed by the financial institution for paying a 
transaction that overdraws a consumer's covered asset account held 
at the financial institution are generally finance

[[Page 106841]]

charges unless they are otherwise addressed by Sec.  1026.4(b)(2), 
(b)(12), or (c). See Sec.  1026.4(a), (b)(2), (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 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 and above breakeven overdraft credit as 
defined in Sec.  1026.62(b)(1), 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 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.
* * * * *

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 as defined in Sec.  1026.62.
    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.

[[Page 106842]]

    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 
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

[[Page 106843]]

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.
* * * * *

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-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

[[Page 106844]]

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 
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

[[Page 106845]]

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.
* * * * *

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. 2024-29699 Filed 12-27-24; 8:45 am]
BILLING CODE 4810-AM-P`