CFPB Proposes Rule Applying TILA to Overdrafts, Among Other Changes

The CFPB recently issued a notice of proposed rulemaking covering very large financial institutions that would make overdraft credit subject to Regulation Z, require overdraft credit to be in a separate account (rather than being a negative balance in the underlying account), and apply Regulation E’s compulsory-use prohibition to the repayment of overdraft credit.

As currently written, charges for overdraft protections are excluded from the definition of “finance charge” under Regulation Z, which implements the Truth in Lending Act (TILA), and overdraft protections are also not considered consumer credit subject to Regulation Z.  The proposed rule would define “overdraft credit” as open-end credit, and make clear that, unless an exemption applies, charges for paying a transaction that overdraws a consumer’s account would be a finance charge. 

Further, the proposed rule would require overdraft credit to be a separate credit account, rather than reflected as a negative balance on an account.  This is meant to avoid automatically applying a consumer’s deposit to overdrafts, and to allow a consumer to decide if deposited assets will be used to pay an overdraft or for other purposes.  Overdraft credit would also be subject to the compulsory use prohibition of Regulation E, which implements the Electronic Funds Transfer Act (EFTA).  That means, in addition to the option to repay through an Electronic Fund Transfer, consumers must be provided with at least one alternative repayment option.  The notice also proposes subjecting overdraft credit to the CARD Act if the credit is open-end credit and accessible by credit or debit card.

If adopted, the proposed rule would apply only to very large financial institutions, defined as insured depository institutions and credit unions with assets of $10 billion or more.  However, the CFPB has stated that it will monitor the market’s response and determine whether these consumer protections should extend to financial institutions with assets under $10 billion.

Comments are due April 1, 2024.  If adopted, the CFPB indicated that it expects the proposed rules would go into effect October 1, 2025.