By Ray Birch
WASHINGTON–The CFPB has issued a final rule on overdrafts that will likely drive many financial institutions over $10 billion in assets to drop their OD charge to a miniscule $5--if the regulation is not rolled back by the Trump Administration.
The CFPB’s OD proposal, which preceded Thursday’s anticipated final rule, had floated a price of $14 for overdrafts. The final rule's cap is $5.
The new rule also provides the big shops with options. However, those choices may require detailed analysis and lead to greater compliance burden, one source is saying.
Analysis from Moebs $ervices suggests the $5 price will likely be the route many big FIs choose, prompting smaller institutions to follow with similar pricing to compete. The move comes at a time when the average overdraft price has dropped to $15 nationally, as many banks, fintechs and credit unions have been cutting price for many reasons, including pressure from Washington, consumer groups and the media.
“The new CFPB rule will drive all financial institutions to $5, even though a $10-billion asset level has been set by CFPB rule,” said Michael Moebs, economist and chair at Moebs $ervices, who added some institutions will simply eliminate overdrafts. “The $5 limit will have to be met by all small-asset-size FIs—such as community banks, credit unions, thrifts and fintechs—to compete with the capped CFPB level. The CFPB has been effective in the last few years at strongly influencing market conditions. This raises a question concerning the commerce clause of the U.S. Constitution prohibiting government from setting prices for goods and services.”
Michael Moebs
The overdraft final rule will take effect on Oct.1, 2025, the CFPB said. However analysts believe the rule will face legal challenges and will have to withstand scrutiny from the Trump Administration.
“The new rules essentially eliminate the longstanding definition of overdrafts as ‘credit but not a loan’ that has been in place since 1969 with Truth in Lending and later reinforced by Truth in Savings,” explained Moebs. “While the rules are final today, there will be legal challenges in the weeks and months to come. The trade groups, including the American Bankers Association and America’s Credit Unions, have been anticipating the CFPB to overreach their authority with this price regulation rule and are prepared to challenge it. I would anticipate formal legal challenges to be filed in the coming days.”
Trump Administration
Moebs noted the new rule runs counter to Trump Administration’s “laissez-faire regulatory approach” during its last administration.
“Therefore, it is hard to imagine the next director of the CFPB, appointed by President Trump, will not roll back many of the CFPB’s rules issued in the lame duck session, including this overdraft rule,” he said.
The CFPB is stating the reforms provide large FIs several options to manage their overdraft lending program.
“They can choose to charge $5; to offer overdraft as a courtesy by charging a fee that covers no more than costs or losses; or continue to extend profit-generating overdraft loans if they comply with longstanding lending laws, including disclosing any applicable interest rate,” the CFPB said.
The final rule is expected to add up to $5 billion in annual overdraft fee savings to consumers, or $225 per household that pays overdraft fees, the agency said.
"For far too long, the largest banks have exploited a legal loophole that has drained billions of dollars from Americans' deposit accounts," said CFPB Director Rohit Chopra. "The CFPB is cracking down on these excessive junk fees and requiring big banks to come clean about the interest rate they're charging on overdraft loans."
Closes ‘Loophole’
The CFPB’s latest action closes the large bank regulatory “loophole” that exempted overdraft fees as a finance charge, the CFPB said.
“When Congress passed the Truth in Lending Act (TILA) in 1968, many families used mail to send and receive checks, and were subject to various bank processing times in order for their deposits and withdrawals to clear. In 1969, the Federal Reserve Board exempted banks from TILA protections for infrequent cases where a bank was honoring a check that had not cleared and subjected the customer to overdraft fees. At the time, overdraft services were not considered profit drivers but courtesy services extended by the bank when, for instance, a paper check sent through the mail may have arrived late,” the CFPB said.
Rohit Chopra
“Over the past few decades, these highly profitable overdraft loans have increased consumer costs by billions of dollars,” the agency continued. “The loans have also led to tens of millions of consumers losing access to banking services, as well as facing negative credit reporting that has prevented them from opening another account in the future.”
Final Overdraft Rule
The CFPB outlined the rule’s choices for institutions with more than $10 billion in assets:
- Cap their overdraft fee at $5: “Under this simple option, covered banks and credit unions could simply cap their fee at $5, which is the estimated level at which most banks could be able to cover their costs associated with administering a courtesy overdraft program.”
- Cap their fee at an amount that covers costs and losses:” For banks that wish to offer overdraft as a convenient service rather than as a profit center, the final rule allows financial institutions to set their fee at an amount that covers their costs and losses.”
- Disclose the terms of their overdraft loan just like other loans: “For financial institutions that wish to profit from overdraft lending, they may do so by complying with the standard requirements governing other loans, like credit cards. This would include giving consumers a choice on whether to open the line of overdraft credit, providing account-opening disclosures that would allow comparison shopping, sending periodic statements, and giving consumers a choice of whether to pay automatically or manually.”
Details And Compliance Costs
J.V. Proesel
J.V. Proesel, president of Moebs $ervices, pointed out his company’s data show the average cost of an overdraft is about $14.
“This includes the direct cost of equipment and people to provide service at the branch level and reconcile accounts. Indirect costs of branches and other branch equipment and personnel. Losses on overdrafts which are about 11% of fee income,” Proesel said. “Finally, overhead, which for most FIs is 50% of direct and indirect costs plus losses. All of this processing will have to be detailed in deposit account agreements, which adds to compliance cost.”
Proesel contended the way the rule is written, the CFPB hopes to steer the big FIs to $5 per OD.
“The CFPB wants ODs to go to Capital One, Chime, Walmart, etc. who can afford to offset the loss of revenue with credit cards and other services,” Proesel said. “Almost all banks, credit unions, and thrifts will lose money and checking will become unprofitable.”
Proesel believes some FIs will try to justify charging a higher price other than $5.
“But, then again, the CFPB, or whoever will be the price regulation authority, may likely reject the proposed price,” Proesel said. “The CFPB is mirroring the Justice Department, who has a 99% conviction rate, and makes it too costly to challenge them.”