CFPB Final Rule on Overdraft Credit by Very Large Financial Institutions

The CFPB recently issued a final rule amending Regulation Z and Regulation E to address an existing exception in Regulation Z from the definition of “finance charge” for charges imposed by financial institutions for honoring checks and similar items that overdraw an account.  The CFPB terms this “credit extended to pay account overdrafts” in the final rule.  The CFPB alleges in the final rule that such overdraft protection has become a major source of revenue for financial institutions in recent years, with “most very large financial institutions [continuing] to charge $35 per overdraft transaction today.”

In the final rule, the CFPB makes certain amendments to Regulation Z that apply to insured depository institutions and credit unions with more than $10 billion in assets (i.e. very large financial institutions).  First, the final rule effectively removes the exemption from the “finance charge” definition for profit-generating overdraft fees (in the final rule’s language, “above breakeven overdraft credit”) imposed by very large financial institutions, thereby bringing such fees and extensions of credit into regulation under TILA (including TILA’s provisions on open-end credit).  The final rule permits such financial institutions to determine whether a fee is above breakeven overdraft credit by either (i) calculating its own costs and losses using a standard articulated in the final rule, or (ii) relying on a benchmark of $5. 

Second, the final rule addresses a related exception providing that a charge imposed on an asset account in connection with an overdraft feature is not a finance charge if the charge does not exceed the charge for a similar transaction account without a credit feature.  The final rule provides clarification as to what constitutes such a comparable charge.

The final rule further amends Regulation E to prohibit very large financial institutions from requiring the use of electronic funds transfers for the repayment of covered overdraft credit; consumers must be given a choice of at least one alternative method of repayment, although they can still voluntarily elect to use electronic funds transfers to make such repayments.

These revisions take effect on October 1, 2025.