I. Background and Summary II. Section-by-Section Description of Proposed Changes III. Regulatory Review I. Background and Summary

DOE is publishing this notice of proposed rulemaking in order to update and clarify DOE's policies and procedures for determining eligibility for access authorizations. The current rule implements the requirement in Executive Order (E.O.) 12968, Access to Classified Information, that agencies promulgate regulations to provide review proceedings to individuals whose eligibility for access to classified information is denied or revoked.

The current rule has not been substantively updated since 2016 (81 FR 71331, Oct. 17, 2016). Since then, as various national policies were issued and amended and DOE has gained additional implementation experience under the current rule, so proposed revisions to update and clarify provisions in the rule are appropriate. The proposed revisions would: (1) expand the scope of the current rule to include individuals applying for or in positions requiring eligibility to hold a sensitive position; (2) incorporate requirements of Security Executive Agent Directive (SEAD) 9, Appellate Review of Retaliation Regarding Security Clearances and Access Determinations, which provides appeal rights to both federal and contractor employees; (3) update hearing procedures to more accurately reflect current practices; (4) update references to DOE offices and officials to reflect new titles and organizational names; (5) remove appendix A, SEAD 4, National Security Adjudicative Guidelines (June 8, 2017); (6) revise and add definitions for certain terms; and (7) make minor updates to improve clarity and delete obsolete references.

DOE proposes to amend title 10 Code of Federal Regulation (CFR) part 710 as follows:

1. The title of this part would be amended to add, “OR ELIGIBILITY TO HOLD A SENSITIVE POSITION” at the end to reflect the proposed expansion of the scope of the rule, as explained in paragraph 4.

2. The authority section of this part would be amended to add a reference to E.O. 13467. Context for this proposed change is explained in paragraph 4.

3. In proposed § 710.1, “Purpose,” § 710.1(a) would be amended to add at the end “or eligibility to hold a sensitive position pursuant to Executive Order 13467 (Reforming Processes Related to Suitability for Government Employment, Fitness for Contractor Employees, and Eligibility for Access to Classified National Security Information),” to reflect the proposed change to the scope of the rule, as explained below in paragraph 4. Section 710.1(b) would be amended to add after the citation for E.O. 10865, “Executive Order 13467, 73 FR 38103 (June 30, 2008) as amended” and to add “or successor directive” after the reference to SEAD 4.

4. In proposed § 710.2 “Scope,” a new paragraph would be added to make the provisions of the rule applicable to an individual's eligibility to hold a sensitive position. This proposed change would clarify that, except when specifically noted, any provision that applies to determinations of eligibility for access to classified information or special nuclear matter would also apply to determinations of eligibility to hold a sensitive position. Conforming changes are also proposed to be made in § 710.2.

In 2017, E.O. 13467, Reforming Processes Related to Suitability for Government Employment, Fitness for Contractor Employees, and Eligibility for Access to Classified National Security Information, was amended by E.O. 13764 to make the provisions of E.O. 12968 that apply to eligibility for access to classified information to also apply to eligibility to hold a sensitive position regardless of whether or not that sensitive position requires access to classified information.

The term “sensitive position” is defined in E.O. 13467, as amended, to mean any position within or in support of a Federal department or agency, the occupant of which could bring about, by virtue of the nature of the position, a material adverse effect on national security regardless of whether the occupant has access to classified information and regardless of whether the occupant is an employee, military service member, or contractor.

The current scope of 10 CFR part 710 applies only to individuals who require eligibility for access to classified information and special nuclear materials and does not address individuals who require eligibility to hold a sensitive position where an access authorization is not a requirement of the position.

Expanding the applicability of this rule to individuals applying for or in positions requiring eligibility to hold a sensitive position, who do not require an access authorization, would bring DOE into compliance with E.O. 13467, as amended.

5. Existing § 710.3, “Reference,” would be deleted in its entirety because appendix A, SEAD 4, National Security Adjudicative Guidelines (June 8, 2017), is proposed for removal as explained below in paragraph 22.

6. In § 710.4, “Policy,” § 710.4(a) would be amended to add at the end “or eligibility to hold a sensitive position,” and § 710.4(b) would be amended to add “or eligibility to hold a sensitive position” after “access authorization” to reflect the proposed change to § 710.2 “Scope.”

7. In § 710.5, “Definitions,” a number of new or amended definitions are proposed.

The term “Continuous Vetting” would be added to reflect recent national policies under Trusted Workforce (TW) 2.0, as explained in paragraph 8.

The term “Local Director of Security” would be amended by removing the references to “Chicago” and “Oak Ridge,” and adding “for the Office of Science (SC), the individual designated in writing by the Deputy Director for Operations,” removing the references to Richland and Savannah River and adding “for the Office of Environmental Management (EM), the individual(s) designated in writing by the Senior Advisor, or delegee, adding an “s” after “individual” in the reference to the National Nuclear Security Administration, and adding “Security” in the title of the Naval Nuclear Propulsion Program. These changes would reflect new titles and organization name changes since the last changes to this rule.

The term “Manager” would be amended by removing the references to the Chicago Operations Office, the Oak Ridge Operations Office, and the “Director, Office of Headquarters Security Operations”. “Manager” would be changed by adding “(to include the Office of River Protection)” in the reference to “Richland,” adding “for the Office of Environmental Management (EM), the individuals(s) designated in writing by the Senior Advisor, or delegee, adding “for the Office of Science (SC), the individual designated in writing by the Deputy Director for Operations,” adding “Security” in the title of the Naval Nuclear Propulsion Program, and adding “Director, Office of Headquarters Security Vetting” in place of “Director, Office of Headquarters Security Operations”. These proposed changes would reflect new titles and organization name changes since the last change to this rule.

The term “Sensitive Position” would be added to reflect the expansion of the scope of the rule to apply to individuals applying for or in sensitive positions, consistent with E.O. 13467, as amended, as explained in paragraph 4.

8. In § 710.6, “Cooperation by the individual,” § 710.6(a)(1) would be amended to add “continuous vetting” after “reinvestigation.” The Director of National Intelligence and the Director of the Office of Personnel Management, pursuant to their responsibilities as Executive Agents under E.O. 13467, as amended, launched the “Trusted Workforce 2.0” initiative to transform Federal personnel vetting programs. One of the changes included a transition from traditional periodic reinvestigations to government-wide continuous vetting. Paragraph (a)(1) would also delete “interviews” and add in its place “consultations” for consistency with current DOE terminology. It would also delete “investigative activities” and add in its place “actions” for consistency with current DOE terminology. The last sentence of paragraph (a)(1) would also be amended to add the language “for incumbents” before “any access authorization then in effect may be administratively withdrawn” to clarify that the term “administratively withdrawn” applies to incumbents while “administratively terminated” applies to applicants. Paragraph (c) would be amended to delete the words “his/her” and add in their place the word “their” for consistency with other DOE policies.

9. Section 710.7(d) would be amended to delete “reports of investigation” and add in its place “investigative results report” for consistency with DOE and other Federal agency practices.

10. Section 710.8(a) would be amended by removing references to an “interview” wherever it occurs and adding, in their place references to a “consultation” for consistency with current DOE terminology.

11. Section 710.9(e) would be amended to reflect the requirements in SEAD 9, Appellate Review of Retaliation Regarding Security Clearances and Access Determinations. In 2022, the Director of National Intelligence issued SEAD 9, which established an appellate review process for employees who seek to appeal an adverse final agency determination with respect to alleged retaliatory action(s) taken by an employing agency affecting the employees' security clearance or access determination as a result of protected disclosures. SEAD 9 clarified that the agency review and appeal rights were available to both federal and contractor employees. Therefore, paragraph (e) would be amended to remove the words, “if the individual is a Federal employee,” and add language to address the appeal rights under SEAD 9. Paragraphs (e) and (f) would be amended to delete the words, “his/her,” and add in their place the word “their” for consistency with other DOE policies.

12. Section 710.20 would be amended to remove the word “interview” and add in its place the word “consultation” for consistency with current DOE terminology.

13. Section 710.21 would be amended to delete from it the words “his/her” and add in their place the word “their” for consistency with other DOE policies. Paragraph (c)(1) would be amended to add a requirement for the Manager to provide a copy of SEAD 4 or successor directive as part of the notification letter. Since Appendix A, which currently contains SEAD 4, is proposed for removal, this proposed amendment would ensure that an individual going through administrative review under this part will receive a copy of the applicable adjudicative standards. Paragraph (c)(2) would be amended to remove the words, “For Federal employees only”, and add language to reflect the requirements in SEAD 9, Appellate Review of Retaliation Regarding Security Clearances and Access Determinations, which extended appeal rights beyond Federal employees to include Federal contractors, as detailed in the explanation of proposed changes to § 710.9(e), in paragraph 11.

14. Proposed § 710.22(c)(4) would be amended to clarify that the 30 days provided to the individual for requesting review of the Manager's initial decision is subject to any extensions granted by the Director under paragraph (c)(3).

15. Proposed § 710.25(c) would be amended to delete the words “his/her” and add in their place the words “their” for consistency with other DOE policies. Paragraph (e) would be amended to delete language stating that hearings will normally be held at or near a DOE facility unless determined otherwise by the Administrative Judge and also to delete that the hearing location will be selected for all the participants' convenience. Paragraph (f) would be amended to add language to clarify that conferences may be conducted by telephone, video teleconference, or other means as directed by the Administrative Judge. These changes to paragraphs (e) and (f) are proposed in order to conform to current agency practice.

16. Proposed § 710.26(a) would be amended to delete the words “his/her” and add in their place the words “their” for consistency with other DOE policies. Paragraph (d) would be amended to delete language that requires the proponent of a witness to conduct the direct examination of their witness. This change is proposed because if an individual is represented by counsel, the individual's counsel will often conduct the direct examination of the individual's witnesses. However, when the individual is not represented by counsel, the individual may choose to allow DOE counsel to conduct the direct examination of the individual's witnesses. This proposed change would align the regulation with current DOE practices, which provides the individual with flexibility in the conduct of direct examinations. In addition, the language currently in § 710.26(d), “[w]henever reasonably possible, testimony shall be given in person,” would be deleted to reflect the current practice that testimony is normally given live via video teleconference and not in-person.

17. Proposed § 710.27(b) would be amended to delete the word “handicapped” and add in its place the word “prejudiced” to reflect updated terminology.

18. Proposed § 710.28(a)(4) would be amended to delete the words “his/her” and add in their place the words “their” for consistency with other DOE policies.

19. Proposed § 710.29(c) would be amended to delete the words “his/her” and add in their place the word “their” to reflect updated terminology for consistency with other DOE policies.

20. In § 710.31, paragraphs (b)(4), (b)(5), and (b)(6) would be amended to correct typographical errors made in the last substantive revision to this regulation. Specifically, paragraphs (b)(4) and (b)(5) would be amended to delete the language “provisions of § 710.31(2)” and add, in their place, “provisions of § 710.31(b)(2)” since § 710.31(2) does not exist in the current rule and the correct reference should have been to paragraph (b)(2), which describes the actions to be taken depending on whether a reconsideration request is approved. Paragraph (b)(6) would be amended to delete the language “paragraphs (f) or (g)” and add, in their place, “paragraphs (b)(4) or (b)(5)”. There are no paragraphs (f) and (g) in the current § 710.31 and paragraph (b)(6) should have referenced §§ 710.31(b)(4) and 710.31(b)(5), which describe the actions to be taken based on whether an individual is found to be eligible for access authorization. Paragraph (b)(6) would also be amended to delete the language “set forth in paragraph (d)” and add, in its place, “set forth in paragraph (b)(2)” for the same reason explained previously. This change is proposed because there is no § 710.31(d) in the current rule. The correct reference should have been § 710.31(b)(2).

21. Appendix A to Part 710—SEAD 4, National Security Adjudicative Guidelines (June 8, 2017) would be deleted in its entirety. On October 17, 2016, DOE removed its adjudicative criteria from the regulation in order to rely solely on the national security adjudicative guidelines (81 FR 71331). As part of that rule, DOE added the entire text of the national security adjudicative guidelines to the regulation as appendix A. The intent behind adding appendix A was to provide the maximum transparency and notice to the public as to the applicable adjudicative criteria in determining eligibility for access to classified information. On December 4, 2017, this regulation was updated to include the latest version of the national security adjudicative guidelines, SEAD 4, which was issued by the Director of National Intelligence. Future updates to the National Security Adjudicative Guidelines are likely and DOE believes retaining appendix A, which may not reflect the latest updated version due to the time it takes to amend a regulation, may cause confusion to the public as to which version of the guidelines applies to their eligibility determination. Therefore, DOE proposes to remove appendix A, SEAD 4, National Security Adjudicative Guidelines (June 8, 2017), and require that a copy of the applicable guidelines be provided to individuals as part of the notification letter, as proposed in § 710.21(c)(1).

This proposed regulatory action has been determined not to be a “significant regulatory action” under E.O. 12866, Regulatory Planning and Review, 58 FR 51735 (October 4, 1993) as supplemented and reaffirmed by E.O. 13563, “Improving Regulation and Regulatory Review,” 76 FR 3821 (Jan. 21, 2011) and amended by E.O. 14094, “Modernizing Regulatory Review”, 88 FR 21879 (April 11, 2023). Accordingly, this proposed rule is not subject to review under the E.O. by the Office of Information and Regulatory Affairs (OIRA) within the Office of Management and Budget (OMB).

With respect to the review of existing regulations and the promulgation of new regulations, section 3(a) of E.O. 12988, “Civil Justice Reform,” 61 FR 4729

(February 7, 1996), imposes on Executive agencies the general duty to adhere to the following requirements: (1) eliminate drafting errors and ambiguity; (2) write regulations to minimize litigation; and (3) provide a clear legal standard for affected conduct rather than a general standard and promote simplification and burden reduction. With regard to the review required by section 3(a), section 3(b) of E.O. 12988 specifically requires that Executive agencies make every reasonable effort to ensure that the regulation: (1) clearly specifies the preemptive effect, if any; (2) clearly specifies any effect on existing Federal law or regulation; (3) provides a clear legal standard for affected conduct while promoting simplification and burden reduction; (4) specifies the retroactive effect, if any; (5) adequately defines key terms; and (6) addresses other important issues affecting clarity and general draftsmanship under any guidelines issued by the Attorney General. Section 3(c) of E.O. 12988 requires Executive agencies to review regulations in light of applicable standards in section 3(a) and section 3(b) to determine whether they are met or it is unreasonable to meet one or more of them. DOE has completed the required review and determined that, to the extent permitted by law, this proposed regulation meets the relevant standards of E.O. 12988.

The Regulatory Flexibility Act (5 U.S.C. 601 et seq. ) requires preparation of an initial regulatory flexibility analysis for any rule that by law must be proposed for public comment, unless the agency certifies that the rule, if promulgated, will not have a significant economic impact on a substantial number of small entities. As required by E.O. 13272, “Proper Consideration of Small Entities in Agency Rulemaking,” (67 FR 53461, August 16, 2002), DOE published procedures and policies on February 19, 2003, to ensure that the potential impacts of its rules on small entities are properly considered during the rulemaking process (68 FR 7990). DOE has made its procedures and policies available on the Office of the General Counsel's website at www.gc.doe.gov.

DOE has reviewed this proposed rule under the provisions of the Regulatory Flexibility Act and the procedures and policies published on February 19, 2003. The proposed rule would amend procedures that apply to the determination of eligibility of individuals for access to classified information and access to special nuclear material. The proposed rule applies to individuals, and would not apply to “small entities,” as that term is defined in the Regulatory Flexibility Act. In addition, as stated previously, DOE has no discretion in adopting the national policies; it is the national policies themselves that impose any impact on affected individuals. As a result, if adopted, the proposed rule would not have a significant economic impact on a substantial number of small entities.

Accordingly, DOE certifies that the proposed rule would not have a significant economic impact on a substantial number of small entities, and, therefore, no regulatory flexibility analysis is required, and DOE has not prepared a regulatory flexibility analysis for this rulemaking. DOE's certification and supporting statement of factual basis will be provided to the Chief Counsel for Advocacy of the Small Business Administration for review under 5 U.S.C. 605(b).

This proposed rule does not impose a collection of information requirement subject to the Paperwork Reduction Act, 44 U.S.C. 3501 et seq.

DOE has determined that this proposed rule is covered under the Categorial Exclusion found in DOE's National Environmental Policy Act regulations at paragraph A5 of appendix A to subpart D, 10 CFR part 1021, which applies to a rulemaking that amends an existing rule or regulation and that does not change the environmental effect of the rule or regulation being amended. Accordingly, neither an environmental assessment nor an environmental impact statement is required.

E.O. 13132, “Federalism”, 64 FR 43255 (August 4, 1999), imposes certain requirements on agencies formulating and implementing policies or regulations that preempt State law or that have federalism implications. Agencies are required to examine the constitutional and statutory authority supporting any action that would limit the policymaking discretion of the States and carefully assess the necessity for such actions. DOE has examined this proposed rule and has determined that it does not preempt State law and, if adopted, would not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. No further action is required by E.O. 13132.

The Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4) generally requires Federal agencies to examine closely the impacts of regulatory actions on State, local, and tribal governments. Subsection 101(5) of title I of that law defines a Federal intergovernmental mandate to include any regulation that would impose upon State, local, or tribal governments an enforceable duty, except a condition of Federal assistance or a duty arising from participating in a voluntary federal program. Title II of that law requires each Federal agency to assess the effects of Federal regulatory actions on State, local, and Tribal governments, in the aggregate, or to the private sector, other than to the extent such actions merely incorporate requirements specifically set forth in a statute. Section 202 of that title requires a Federal agency to perform a detailed assessment of the anticipated costs and benefits of any rule that includes a Federal mandate which may result in costs to State, local, or Tribal governments, or to the private sector, of $100 million or more in any one year (adjusted annually for inflation). 2 U.S.C. 1532(a) and (b). Section 204 of that title requires each agency that proposes a rule containing a significant Federal intergovernmental mandate to develop an effective process for obtaining meaningful and timely input from elected officers of State, local, and tribal governments. 2 U.S.C. 1534. The proposed rule would expand the scope of the current rule with respect to individuals covered, make updates and clarifications for consistency with national polices and DOE practices, update references to DOE officials and offices, and make minor updates to improve clarity and delete obsolete references. The proposed rule would not result in the expenditure by State, local or tribal governments in the aggregate, or by the private sector, of $100 million or more in any one year. Accordingly, no assessment or analysis is required under the Unfunded Mandates Reform Act of 1995.

Section 654 of the Treasury and General Government Appropriations Act, 1999 (Pub. L. 105-277), requires Federal agencies to issue a Family Policymaking Assessment for any proposed rule that may affect family well-being. This proposed rule would not have any impact on the autonomy or integrity of the family as an institution. Accordingly, DOE has concluded that it is not necessary to prepare a Family Policymaking Assessment.

E.O. 13211, “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use,” 66 FR 28355 (May 22, 2001), requires Federal agencies to prepare and submit to, OMB, a Statement of Energy Effects for any proposed significant energy action. A “significant energy action” is defined as any action by an agency that promulgates or is expected to lead to promulgation of a final rule, and that: (1) is a significant regulatory action under E.O. 12866, or any successor order, and (2) is likely to have a significant adverse effect on the supply, distribution, or use of energy, or (3) is designated by the Administrator of OIRA as a significant energy action. For any proposed significant energy action, the agency must give a detailed statement of any adverse effects on energy supply, distribution, or use should the proposal be implemented, and of reasonable alternatives to the action and their expected benefits on energy supply, distribution, and use. This regulatory action would not have a significant adverse effect on the supply, distribution, or use of energy and is therefore not a significant energy action. Accordingly, DOE has not prepared a Statement of Energy Effects.

The Treasury and General Government Appropriations Act, 2001 (44 U.S.C. 3516, note) provides for agencies to review most disseminations of information to the public under guidelines established by each agency pursuant to general guidelines issued by OMB.

OMB's guidelines were published at 67 FR 8452 (February 22, 2002), and DOE's guidelines were published at 67 FR 62446 (October 7, 2002). DOE has reviewed this proposed rule under the OMB and DOE guidelines and has concluded that it is consistent with applicable policies in those guidelines.

The Secretary of Energy has approved issuance of this notice of proposed rulemaking.

This document of the Department of Energy was signed on January 24, 2024, by Jennifer Granholm, Secretary of Energy. That document with the original signature and date is maintained by DOE. For administrative purposes only, and in compliance with requirements of the Office of the Federal Register, the undersigned DOE Federal Register Liaison Officer has been authorized to sign and submit the document in electronic format for publication, as an official document of the Department of Energy. This administrative process in no way alters the legal effect of this document upon publication in the Federal Register .

For the reasons set out in the preamble, DOE proposes to amend part 710 of title 10 of the Code of Federal Regulations as set forth below:

The additions and revisions read as follows:

The revision reads as follows:

The revision reads as follows:

The revisions read as follows:

The revisions read as follows:

The revision reads as follows:

When a consumer's attempted withdrawal, debit, payment, or transfer transaction amount exceeds the available funds in their account, currently, a financial institution might decline the transaction and charge the consumer a fee, often called a nonsufficient funds (NSF) fee. NSF fees might be charged on transactions that the financial institution declines within seconds after the payment request is initiated, as well as on transactions that are rejected hours or days after the initial request to pay is made. As discussed below, many financial institutions in recent years have stopped charging NSF fees. To the extent they continue to be charged currently, however, NSF fees are almost always charged only on check or Automated Clearing House (ACH) transaction declinations, which do not occur instantaneously. In contrast, NSF fees are rarely charged on Automated Teller Machine (ATM) or point-of-sale (POS) debit transaction declinations, which do occur instantaneously. The CFPB is aware of limited instances where such fees might be charged on the latter set of transactions (for example, in connection with prepaid accounts and transactions declined at ATMs that are outside the depository institution's ATM network). 1 To a similarly limited extent, the CFPB has also observed such fees being charged in connection with other types of transactions (such as online transfer and in-person bank teller transactions). 2

The CFPB is proposing to prohibit covered financial institutions from charging NSF fees on transactions that are declined instantaneously or near-instantaneously. 3 As technological advancements may eventually make instantaneous payments ubiquitous, the CFPB believes that is important to proactively set regulations to protect consumers from abusive practices.

To prevent abusive practices related to NSF fees on instantaneously declined transactions, as detailed below in part IV (Discussion of Proposed Rule), the CFPB proposes to prohibit covered financial institutions from charging such fees. The CFPB preliminarily concludes that charging NSF fees in these circumstances would constitute an abusive practice under the Consumer Financial Protection Act's prohibition on unfair, deceptive, or abusive acts or practices. The proposal would prohibit financial institutions from engaging in this practice across all instantaneously declined transactions, regardless of transaction method ( e.g., debit card, ATM, person-to-person).

Today, the combined costs of overdraft and NSF fees constitute a higher cost to consumers than the combined costs of periodic maintenance fees and ATM fees. 4 Although overdraft and NSF fees are distinct, many publications discuss them together, 5 and, in recent decades, a financial institution's NSF fee has typically been the same amount as any per-transaction overdraft fee it may charge. 6 The amount of an NSF fee is typically not pegged to the transaction's processing cost  7 or the transaction's amount;  8 institutions generally charge a fixed amount per declined transaction. 9 The CFPB's research found that in 2012, the median NSF fee among 33 large institutions sampled was $34. 10 While many institutions have opted to stop charging NSF fees within the last two years, 11 the CFPB recently found through its market monitoring that, among institutions above $10 billion in assets still charging such fees, the median fee is $32.

Overdraft and NSF fees tend to be incurred by consumers with higher financial vulnerability (including those with lower incomes  12 and lower credit scores  13 ). The CFPB has previously found that individuals with more overdraft and NSF fees in the prior year tend to have lower account balances and tend to be more credit-constrained than other consumers, as they have lower average credit scores, are less likely to possess a general-purpose credit card, have less available credit when they do have such cards, and more often possess thin credit files. 14 Researchers also found that only 4 percent of “Financially Healthy”  15 households with checking accounts reported paying an overdraft or NSF fee in 2022, compared with 46 percent of “Financially Vulnerable”  16 households. 17 According to a CFPB study, 9 percent of all accounts at the studied banks paid nearly 80 percent of combined overdraft and NSF fees. 18

Beyond the impact of having insufficient funds, incurring NSF fees can negatively affect a consumer's overall perceptions of whether the banking system is fair, transparent, and competitive. 19 The Federal Deposit Insurance Corporation (FDIC) has found that among unbanked households in 2021, almost three in ten (29.2 percent) cited as a main reason for not having an account concerns related to fees or minimum balance requirements—“Bank account fees are too high,” “Bank account fees are too unpredictable,” or “Don't have enough money to meet minimum balance requirements.”  20

When NSF fees are charged, they are almost always charged exclusively in connection with noncash payments (that is, ACH, cards, mobile application payments, and checks), the use of which has grown rapidly due in large part to technological and regulatory changes. In a recent study, the Federal Reserve Bank of San Francisco (FRBSF) found that generally, consumers are shifting away from cash and increasingly making card payments. 21 The FRBSF attributed this shift in large part to consumers making a greater share of purchases remotely when compared to before the COVID-19 pandemic  22 and to increased preference for card payments. 23 In addition, consumers are increasingly adopting newer noncash payment methods, such as those initiated through digital applications. 24 This shift away from cash by banks also coincided with certain regulatory developments—such as the enactment of the Check Clearing for the 21st Century Act (Check 21), a Federal law that took effect in 2004. 25 Check 21 provided that a properly prepared paper reproduction of an original check (a “substitute check”) is the legal equivalent of an original paper check  26 and allowed banks to avoid the “inefficient and costly”  27 transportation of paper checks.

The rise in noncash payments also prompted regulatory interventions necessary to protect consumers. For example, in 2009, the Board of Governors of the Federal Reserve System (Board) amended Regulation E, which was subsequently recodified by the CFPB, to require financial institutions to obtain account holders' affirmative consent ( i.e., their “opt-in”) for overdraft coverage of ATM and one-time (non-recurring) POS debit card transactions before the financial institution could charge a fee for paying such overdraft transactions (2009 Opt-in Rule). 28 Following implementation of that rule, the CFPB found that consumers who opted in pay significantly more fees than consumers who do not opt in ( i.e., opted-in consumers paid on average $22 per month in overdraft and NSF fees while non-opted-in consumers paid on average $3 per month). 29 The CFPB also found that if a consumer has not opted in, depository institutions typically will not authorize any ATM or one-time debit card transactions if there are insufficient funds at the time the transaction is attempted. 30 These institutions rarely charge an NSF fee when declining an ATM transaction or a debit card authorization inquiry at a merchant POS, 31 likely for two reasons. First, the cost of declining such transactions has always been trivial. 32 Second, in its preamble to the 2009 Opt-In Rule, the Board wrote that such fees “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.”  33 The CFPB understands that many financial institutions interpret that language to suggest that charging NSF fees in these circumstances would violate the FTC Act's unfairness prohibition, and have oriented their practices to charge fees generally only when overdraft coverage is provided on ATM and one-time debit card transactions and to not charge fees when those transactions are declined. 34

Another impactful change in the noncash market came in 2011 when the debit card interchange fee standard in Regulation II  35 first went into effect, capping the interchange fee that a larger debit card issuer may charge or receive. 36 In response to this rule, some financial institutions initially sought to replace the lost revenue with debit usage fees, but then quickly abandoned such efforts, largely due to public displeasure and pressure. 37

More recently, there has been an effort across the Federal Government to eliminate fees that are not subject to the competitive processes to ensure fair pricing. In January 2022, the CFPB launched an initiative to reduce certain fees charged by banks and other companies under its jurisdiction. 38 Soon after, the CFPB issued a Request for Information (RFI) regarding anti-competitive fees in banking, 39 took action to constrain “pay-to-pay” fees, 40 and announced a proposed rulemaking on credit card late fees. 41 The CFPB also published several research reports on overdraft/NSF fees, 42 an analysis of fees on college banking products, 43 and a report on credit cards. 44 Most recently, the CFPB issued guidance to stop large banks from charging illegal fees for basic customer service  45 and proposed to supervise larger nonbank companies that offer services like digital wallets and payment applications. 46

The CFPB's recent supervisory and enforcement activity has also focused, in part, on certain types of NSF fees. In its supervisory work, the CFPB has cited financial institutions for engaging in several problematic practices related to deposit account fees, including assessing certain types of NSF fees. For example, the CFPB previously found that some institutions engaged in unfair acts or practices by assessing multiple NSF fees for the same transaction. 47 The CFPB also took concurrent action with the Office of the Comptroller of the Currency (OCC) addressing this practice, among others. 48 Most recently, the CFPB discussed its supervisory findings related to the charging of multiple NSF fees for the same transaction and of returned deposit item fees. 49

Other Federal agencies have also taken actions to address certain practices related to NSF fees. 50 In September 2023, the Board issued a supervisory statement noting it had cited NSF representment fees as unfair. 51 In April 2023, the OCC issued a bulletin that found, among other things, that the practice of assessing an additional NSF fee on a representment transaction was, in some instances, unfair and deceptive. 52 In August 2022, the FDIC issued supervisory guidance stating that practices involving the charging of multiple NSF fees arising from the same unpaid transaction results in heightened unfairness and other risks. 53 In 2019, the National Credit Union Administration (NCUA) issued a rule prohibiting Federal credit unions from charging overdraft or NSF fees related to certain types of loan payments drawn against a borrower's account. 54

The CFPB has observed recent significant reductions in NSF fees, at least in part due to these actions. The CFPB has found that banks' overdraft/NSF fee revenue declined significantly compared to pre-pandemic levels (predominantly due to changes in bank policies), 55 and nearly two-thirds (65 percent) of banks with over $10 billion in assets have eliminated NSF fees, representing an estimated 97 percent of annual NSF fee revenue earned by those institutions. 56 However, 80 percent of credit unions with over $10 billion in assets still charge NSF fees. 57

The CFPB has engaged in outreach and research related to overdraft and NSF fees since soon after the CFPB's inception. In 2012, the CFPB initiated a broad inquiry into overdraft programs for consumer checking accounts. 58 This inquiry included issuance of an RFI on the impacts of overdraft-related fees, including NSF fees, on consumers  59 and collection and analysis of overdraft-related data from several large banks over $10 billion in assets that provided a significant portion of all U.S. consumer checking accounts. 60 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. 61 These studies assessed, among other things, overdraft and NSF fee size, incidence, and related account closure; overdraft-related policies and practices across institutions; the distribution of overdraft and NSF fee incurrence across accounts; and the characteristics of account holders 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 overdraft and NSF policies and practices among a large sample of financial institutions using core processors. 62

In 2021, the CFPB examined financial institutions' reliance on overdraft/NSF fees from 2015 to 2019, finding that it was persistent. 63 Since then, the CFPB has continued tracking overdraft and NSF trends in the marketplace  64 and evaluating some banks' key overdraft-related metrics through the CFPB's supervision work. 65 From April 2023 to August 2023, the CFPB reviewed the publicly available overdraft and NSF practices of financial institutions with assets over $10 billion. 66 In addition, the CFPB has recently collected information from several financial institutions under the CFPB's supervision regarding their overdraft-related practices. 67

In 2022, CFPB issued an RFI regarding fees that are not subject to competitive processes that ensure fair pricing, which received over 80,000 comments. 68 Overdraft-related fees were by far the most common issue raised in the comments. Many consumers expressed concerns that the fees were charged for reasons that were unclear, disproportionate compared to the incidents resulting in the fees, and difficult or impossible to avoid. Consumers also reported that they were being charged fees that they believed were excessive, they appeared surprised by the fees, and they evidenced confusion about whether they were being charged an overdraft or NSF fee.

Through market monitoring engagement with credit union and State bank associations, the CFPB has received feedback pertaining to NSF and overdraft practices. Some banks and credit unions stated that many consumers place value on the short-term liquidity provided by overdraft services, while other institutions claimed that these types of fees are important for funding other services and programs offered to customers, such as financial literacy programs. Federal and State depository trade associations also have critiqued the characterization of their members' fees as so-called “junk fees” and urged the CFPB to study consumer preferences before taking further action.

The CFPB also gathers information on NSF and other bank fees from its Consumer Complaint Database. Consumers who submit complaints sometimes do not appear to understand the difference between NSF and overdraft fees. The complaints strongly suggest that consumers are often confused about why they were charged NSF fees when they declined overdraft protection and some consumers complain that their bank's transaction posting order led to fees that should not have been charged. Consumers also expressed frustration at not being able to track their account balance accurately. For example, consumer complainants frequently express the belief that deposited funds would be available, but an extended hold placed on the deposit led to overdraft or NSF fees. 69

As discussed in connection with section 1022(b)(2) of the Consumer Financial Protection Act (CFPA) below, the CFPB's outreach included consultation with other Federal consumer protection and prudential regulators. The CFPB has provided other regulators with information about the proposal, and received feedback that has assisted the CFPB in preparing this proposal. The CFPB's outreach also included State Attorneys General, Tribal Attorneys General, State financial regulators, and organizations representing the officials charged with enforcing applicable Federal, State, and local laws.

Section 1031(b) of the CFPA provides the CFPB with the authority to “prescribe rules applicable to a covered person or service provider identifying as unlawful unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.”  70 CFPA section 1031(b) further provides that rules under section 1031 may include requirements for the purpose of preventing such acts or practices. 71

Under CFPA section 1031(d), the CFPB “shall have no authority . . . to declare an act or practice abusive in connection with the provision of a consumer financial product or service” unless the act or practice meets at least one of several enumerated conditions. 72 CFPA section 1031(d)(2) provides, in pertinent part, that an act or practice is abusive when it takes unreasonable advantage of a consumer's lack of understanding of the material risks, costs, or conditions of the product or service.

Congress intended the statutory phrase “abusive acts or practices” to encompass conduct by covered persons that is beyond what would be prohibited as unfair or deceptive acts or practices. 73 Unlike unfairness, but similar to deception, a finding of abusive conduct requires no showing of substantial injury to establish liability. Rather, it is focused on conduct that Congress presumed to be harmful or distortionary to the proper functioning of the market. An act or practice need fall into only one of the enumerated conditions under CFPA section 1031(d) to be abusive, but an act or practice could satisfy more than one condition. 74

Section 1022(b)(1) of the CFPA provides that the CFPB's Director “may prescribe rules and issue orders and guidance, 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.”  75 The term “Federal consumer financial law” includes rules prescribed under title X of the CFPA, which include rules prescribed under section 1031. 76

Section 1022(b)(2) of the CFPA prescribes certain standards for rulemaking that the CFPB must follow in exercising its authority under CFPA section 1022(b)(1). 77 See part VI for a discussion of the CFPB's standards for rulemaking under CFPA section 1022(b)(2).

Proposed § 1042.2(a) provides that “account” has the same meaning as the term in Regulation E, 12 CFR 1005.2(b). Pursuant to that definition, an account would include the following: (1) a checking, savings, or other consumer asset account held by a financial institution (directly or indirectly), including certain club accounts, established primarily for personal, family, or household purposes, 78 and (2) a prepaid account, as defined in 12 CFR 1005.2(b)(3). 79 An account would not include, for example: (1) an account held by a financial institution under a bona fide trust agreement;  80 (2) an occasional or incidental credit balance in a credit plan;  81 (3) profit-sharing and pension accounts established under a bona fide trust agreement;  82 (4) escrow accounts such as for payments of real estate taxes, insurance premiums, or completion of repairs or improvements;  83 or (5) accounts for purchasing U.S. savings bonds. 84

The CFPB preliminarily concludes that referencing this existing definition of account for purposes of this proposal would help to foster consistency with Regulation E and would provide a familiar regulatory definition that has already been successfully implemented by many covered financial institutions. This definition would also capture a broad range of consumer account types to maximize the number of consumers protected from the preliminarily identified abusive practice. The CFPB seeks comment on its proposed approach to this definition.

Proposed § 1042.2(b) provides that “covered financial institution” means a “financial institution” as defined in Regulation E, 12 CFR 1005.2(i). Applying that definition, a “covered financial institution” would mean a bank, savings association, credit union, or any other person that directly or indirectly holds an account belonging to a consumer, or that issues an access device and agrees with a consumer to provide electronic fund transfer services. A covered financial institution would not include a motor vehicle dealer, as defined in CFPA section 1029(f)(2), that is predominantly engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles, or both. 85 Adopting this definition would also incorporate related definitions and commentary, such as those for “access device”  86 and “electronic funds transfer.”  87

The CFPB preliminarily concludes that referencing this existing definition of account for purposes of this proposal would help to foster consistency with Regulation E and would provide a familiar regulatory definition that has already been successfully implemented by many covered financial institutions. This definition would also capture a broad range of financial institutions to ensure an equal playing field. The CFPB seeks comment on its proposed approach to this definition.

Proposed § 1042.2(c) provides that “covered transaction” means an attempt by a consumer to withdraw, debit, pay, or transfer funds from their account that is declined instantaneously or near-instantaneously by a covered financial institution due to insufficient funds. A declination occurs instantaneously or near-instantaneously when the transaction is processed in real time and there is no significant perceptible delay to the consumer when attempting the transaction. While consumers may attempt to withdraw, debit, pay, or transfer funds from their account in a variety of different ways, including by check, ACH, person-to-person (P2P) transaction, or debit card, this proposed definition would only cover transactions that are instantaneously or near-instantaneously declined due to insufficient funds. Transactions declined or rejected due to insufficient funds hours or days after the consumer's attempt would not be covered by the proposal. Transactions authorized in the first instance, even if they are later rejected or fail to settle due to insufficient funds, also would not be covered by the proposal.

Based on this proposed definition, checks and ACH transactions would not be covered, assuming these payment mechanisms do not evolve in such a way that they are able to be declined instantaneously or near-instantaneously. Generally, a check is physically accepted by the merchant or payee, without payment authorization or guarantee, and is deposited in its bank and sent through the check clearing process to the payor's bank. 88 Checks usually clear within one or two business days. 89 Similarly, ACH transactions generally are not processed in real time—they are typically processed in batches several times a day when the applicable ACH operator (the Federal Reserve Bank or the Electronic Payments Network) is open for business. 90

Based on this proposed definition, one-time debit card transactions that are not pre-authorized, ATM transactions, and certain P2P transactions would be covered by the proposal, assuming these payment mechanisms continue to be declined instantaneously or near-instantaneously. ATM and one-time debit card transactions that are subject to the requirements of Regulation E's opt-in requirements  91 are authorized instantaneously or near-instantaneously, and in the event of insufficient funds, are declined instantaneously or near-instantaneously. 92 Some debit card transactions are not authorized in real time—for example, decoupled debit card transactions are typically processed as ACH debits, 93 and most recurring debit card transactions are authorized in advance. Some P2P transactions are authorized in real time and may be declined instantaneously or near-instantaneously, whereas others are processed as ACH debits. 94 The applicability of the proposal to P2P transactions may also depend in part on whether the P2P provider offers a stored value account for funds or links to a deposit account, and on the evolution of P2P transaction mechanisms more generally. 95

The CFPB solicits comment on the proposed definition of covered transaction, including whether: (1) the timing component is sufficiently clear to determine coverage; (2) the proposed definition appropriately accounts for emerging payment networks and technology innovations; and (3) the proposed definition captures the scope of relevant transactions where potential abusive practices are occurring in the market or are at risk of occurring in the future.

Proposed § 1042.2(d) provides that “insufficient funds” refers to the status of an account that does not have enough money to cover a withdrawal, debit, payment, or transfer transaction. The CFPB preliminarily concludes that including this definition would streamline the rule by avoiding circular definitions. The CFPB seeks comment on its proposed approach to this definition.

Proposed § 1042.2(e) provides that “nonsufficient funds fee or NSF fee” means a charge that is assessed by a covered financial institution for declining an attempt by a consumer to withdraw, debit, pay, or transfer funds from their account due to insufficient funds. This proposed definition also would clarify that the name used by the financial institution for a fee is not determinative of whether it is considered a “nonsufficient funds fee.”

Unlike overdraft fees, which can also be charged in the event of insufficient funds, NSF fees as defined herein are only charged after a declined transaction. As a result, such fees may sometimes be referred to as “declination” fees or “bounced check” fees. The CFPB has also observed such fees labeled as, for example, “returned item fees,”  96 “returned payment fees,” “uncollected funds fees,” “overdraft—unpaid fees,” and “shortage of funds fees.” This proposed definition broadly includes the types of fees that, if charged, would in substance constitute an abusive practice, regardless of how the fees are labeled. The CFPB seeks comment on its proposed approach to this definition. The CFPB also solicits comments on its examples of fee labels.

The CFPB's preliminary findings regarding covered financial institutions' abusive charging of NSF fees in connection with covered transactions are discussed below. The CFPB is making these preliminary findings based on the evidence discussed in the abusive conduct analysis below and in the section-by-section analysis and Background discussion above.

Under CFPA section 1031(d)(2)(A), the CFPB may declare an act or practice to be abusive in connection with the provision of a consumer financial product or service if the act or practice takes unreasonable advantage of a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service. 97 The CFPB is preliminarily determining that charging an NSF fee in connection with a covered transaction would take unreasonable advantage of consumers' lack understanding of the material risks, costs, or conditions associated with their deposit accounts, and thus would be abusive.

The CFPB understands, based on its market monitoring, that currently covered financial institutions rarely charge NSF fees on covered transactions. 98 The CFPB is proposing this rule primarily as a preventive measure. 99 Financial institutions have ongoing incentives to generate revenue, and NSF fees may become increasingly appealing as a revenue source in the absence of this proposal. For example, if the recently released Overdraft Proposed Rule  100 is finalized and curbs overdraft fee revenue, institutions might have an incentive to impose new fees. This proposal, if finalized, would prevent the imposition of NSF fees in various contexts where they might foreseeably arise, such as declines of ATM, debit card, and P2P transactions. 101 Thus, the CFPB is proposing to preempt imposition of new fees that would harm consumers in the future.

The CFPB considered whether a disclosure remedy to the preliminarily identified abusive practice would be sufficient, and has preliminarily determined that although such a remedy might reduce the incidence of the abusive conduct, it would not eliminate it and would likely be too costly or not feasible in many or most situations. Theoretically, a financial institution could present a disclosure when the transaction is attempted, explaining that the transaction would be declined and a fee would be charged. However, the CFPB is skeptical that such a disclosure would be feasible because the financial institution is often not the party operating the point-of-sale terminal, ATM machine, or P2P application interface. If it were feasible, it would likely be costly to present individual disclosures for each such transaction and implement such disclosures across many different payment channels and consumer interfaces. And a disclosure of that nature would not eliminate the incidence of the abusive practice because there would still be consumers who may not understand even a well-crafted disclosure. 102

The CFPB seeks comment on whether the practices identified in this proposal are broad enough to address the potential consumer harms and if the description of the preliminarily identified abusive practice should be revised in any way, and requests any relevant additional data that should be considered.

Before describing the reasoning behind the CFPB's preliminary conclusion that it would be an abusive practice for covered financial institutions to charge NSF fees on covered transactions, the CFPB first discusses the approach taken to assess abusive practices in prior rulemakings. Under CFPA section 1031(d)(2)(A), an act or practice can be abusive if covered parties take unreasonable advantage of the “lack of understanding on the part of consumers of the material costs, risks, or conditions of the product or service.” The CFPB's 2017 rulemaking on Payday, Vehicle Title, and Certain High-Cost Installment Loans (2017 rule) stated that consumers lack understanding in the context of obtaining certain types of small-dollar loans “if they fail to understand either their personal likelihood of being exposed to the risks of the product or service in question or the severity of the kinds of costs and harms that may occur.”  103 This conclusion was part of the 2017 rule's larger set of findings that a lender's failure to determine whether a consumer had the ability to repay a covered loan was abusive and unfair. In a separate 2020 rulemaking, the CFPB rescinded certain provisions of the 2017 rule's UDAAP findings as well as the 2017 rule's mandatory underwriting provisions (2020 rule). 104

In explaining the rationales for rescission, the 2020 rule's preamble included certain statements about the abusive conduct prohibition. However, these rationales were specific to and inextricably intertwined with the evidentiary record and financial products at issue in the 2017 rule. Accordingly, the 2020 rule's discussion of the abusive conduct prohibition was likewise limited and did not address facts and circumstances other than those at issue in the 2020 rule (which, again, was inextricably linked to the 2017 rule's evidentiary record and product coverage). 105 The 2020 rule does not, for example, address factual situations where a lender exploits an information asymmetry between a lender and a consumer about the level of risk posed to the consumer by the product or service. 106

Thus, as a general matter, the preamble in the 2020 rule does not constrain the CFPB's authority to enforce, supervise, or regulate under the full scope of the CFPA's abusive conduct prohibition in other rules or in individual supervisory or enforcement matters. As the 2020 rule's preamble itself explained, the 2020 rule “addresses the legal and evidentiary bases for particular rule provisions identified in [the 2020] rule. It does not prevent the [CFPB] from exercising tool choices, such as appropriate exercise of supervision and enforcement tools, consistent with the [CFPA] and other applicable laws and regulations.”  107 The 2020 rule also explained that it “does not prevent the [CFPB] from exercising its judgment in light of factual, legal, and policy factors in particular circumstances as to whether an act or practice meets the standards for abusiveness under section 1031 of the [CFPA].”  108

Nevertheless, out of an abundance of caution and to correct any possible misimpressions that the 2020 rule's preamble set forth interpretive limits on the CFPB's authority under the abusive conduct prohibition that the agency must follow in other contexts, the CFPB hereby proposes to clarify the interpretation of the abusive conduct prohibition in the context of the 2020 rule, consistent with the analysis below. The CFPB also requests comment on whether there are other aspects of the 2020 rule's discussion of the abusive and unfair conduct prohibitions that warrant clarification.

Conflation of lack-of-understanding and reasonable-avoidability standards. The 2020 rule stated that the 2017 rule's lack-of-understanding standard was “problematic” and “too broad,”  109 and instead “should be treated as similar” to the reasonable-avoidability element of unfairness. 110 The 2020 rule stated that, for purposes of unfairness, consumers could reasonably avoid injury if they “have an understanding . . . sufficient for them to anticipate [the] harms and understand the necessity of taking reasonable steps to prevent resulting injury.”  111 It used a nearly identical approach to lack of understanding, stating that consumers have a sufficient understanding under section 1031(d)(2)(A) if their understanding is “sufficient . . . to anticipate [the] harm and understand the necessity of taking reasonable steps to prevent resulting injury.”  112

These preamble statements reflect an overly narrow application of the statutory text for lack of understanding. With respect to the abusive conduct prohibition generally, it is worth noting that, unlike the CFPA's unfairness provision, the statutory text for the abusive conduct prohibition does not require any inquiry into reasonable avoidability. 113 Although the CFPB preliminarily finds that consumers' lack of understanding that they would be charged an NSF fee for covered transactions is generally reasonable, as discussed below, the statute does not require that the lack of understanding was reasonable to demonstrate abusive conduct. 114 The 2020 rule also did not specify why, in spite of the differences between the standards, it was “appropriate” to treat reasonable avoidability and lack of understanding as “similar but distinct.”  115

Conflating the two standards in this manner contravenes the context and purpose of the abusive conduct prohibition and the statutory text. Congress passed the prohibition after the 2008 mortgage crisis, recognizing that the unfairness and deception prohibitions were insufficient to prevent predatory mortgage lending. 116 The abusive conduct prohibition was explicitly added as a new standard of fair dealing, and clearly was not intended to simply mirror unfairness. 117 Moreover, although a consumer's lack of understanding might, depending on the facts, contribute to a consumer being unable to reasonably avoid substantial injury, nothing in CFPA section 1031(d)(2)(A)'s text supports interpreting the provision to track the reasonable-avoidability standard. Rather, under the statute the inquiry is whether the consumers at issue lack understanding of the risks, costs, or conditions of a product or service and whether the company took unreasonable advantage of that lack of understanding—not whether, as noted above, the lack of understanding was reasonable. 118 Lastly, the 2020 rule itself in various passages acknowledged these textual differences and recognized how they lead to different contours of authority, which undermines the 2020 rule's attempt to tether the two standards. 119 Accordingly, the CFPB proposes to clarify that lack of understanding under CFPA section 1031(d)(2)(A) is not synonymous with reasonable avoidability under the unfairness standard.

Magnitude and likelihood of risk of harm. The 2020 rule stated that consumers have “sufficient understanding” of the material costs, risks, or conditions of small-dollar loans if they understand “the magnitude and likelihood of risk of harm associated with the [product or service], as well as the necessity of taking reasonable steps to prevent resulting injury.”  120 “Magnitude and likelihood of risk of harm” is a reasonable articulation of the standard for understanding certain “risks” that implicate prediction of future outcomes, especially in relation to loan underwriting. However, that is not the full scope of the potential risks under CFPA section 1031(d)(2)(A). As the CFPB's Statement of Policy Regarding Prohibition on Abusive Acts or Practices (Abusive Policy Statement) noted, the risks of which a consumer lacks understanding “encompass a wide range of potential consumer harms.”  121

The CFPB proposes to clarify that the 2020 rule's focus on “magnitude” and “likelihood” of risk of harm was an application of what it means under the statute to understand “risks,” not necessarily “costs” or “conditions.” The statutory references to “costs” and “conditions” are textually disjunctive and can be conceptually distinct from “risks” and from each other. Where consumers lack understanding of the relevant costs or conditions, the notion of “likelihood and magnitude of harm” may have no bearing on the lack-of-understanding analysis. For example, it is enough to show that a company takes unreasonable advantage of the fact that consumers do not know a fee (“cost”) will be charged in a particular circumstance, even if consumers have some understanding of the “risk” that a fee might sometimes be charged. See below for a discussion of what risks, costs, and conditions mean in the particular context of this proposal.

Specific vs. general understanding. The 2020 rule took issue with the conclusion in the 2017 rule that consumers in the small-dollar lending market lack understanding or cannot reasonably avoid harm under the unfairness standard if they do not have a “specific understanding of their personal risks such that they can accurately predict how long they will be in debt after taking out” a covered loan. 122 The 2020 rule stated, rather, that “consumers need not have a specific understanding of their individualized likelihood and magnitude of harm such that they could accurately predict how long they would be in debt after taking out” a payday loan and that the appropriate analysis was whether consumers “have an understanding of the likelihood and magnitude of risks of harm associated with payday loans sufficient for them to anticipate those harms.”  123 According to the 2020 rule, this means that “consumers need only understand that a significant portion of payday borrowers experience difficulty repaying,” which the 2020 rule described as a “generalized” or “general” understanding. 124 The 2020 rule applied this distinction between “specific” and “general” consumer understanding both to the lack-of-understanding element of the abusive conduct prohibition, and to the reasonable-avoidability element of unfairness. Because the 2020 rule linked the unfair and abusive conduct prohibitions, the following discussion applies to the interpretation of both prohibitions.

The CFPB preliminarily declines to characterize consumers' lack of understanding in this proposal as either “specific” or “general” because that binary framework is unhelpful for determining whether consumers understand the material risks, costs, or conditions of a consumer financial product or service, which is the statutory requirement. A consumer's lack of understanding can be based on one or the other, or a mixture of both, and each can inform one another. Indeed, a person's understanding of their personal risk may be intertwined with their understanding of the general risk to all consumers—if one knows that many are harmed, they are more likely to understand that they are likely to be harmed.

Furthermore, to the extent that the 2020 rule could be misconstrued to suggest that analysis of the abusive conduct prohibition requires an inquiry into a consumer's so-called general understanding of risk, the CFPB is clarifying that is a misimpression for the reasons described below. Consumers' understanding of risk, and specifically, their anticipation of harm can be informed by a variety of factors, including personal circumstances. As noted above, those factors sometimes include general perception of risk in the market: if one knows that many are harmed or that the magnitude of harm is high, they are more likely to understand that they are likely to be harmed. But, in many circumstances, consumers would not have an accurate general understanding of risk in the market because, for example, either (1) they cannot observe harm to other consumers, or (2) even if they could, they would have no way of knowing whether those consumers are similarly situated to them. For example, in the deposit market, consumers cannot observe the frequency with which similarly situated consumers incur NSF fees. A consumer's understanding of the experience of their peers or general risk in the market may sometimes not accurately inform their understanding of the likelihood of incurring NSF fees generally or in connection with a particular transaction. 125 A consumer's lack of awareness of general risk in the market also may not mean that the consumer necessarily lacks understanding of the risk of using a product or service.

A consumer's general understanding of risk may not always be the sole relevant inquiry for purposes of ascertaining consumer understanding of risk of the likelihood or magnitude of harm. As stated earlier, a consumer's lack of understanding can be based on specific understanding or general understanding, or a mixture of both, and each can inform one another. Congress enacted the abusive conduct prohibition largely in response to the circumstances leading up to the 2008 financial crisis, where consumers may have generally understood the possibility of loan default and its consequences but lacked understanding of the specific, individualized risks set-up-to-fail mortgages posed to themselves.

Regarding unfairness, long-existing precedent in part frames the reasonable-avoidability analysis through the lens of a consumer's understanding of their own circumstances. For example, the D.C. Circuit described the reasonable-avoidability analysis in the FTC's Credit Practices Rule, in part, in the following manner: “Since consumers do not expect to default, the invocation of particular credit remedies seems remote and speculative at the time of contracting and thus is not a material element in the consumer's decision. Instead, consumers quite reasonably focus their attention on the more immediate terms such as interest rates and payments.”  126 This discussion of the conditions relevant to how consumers comprehend contract terms relates to consumers' understanding of their own risk of default. Similarly, in addressing an FTC action against a website operator that allowed users to create unverified checks drawn from unauthorized accounts, the Ninth Circuit discussed individual consumer circumstances that were relevant to the reasonable-avoidability analysis, including how it is “likely that some consumers never noticed the unauthorized withdrawals.”  127 While this precedent relates to the prohibition on unfair rather than abusive conduct, the long history and precedent regarding the standards of fair dealing in part inform how the CFPB interprets the abusive conduct prohibition.

As stated above and explained more fully below, the CFPB has preliminarily determined that consumers charged NSF fees on covered transactions would lack understanding of the material risks, costs, or conditions of their account at the time they are initiating covered transactions. As explained in the preamble discussing proposed § 1042.2(c), a covered transaction means a request by a consumer to withdraw, debit, pay, or transfer funds from their account that is declined instantaneously or near-instantaneously by a covered financial institution due to insufficient funds. The CFPB considers the account that is associated with a covered transaction to be a “product or service,” under CFPA section 1031(d)(2)(A). 128

In view of CFPA section 1031(d)(2)(A)'s disjunctive formulation of “material risks, costs, or conditions,” an act or practice is abusive if it takes unreasonable advantage of the consumer's lack of understanding of at least one material risk, cost, or condition. In the circumstances addressed by this proposal, a lack of understanding of all three elements would be present for at least some consumers, and consumers would generally lack understanding of at least one element, as explained in the next subsection. 129

As used in section 1031(d)(2)(A), “risks” is an expansive term. 130 At the time a consumer considers initiating a request to withdraw, debit, pay, or transfer funds from their account, the relevant risks to the consumer would include the possibility the transaction will be declined and result in an NSF fee. Furthermore, once a consumer actually initiates a covered transaction, it is certain that the transaction will be instantaneously declined and they will be charged a fee; therefore, the likelihood of harm at that time is 100 percent. This is because no chance occurrence, consumer choice, or other intervening event can happen between the transaction's initiation and the instantaneous decline that could change the harmful outcome ( i.e., the assessment of the fee). In other words, for covered transactions that are initiated, the risk of harm is a certainty. Therefore, a consumer who initiates such a transaction believing the transaction nevertheless might go through would lack understanding of the likelihood of harm. Given the tangible and negative consequences of both a transaction decline and the imposition of a fee, the CFPB interprets this risk, if and when present, to be material.

The “costs” associated with a covered transaction that would result in an NSF fee would primarily be the amount of the fee itself. 131 NSF fees that are charged in today's market are usually approximately $32 and typically are assessed on a per-transaction basis. 132 Even if NSF fees assessed on covered transactions were significantly lower than $32, they would still be material because they would be non-trivial to the consumer and would be paid without any service being received. The personal magnitude of this cost might be exacerbated by the fact that it could occur when the consumer's bank account would be empty or close to empty.

The amount of funds in the account and whether they are sufficient for a given transaction at the time the consumer is initiating that transaction are relevant “conditions” of the consumer's deposit account. 133 Given how the conditions of the account would relate to the financial institution's imposition of NSF fees (whether, when, and how much), the CFPB would interpret these conditions as material.

The following subsection explains more fully the CFPB's preliminary finding that a consumer would lack understanding of the material risks, costs, or conditions of the account if a covered transaction were to take place.

As the CFPB's Abusive Policy Statement explains, the prohibition in CFPA section 1031(d)(2)(A) turns on a consumer's lack of understanding, regardless of how that lack of understanding arose. 134 Although consumers' lack of understanding that they will be charged an NSF fee in the circumstances addressed in this proposal is generally reasonable, the statutory text of the prohibition does not require a finding that the consumer's lack of understanding was reasonable to demonstrate abusive conduct. 135 In addition, as the Abusive Policy Statement notes, the statutory text does not require that the covered financial institution caused the person's lack of understanding through untruthful statements or other actions or omissions. 136

The CFPB preliminarily finds that a consumer who would be charged an NSF fee on a covered transaction would lack understanding of their account's material risks, costs or conditions at the time they initiated that transaction. Drawing on its experience and expertise regarding consumer behavior, the CFPB believes that if a transaction entails material risks or costs and consumers derive minimal or no benefit from the transaction, it is generally reasonable to conclude that consumers who nonetheless went ahead with the transaction did not understand the material risks, costs or the conditions giving rise to those risks or costs. 137 In this instance, such a transaction would provide no benefit to consumers, but consumers would incur a material cost or risk. Consequently, consumers would be paying something or taking a risk but receiving nothing in return. Therefore, the CFPB preliminarily concludes that consumers initiating covered transactions that incur NSF fees would generally lack awareness of their available account balance or other information about the material risks, costs, or conditions regarding their account. Indeed, if a consumer knew at the time of initiating a specific payment, debit, transfer, or withdrawal that they did not have enough funds to cover the transaction and an NSF fee would be charged, that consumer would likely either use a different payment method that would not result in such a fee or would postpone or forgo the transaction.

As explained further below, the CFPB also preliminarily concludes that there are a variety of specific reasons why consumers generally, or certain consumers individually, would lack understanding of the material risks, costs, or conditions when initiating a covered transaction. First, consumers' usage of deposit accounts has changed due to the advent and increased importance of debit cards during the past several decades. 138 The rise in debit card usage for small transactions resulted in increased transaction activity on the account for consumers' individual purchases. 139 These more frequent transactions might make it harder for some consumers to track their available funds. Although most consumers can now see a version of their account balance electronically through a mobile application, older consumers are far less likely to access their accounts through mobile apps, 140 and approximately 15 percent of Americans do not own a smartphone. 141 Even if consumers can access their account balance, the number displayed may not reflect what is available when the transaction takes place. 142 Furthermore, some consumers with smartphones might forgo checking their balance before initiating a covered transaction for a variety of reasons, including the rapidity of these transactions (see below) and discomfort with pulling up account information in a public location or using public Wi-Fi. And while ATM users can check their balance on the screen, some consumers may want to avoid incurring a fee to do so (particularly at an out-of-network ATM).

Second, certain account features and settlement practices that are unknown, complex, or counterintuitive make it challenging for consumers to understand whether they have the funds available for a transaction at a given time, or how that transaction would be handled. These complications make it difficult for consumers to understand the material risks, costs, or conditions when initiating a covered transaction. One example would be when a consumer has opted into overdraft coverage on ATM or one-time debit card transactions and expects the financial institution to pay a transaction into overdraft, but the institution instead denies overdraft coverage and charges an NSF fee, possibly because the consumer unknowingly exceeded the overdraft coverage limit that the financial institution had set for that particular customer. 143 An analysis of supervisory data on NSF practices at eight very large financial institutions suggests that 84.3 percent of NSF fees were assessed on accounts with overdraft coverage in 2022. 144 Other examples that could cause a lack of understanding of the material risks, costs or conditions of a consumer's account would be if the consumer were unaware of whether scheduled transactions, checks, or other non-instantaneous withdrawals had settled, or whether or not recent deposits had become fully available. 145

Third, some consumers would not understand that it is even possible to overdraw their accounts with ATM or debit cards, or with a P2P transaction—in contrast to other payment methods such as checks and ACH transactions. As the Board explained in the 2009 Opt-in Rule, “many consumers may not be aware that they are able to overdraft at an ATM or [point of sale]” and “[d]ebit cards have been promoted as budgeting tools, and a means for consumers to pay for goods and services without incurring additional debt.”  146 Even following implementation of the 2009 Opt-in Rule, consumers have experienced confusion about whether their cards could overdraw their accounts. 147 Furthermore, consumers who did not elect to opt into overdraft coverage on ATM and one-time debit card transactions may be especially likely to lack understanding in this context, since they may believe that it is not possible to incur a fee (whether called an overdraft or an NSF fee) on these covered transactions.

Fourth, for many covered transactions under this proposal, the decision-making environment and rapidity of the consumer's required choices at the merchant POS, ATM, or online may contribute to consumers' lack of understanding of the material costs, risks, or conditions of these transactions, particularly in conjunction with the reasons discussed above. Although, as noted above, many consumers can now check their account balances on a smartphone, when a consumer purchases a good or service at a merchant POS terminal, makes an online purchase, or uses an ATM, the transaction typically occurs very rapidly and the consumer may not have time (or may perceive that they do not have time) to check the account balance, which may itself be a moving target if there are transactions that have not settled (see earlier discussion). Moreover, the burden of checking a balance immediately prior to a purchase is likely to be higher for economically vulnerable consumers, who are less likely to have internet or smartphone access to their depository accounts. This increased expected burden of getting information on an account balance, which may sometimes entail a fee when a vulnerable consumer has limited access to a bank branch with an in-network ATM, would make information acquisition about balances less likely and could make covered transactions more likely. 148

The decision-making environment and rapidity of the consumer's choices may also contribute to consumers' lack of understanding of the material costs, risks, or conditions of many P2P covered transactions. Per the 2021 FDIC Survey, consumer households use nonbank online payment services to send or receive money (58.2 percent), make purchases in person (30.4 percent), and make purchases online (63.9 percent). 149 When a consumer purchases a good or service in person using a debit card, makes an online purchase, or sends money to a friend, the transaction occurs very rapidly and misremembering their account balance is possible. Although the speed and convenience can generally be viewed as positive features of such transactions for consumers, the CFPB preliminarily believes that these features, in conjunction with other issues, may make it more challenging for consumers to understand those transactions' material costs, risks, or conditions.

Under CFPA section 1031(d)(2)(A), a practice is abusive if it takes unreasonable advantage of consumers' lack of understanding of the material risks, costs, or conditions of a consumer financial product or service. The CFPB preliminarily concludes that the practice of charging NSF fees on covered transactions takes unreasonable advantage of consumers' lack of understanding of the above-referenced material risks, costs, or conditions of their accounts when they initiate those transactions. 150

A determination of unreasonable advantage-taking, as the Abusive Policy Statement explains, involves an evaluation of the facts and circumstances that may affect the nature of the advantage and the question of whether the advantage-taking was unreasonable under the circumstances. 151 The Abusive Policy Statement also explains that such an evaluation does not require an inquiry into whether the advantage-taking is typical or not—that even a relatively small advantage may be abusive if it is unreasonable, and that one may rely on qualitative assessment rather than an investigative accounting of costs and benefits to determine whether a covered financial institution takes an unreasonable advantage. 152

There is a point at which a covered financial institution's conduct in leveraging its superior information becomes unreasonable advantage-taking and thus is abusive. A number of analytical methods, including but not limited to those described in the Abusive Policy Statement, can be used to evaluate unreasonable advantage-taking. 153 The identified practice in this proposal preliminarily constitutes unreasonable advantage-taking under multiple of those analytical methods.

First, NSF fees are not fees for a service. Profiting from transactions where the consumer receives no service in return raises threshold concerns that a covered financial institution may be engaging in unreasonable advantage-taking. If a covered financial institution were to assess an NSF fee on a covered transaction, the practice would impose a cost (approximately $32 based on current NSF fees) with no benefit to the consumer, while at the same time imposing only an apparently de minimis cost on the covered financial institution ($0.005 at most, according to a 2021 Board survey)  154 that presumably could easily be recovered via fees collected on successful transactions. As noted above, charging an NSF fee in connection with a covered transaction would result in the consumer paying something for receiving nothing. This effectively turns the fee into a penalty fee. The CFPB notes that a consumer may already suffer disruption in the first instance by the decline of the covered transaction itself, whether through non-receipt of an expected good or service, embarrassment, or other adverse consequences. The NSF fee would compound that disruption by imposing a material cost.

Although the data noted above indicates that the cost to covered financial institutions of declining covered transactions appears to be de minimis, the CFPB requests submission of further data on these costs, as well as comment on the possibility of limiting the determination of unreasonable advantage-taking and the corresponding prohibition to allow for cost recovery.

Second, covered financial institutions would have no reason for imposing such fees other than reaping a windfall, because they could simply refuse to authorize the transaction instantaneously, which, as discussed above, would impose negligible cost on them. 155 The CFPB notes that in consumer litigation about banks' charging of fees on debit card transactions prior to the 2009 Opt-in Rule, one court held, for purposes of opining on a motion to dismiss, that charging such fees was an unconscionable practice under State law in part because the banks' ability to make an instantaneous decision about whether to process or decline a debit card transaction means there is less risk to the banks of the account having insufficient funds to cover the transaction. 156

Third, covered financial institutions that charge NSF fees on covered transactions would be benefiting from negative consumer outcomes that result from one of the enumerated factors identified in CFPA section 1031(d)(2), 157 i.e., a consumer's lack of understanding. As the Abusive Policy Statement explains, Congress, partly in response to the financial crisis, prohibited certain abusive business models and other acts or practices that—contrary to standard consumer finance relationships where the company benefits from consumer success—misalign incentives and generate benefit for a company when people are harmed. 158 The CFPB generally considers it unreasonable for a financial institution to benefit from, or be indifferent to, negative consumer outcomes resulting from a consumer's lack of understanding. 159

Finally, in assessing whether the practice at issue here involves unreasonable advantage-taking, a relevant factor is the vulnerability of many of the consumers who would incur such NSF fees if they were imposed. 160 Although consumers of all income levels overdraw their checking accounts, 161 more affluent consumers are more likely to be able to maintain a cushion to help avoid doing so. As research shows, less well-off, more economically vulnerable consumers are more likely to be struggling to meet their regular expenses. 162 For these vulnerable consumers, maintaining such a cushion often is not possible. 163 As a result, NSF fees function as a penalty imposed on these consumers because they do not have enough money in their account, whether that deficiency is due to chronic income shortfalls, timing mismatches regarding inflows and outflows over which they have no control, or other reasons. 164 The harm inflicted on economically vulnerable consumers from such fees, if they were to be charged, would likely be greater than that which more affluent consumers would suffer. Because much of the windfall from charging NSF fees on covered transactions would be gained from vulnerable consumers in exchange for providing no benefit to them, a covered financial institution would be taking unreasonable advantage of such consumers in doing so. As with consumers in general, the profit accrued from imposing NSF fees in this circumstance would be derived directly from vulnerable consumers' lack of understanding. This practice would constitute unreasonable advantage-taking because covered financial institutions are profiting directly from consumer hardship rather than from providing useful services to avoid or alleviate it.

The CFPB is proposing that this rule have an effective date of 30 days after publication of a final rule in the Federal Register . The CFPB is proposing this expedited effective date because the practice that would be prohibited based on the CFPB's preliminary abusive conduct determination is not thought to be prevalent today, and therefore any burdens associated with implementation of this proposal, if finalized, should be minimal. However, since the CFPB understands that a limited number of providers may currently charge fees that would be subject to the prohibition, the CFPB seeks comment on whether the proposed effective date should be modified to provide additional time for implementation.

In developing the proposed rule, the CFPB has considered the proposed rule's potential benefits, costs, and impacts in accordance with section 1022(b)(2)(A) of the CFPA. The CFPB requests comment on the preliminary analysis presented below and submissions of additional data that could inform the CFPB's analysis of the benefits, costs, and impacts. In developing the proposed rule, the CFPB has consulted with the appropriate prudential regulators and other Federal agencies, including regarding the consistency of the proposed rule with any prudential, market, or systemic objectives administered by those agencies, in accordance with section 1022(b)(2)(B) of the CFPA.

The CFPB is proposing this rule because of its preliminary determination that consumers would lack understanding of the material risks, costs, or conditions of a covered financial institution's charging of an NSF fee in connection with a covered transaction. In general, if consumers lack understanding of the material risks, costs, or conditions of a particular transaction, their choices may be suboptimal from an economic perspective.

The discussion below relies on information that the CFPB has obtained from industry and publicly available sources, including reports published by the CFPB. These sources form the basis for the CFPB's consideration of the likely impacts of the proposed rule. The CFPB provides estimates, to the extent possible, of the potential benefits and costs to consumers and covered persons of this proposal given available data.

The specific data sources that inform this discussion and the CFPB's existing analysis include public call report data, internal data provided by financial institutions through supervisory information requests, and research published by the CFPB. In addition, the existing academic literature as well as policy work conducted by State regulators, and by the Board were considered.

There remain important data limitations that preclude a more exhaustive determination of the proposed rule's benefits, costs, and impacts. Foremost among them is that the existing data sources and evidence available to the CFPB generally do not separately identify whether NSF transactions or NSF fees were incurred on requests by consumers to withdraw, debit, pay, or transfer funds from their checking, savings, or consumer asset account where the transaction is declined instantaneously or near-instantaneously by the financial institution (henceforth, covered transactions). In part, this reflects the CFPB's understanding of the current prevalence of the practice; based on its market monitoring activities the CFPB believes that covered financial institutions rarely charge NSF fees on covered transactions.

Relatedly, quantifying the benefits, costs, and impacts of the proposed rule requires quantifying future consumer and covered financial institution behavior both with and without the proposed changes, and the CFPB is not aware of available data that could be used to generate reliable predictions about such future behavior. In particular, there is considerable uncertainty around the future frequency with which financial institutions would charge NSF fees on covered transactions in the absence of the proposed rule. This includes uncertainty about how many, and which financial institutions would begin charging NSF fees on covered transactions as well as at what rate and fee amount these fees would be assessed. To reflect this uncertainty, the CFPB considers a range of ways in which market practices might evolve in the absence of the proposed rule when calculating the costs, benefits, and impacts of the proposed rule.

The data, prior research, and existing policy work available to the CFPB or with which the CFPB is familiar provide an important basis for understanding the potential effects of the proposed rule, albeit without being sufficient to completely quantify the potential effects of the proposal for consumers and covered persons. The deficits in existing data and evidence are due primarily to the proposed rule addressing practices not thought to currently be prevalent in consumer financial markets, to existing data not enabling the identification of covered transactions, to difficulty predicting the evolution of the market, and to the lack of existing evidence on the magnitude or direction of potential behavioral responses by consumers and covered persons to policies like the proposed rule. While the CFPB acknowledges these data limitations, the analysis below provides quantitative estimates where possible alongside qualitative discussions of the proposed rule's benefits, costs, and impacts. General economic principles and the CFPB's expertise, together with the available data, allow the CFPB to provide insight into these benefits, costs, and impacts. The CFPB requests additional data or studies that could help quantify the benefits and costs to consumers and covered persons of the proposed rule including information related to the current or likely future incidence of NSF fees on covered transactions.

In evaluating the proposal's benefits, costs, and impacts, the CFPB considers the impacts of the proposed rule against a baseline in which the proposed rule does not become effective. The baseline the CFPB considers corresponds to current law, wherein NSF fees are not explicitly prohibited for covered transactions. Based on its market monitoring activities, the CFPB understands that covered financial institutions rarely charge NSF fees on covered transactions; however, the CFPB is uncertain about the extent to which such fees are currently charged and the CFPB believes there is a risk that such fees may be charged to a greater degree in the future. The CFPB recognizes that financial institutions have incentives to generate new revenue; assessing NSF fees on covered transactions is one potential source of new revenue. Additionally, if the Overdraft Proposed Rule is finalized and reduces overdraft fee revenue for covered financial institutions, it may lead some institutions to consider imposing new fees. Increasing the prevalence of NSF fees on covered transactions could be one way that covered financial institutions respond, while market forces could lead even non-covered financial institutions to begin charging NSF fees on covered transactions.

Accordingly, for the baseline, the CFPB considers potential NSF market practices that range from financial institutions rarely charging NSF fees on covered transactions to a scenario where some financial institutions charge NSF fees on covered transactions. The CFPB believes that, absent the proposed rule, it is unlikely that NSF fees on covered transactions would be assessed at a rate greater than the rate at which they are currently charged on non-covered transactions. 165 To estimate the share of total NSF transactions  166 that would be covered, the CFPB uses data from the Federal Reserve Payments Study (FRPS)  167 to calculate the percent of total non-cash payments that were non-prepaid debit card payments in 2021: 44.7 percent. As further discussed below, this is informative of an upper bound on how large the impact of the proposed rule might be. 168

For costs, benefits, and impacts, the CFPB estimates annual values and, absent any evidence to suggest that the values would change over time, the CFPB assumes that the annual values persist indefinitely.

The CFPB requests comment on the approach to evaluating the proposal's benefits, costs, and impacts and, specifically, on the assumptions implicit in providing estimates that correspond to a range of future NSF market practices.

The proposal to prohibit NSF fees on covered transactions would directly benefit consumers who would have been assessed NSF fees on covered transactions by reducing the amount that they pay in NSF fees. In addition to the direct benefits from the absence of NSF fees, a prohibition on NSF fees could have several indirect impacts on consumers who would otherwise have been charged NSF fees. First, for consumers with account balances low enough that an NSF fee brings their balance below zero or farther below zero, NSF fees may lead consumers to have their account closed or to have their account information furnished to a checking account reporting company, which could make getting access to a new depository account more difficult in the future. By prohibiting NSF fees, the proposed rule should reduce (to zero) the likelihood of these indirect impacts of NSF transactions. Second, without the ability to assess NSF fees on transactions that consumers undertake without sufficient funds, financial institutions may opt to allow additional transactions to go through and charge overdraft fees instead. By allowing accounts to go into overdraft this implies more consumers will receive the item(s) they were attempting to purchase, though they may be assessed an overdraft fee. A third possibility is that a prohibition on NSF fees could reduce expected revenue for the consumer segments most likely to incur NSF fees and result in financial institutions being less willing to open depository accounts for those consumers. 169

As discussed further below, the extent of any of these benefits depends on the extent to which NSF fees would be charged on covered transactions under the baseline. To the extent NSF fees would be charged, the direct effects of the proposed rule should benefit consumers by reducing the amount they pay in NSF fees. Similarly, the first above-mentioned indirect effect—a decreased likelihood of depository account closure and having negative information furnished to a checking account reporting company—should increase consumer welfare. Consumer welfare could increase or decrease from having more transactions go through and being assessed an overdraft fee instead of an NSF fee; whether consumers benefit will depend on the relative size of NSF and overdraft fees as well as how much consumers value the goods or services they were attempting to purchase. Consumer welfare could also decrease if the inability to assess and collect NSF fees makes financial institutions less willing to offer depository accounts to certain consumers.

As discussed above, the proposed rule will directly benefit consumers to the extent that NSF fees would have been charged on covered transactions, which are estimated to represent 44.7 percent of checking account transactions based on 2021 FRPS data. The CFPB understands that it is currently uncommon for financial institutions to charge NSF fees on covered transactions, but the CFPB does not have reliable data on how frequent the practice might be either now or in the future.

Recent CFPB analysis of Call Report data suggests that even after sharp declines in the number of banks with over $1 billion in assets charging NSF fees, consumers will be paying roughly $250 million annually in NSF fees to banks with more than $1 billion in assets. 170 The CFPB estimates that an additional $73 million in annual NSF fees is being paid to banks with less than $1 billion in assets and to credit unions, for a total of $323 million in annual NSF fees. 171

Of this total, the CFPB's understanding is that the large majority was paid on non-covered transactions and therefore would be unaffected by the proposed rule, and the CFPB does not have definitive evidence with which to forecast the revenue that might be generated by covered transactions in the future under the baseline. As a starting point to arrive at a range of possible future NSF fee practices for covered transactions, the CFPB begins from our current annual estimate of all NSF fee revenue: $323 million. As a likely lower bound for potential future NSF fee market practices, the CFPB considers the scenario where NSF fees are rarely charged on covered transactions. This would suggest that the $323 million in current annual NSF fee revenue corresponds to $0 in future NSF fee revenue from covered transactions. As a more probable range of potential future NSF fee market practices for covered transactions, if projected annual NSF fee revenue for covered transactions were to correspond to between 5 and 20 percent of current annual NSF fee revenue, it would suggest between $16.2 million and $64.6 million in annual NSF revenue from covered transactions. The proposed rule would therefore indicate a direct benefit to consumers of between $16.2 million and $64.6 million in reduced NSF fees.

The CFPB seeks comment on the extent to which NSF fees are currently charged on covered transactions and the extent to which they might be charged on covered transactions in the future.

To the extent covered financial institutions would have charged NSF fees on covered transactions under the baseline, the proposed rule would benefit consumers by reducing to zero the probability that an NSF fee on a covered transaction would bring their account balance below zero and cause their account to be closed or their information to be furnished to a checking account reporting company. The indirect benefits to consumers from these reductions would increase consumer welfare for the consumers that would have experienced these events in the absence of the proposed rule.

The extent of these indirect benefits depends on the prevalence and amount of NSF fees charged on covered transactions under the baseline. At NSF fee market practices between the lower and upper bound projections, the proposed rule would generate indirect benefits to consumers through the same changes, though these benefits would be proportionally smaller in size than under the upper bound projection.

If the prohibition on NSF fees induces some financial institutions to allow additional transactions that they would have declined to go into overdraft, it could also benefit consumers relative to the baseline in instances where a consumer had a transaction declined, and they were assessed an NSF fee of the same amount as the overdraft fee. If the potential NSF fee is less than the potential overdraft fee, whether consumers benefit will depend on the consumers' valuation of the goods they were purchasing or attempting to purchase net of the price of the good(s). Whether this benefit is as large as the benefit the consumer receives if their transaction is declined but they are not assessed an NSF fee will depend on the consumer's valuations and the relative size of the NSF and overdraft fees. These indirect benefits would accrue to consumers only under NSF fee market practice projections that predict a positive number of NSF fees on covered transactions.

To the extent covered financial institutions would have charged NSF fees on covered transactions under the baseline, the proposed rule could generate changes in the behaviors of consumers or covered persons. One possibility is that a prohibition on NSF fees could make consumers less willing to exert effort to get information on their account balance prior to making purchases and therefore could increase the likelihood of NSF transactions for some consumers. However, the CFPB can find little evidence to support the existence of a deterrent effect of NSF fees on the prevalence of NSF transactions. Based on data on NSF fees on transactions of all types from seven of the eight financial institutions that submitted data, after controlling for month-specific and financial institution-specific differences in the number of NSF transactions, the number of NSF transactions financial institutions report after decreasing or eliminating NSF fees decreased, on average, for the five financial institutions that made a change during the reporting period. This is consistent with the costs of avoiding NSF fees being sufficiently high for consumers at risk of NSF transactions that a change in NSF fee size does not result in a meaningfully different amount of optimal effort put towards avoiding these fees, 172 or with consumers not being aware of the possibility or size of NSF fees. The CFPB caveats that the NSF fees and transactions observed in the data are likely to have occurred primarily on non-covered transactions and it is possible that the relationship between NSF transactions and NSF fee sizes could be different if we were able to estimate it using only information on covered transactions and fees. Similarly, data that cover a longer period after a reduction in NSF fees would allow for the consideration of medium- and long-term deterrent effects of NSF fees. The data available to the CFPB only permit the consideration of effects that are observable less than twelve months after an NSF fee reduction. Nevertheless, the CFPB seeks comment on the potential deterrent effect of NSF fees on NSF transactions, including data and information that could help inform our understanding of this relationship.

Another possibility is that a prohibition on NSF fees could reduce expected revenue for the consumer segments most likely to incur NSF fees on covered transactions under NSF fee market practice projections above the lower bound, and result in financial institutions being less willing to open depository accounts for those consumers. This would decrease the benefits to the consumer segments that lose access to depository accounts that they would have had under the baseline and those NSF fee market projections.

Last, financial institutions could respond to the proposed rule by offsetting the NSF fee revenue that they would earn under projections above the lower bound with changes in other account fees or prices. These increases in other account fees or prices would decrease the benefits to consumers from the proposed rule. 173 Consumers with accounts that are assessed a greater value of new fees than they would have been assessed in NSF fees will benefit less from the proposed rule.

NSF transactions and fees are more likely for consumers with limited resources. Information from the eight financial institutions that responded to the CFPB's supervisory information request suggest that NSF transactions occurred 20 times as often on consumer accounts with low average daily balances (below $500) as for consumer accounts with high average daily balances (above $1,500). 174 NSF fees are 11 times as likely to be assessed on low-balance consumer accounts as on high-balance consumer accounts.

For covered persons, the costs and benefits are, in general, the opposite of the benefits or costs to their customers, as detailed above, and net of offsetting changes. Any decrease in fees paid by consumers will result in an equally sized decrease in revenue for covered persons. Any increase in fees paid by consumers due to offsetting fees assessed by covered financial institutions will result in an equally sized increase in revenue for covered persons.

Additional potential costs to covered persons are the legal and personnel costs of reviewing current policies and pricing strategies to determine whether existing policies are compliant and whether to re-optimize behavior after considering the proposed rule. Given that the CFPB understands that NSF fees today are rarely charged on covered transactions, any such costs should be small, as current policies are generally consistent with the proposed rule's requirements. Some of these costs might be incurred by covered financial institutions due to the Overdraft Proposed Rule, regardless of whether the proposed rule takes effect.

As was the case above for consumers, for the baseline at the lower bound projection for NSF fee market practices, the proposed rule would generate few benefits, costs, or impacts for covered persons.

At levels above the lower bound projection, the proposed rule will have distinct benefits, costs, and impacts on covered persons, depending on whether financial institutions charge NSF fees on covered transactions.

Based on a CFPB analysis of publicly available Call Report data and publicly available information regarding banks' NSF practices, a majority of NSF fees have been eliminated among banks with at least $1 billion in total assets. 175 The CFPB report estimates that nearly three-fourths of the 75 banks with the highest combined NSF and overdraft revenue in 2021 have since stopped charging NSF fees. A similar analysis of NSF fee practices among banks with over $10 billion in assets estimates that two-thirds of those institutions have eliminated NSF fees. These findings suggest that a growing share of covered persons no longer charge NSF fees of any kind. These differences in NSF fee policies across covered persons could persist for covered transactions in the baseline. That is, some covered persons are likely to be charging NSF fees on covered transactions while other covered persons will not be charging NSF fees on covered transactions. To the extent that this behavior follows similar patterns as the currently observed decisions to charge NSF fees on non-covered transactions, the analysis suggests that smaller financial institutions may be less likely to not charge NSF fees on covered transactions than larger financial institutions. However, it is also possible that the covered financial institutions that have eliminated NSF fees on non-covered transactions could opt to start charging NSF fees on covered transactions under market scenarios above the lower bound projection.

For covered persons that are not charging NSF fees on covered transactions, the proposed rule would likely generate smaller costs and benefits.

For covered persons that are charging NSF fees on covered transactions or that would charge them under the baseline, the proposed rule would impose costs equal to the loss in NSF revenue due to the prohibition on NSF fees on covered transactions, net of any offsetting revenue increases from new fees. If future annual NSF fees from covered transactions represented between 5 and 20 percent of current total 2022 NSF revenue, the cost borne by covered persons charging NSF fees on covered transactions would be between $16.2 million and $64.6 million.

As mentioned above, the direct benefits, costs, and impacts on covered persons are likely to be the opposite of those discussed for consumers. However, for some of the potential indirect impacts, this may not be the case. For example, consumers may benefit from a reduced probability that an NSF fee would bring their account balance below zero and cause their account to be closed or their information to be furnished to a checking account reporting company. For covered financial institutions, these indirect impacts do not represent costs, and they may represent benefits as they no longer need to incur the costs associated with closing these depository accounts or furnishing information to checking account reporting companies.

Similarly, if the prohibition on NSF fees induces some financial institutions to not offer depository accounts to the consumer segments most likely to incur NSF fees on covered transactions, it could impose a cost on consumers in those segments who may find it more difficult to access a depository account. This would also impose a cost on the covered financial institutions that are no longer willing to offer these accounts, with the cost being equal to the expected revenue on the depository accounts they would have opened for these consumer segments under the baseline and NSF fee market projection, but which they are no longer willing to open under the proposed rule.

Any indirect effects for covered financial institutions from allowing additional transactions to go into overdraft are likely to be small and will depend on the relative size of expected revenue and cost from charging an overdraft fee compared to charging an NSF fee.

The CFPB considered proposing an alternative in which financial institutions would be permitted to charge fees on covered transactions that are limited to the cost of handling NSF transactions. Such an alternative would have little effect on the estimates presented above. Research from the Board suggests the average cost of NSF handling was just $0.005 in 2021 and this has remained relatively stable since 2011. 176 If the CFPB assumes $32 per NSF fee along with our projections for future NSF fee revenue from covered transactions that correspond to between 5 and 20 percent of current annual NSF fee revenue, 177 wherein the proposed rule would result in between $16.2 million and $64.6 million in reductions in NSF revenue, this would represent between 506,250 and 2,018,750 NSF fees. At $0.005 per NSF fee, this would imply between $2,531 and $10,094 in total costs for financial institutions to handle NSF transactions that generated fees. The CFPB can also use the information requested from eight very large financial institutions in a supervisory capacity to adjust this number given that the eight institutions represented in the data assessed NSF fees on 13.4 percent of NSF transactions. 178 To account for the costs of NSF transactions that did not generate fees, the range of $2,531 to $10,094 in NSF handling cost totals can be inflated based on the number of fee-generating transactions by 1/0.134, to estimate that the total allowed cost recovery for financial institutions from their handling of NSF transactions would be between $18,888 and $75,328. The remaining benefit to consumers from reduced NSF fees after accounting for allowed cost recovery for financial institutions at between 5 and 20 percent of the upper bound projection for NSF fee practices would be between $16,181,112 and $64,524,672. As was the case above, these also represent the costs to covered persons after accounting for allowed cost recovery if NSF fees on covered transactions were assumed to be responsible for between 5 and 20 percent of projected annual NSF revenue.

Existing data do not clearly indicate whether there would be specific impacts of the proposed rule on depository institutions and credit unions with $10 billion or less in total assets that are different from the impacts on other affected financial institutions. As mentioned above, smaller financial institutions were less likely to have eliminated NSF fees as of 2022. If these institutions are more likely to have started charging NSF fees on covered transactions under an NSF fee market projection, they may be more likely to see NSF fee revenue decrease under the proposed rule relative to the baseline. However, whether there are specific impacts on depository institutions and credit unions with $10 billion or less in assets may also depend on interactions with the Overdraft Proposed Rule. The Overdraft Proposed Rule only applies to depository institutions with more than $10 billion in total assets. If financial institutions impacted by the Overdraft Proposed Rule are those most likely to charge NSF fees on covered transactions under the baseline, it would imply that depository institutions and credit unions with $10 billion or less in total assets may be less likely to be impacted by the proposed rule. Thus, whether there are specific impacts on depository institutions and credit unions with less than $10 billion in total assets will depend on which institutions opt to start charging NSF fees on covered transactions and, possibly, on interactions between the proposed rule and the Overdraft Proposed Rule.

The CFPB does not anticipate that the proposed rule will have any negative effects on consumer access to credit under the baseline. To the extent that some financial institutions respond to the proposed rule by increasing the likelihood that they allow transactions to go into overdraft, the proposed rule could result in increased credit access for some consumers.

The CFPB does not have depository account-level data with geographic identifiers that would allow us to measure NSF fees assessed on consumers in rural areas. However, existing research suggests that consumers in rural areas are more likely to be unbanked  179 and more likely to live in a bank desert. 180 This lower access to depository accounts could mean consumers in rural areas are less likely than consumers in other areas to pay NSF fees on covered transactions, which could decrease the potential benefits to consumers in rural areas of the proposed rule.

The CFPB has also calculated the share of the unbanked in the lowest fifth of the income distribution in ZIP codes that the U.S. Census Bureau classifies as urban, rural, and mixed. 181 Seventy-four percent of consumers in the lowest income quintile in both urban and rural ZIP codes have a bank account. This would suggest that lower-income consumers in urban and rural areas have similar access to bank accounts and may also see similar benefits from the proposed rule.

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. The CFPB is also subject to specific additional procedures under the RFA involving convening a panel to consult with small business representatives before proposing a rule for which an IRFA is required. An IRFA is not required for this proposal because the proposal, if adopted, would not have a significant economic impact on a substantial number of small entities.

Small institutions, for the purposes of the Small Business Regulatory Enforcement Fairness Act (SBREFA) of 1996, are defined by the Small Business Administration. Effective December 19, 2022, depository institutions with less than $850 million in total assets are determined to be small.

As mentioned above, the CFPB understands that covered persons rarely currently charge NSF fees on covered transactions. As a result, under current market practices the proposed rule should not have a significant impact on a substantial number of small entities.

Moreover, even when combined with overdraft fees, total NSF fees generally represent well under 2 percent of total revenue at the smallest financial institutions that regularly report this information, suggesting that any potential reduction in NSF fee revenue would not be likely to have a significant impact on institutions with less than $850 million in total assets. 182 As a result, the proposed rule should not have a significant impact on a substantial number of small entities even if NSF revenue were entirely comprised of NSF fees on covered transactions.

Accordingly, the Director hereby certifies that this proposal, if adopted, would not have a significant economic impact on a substantial number of small entities. Thus, neither an IRFA nor a small business review panel is required for this proposal.

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 CFPB has determined that the proposed rule would not impose any new information collections or revise any existing recordkeeping, reporting, or disclosure requirements on covered entities or members of the public that would be collections of information requiring approval by the Office of Management and Budget under the Paperwork Reduction Act.

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: Consumer Financial Protection Bureau (Attention: PRA Office), 1700 G Street NW, Washington, DC 20552, or by email to CFPB_Public_PRA@cfpb.gov.

The FAA invites you to send any written relevant data, views, or arguments about this proposal. Send your comments to an address listed under ADDRESSES . Include “Docket No. FAA-2024-0040; Project Identifier MCAI-2023-01196-T” at the beginning of your comments. The most helpful comments reference a specific portion of the proposal, explain the reason for any recommended change, and include supporting data. The FAA will consider all comments received by the closing date and may amend this proposal because of those comments.

Except for Confidential Business Information (CBI) as described in the following paragraph, and other information as described in 14 CFR 11.35, the FAA will post all comments received, without change, to regulations.gov , including any personal information you provide. The agency will also post a report summarizing each substantive verbal contact received about this NPRM.

CBI is commercial or financial information that is both customarily and actually treated as private by its owner. Under the Freedom of Information Act (FOIA) (5 U.S.C. 552), CBI is exempt from public disclosure. If your comments responsive to this NPRM contain commercial or financial information that is customarily treated as private, that you actually treat as private, and that is relevant or responsive to this NPRM, it is important that you clearly designate the submitted comments as CBI. Please mark each page of your submission containing CBI as “PROPIN.” The FAA will treat such marked submissions as confidential under the FOIA, and they will not be placed in the public docket of this NPRM. Submissions containing CBI should be sent to Vladimir Ulyanov, Aviation Safety Engineer, FAA, 1600 Stewart Avenue, Suite 410, Westbury, NY 11590; telephone 206-231-3229; email Vladimir.ulyanov@faa.gov. Any commentary that the FAA receives that is not specifically designated as CBI will be placed in the public docket for this rulemaking.

The FAA issued AD 2014-15-09, Amendment 39-17911 (79 FR 44663, August 1, 2014) (AD 2014-15-09), for all Airbus SAS Model A330-200 Freighter, A330-200 and -300, and A340-200, -300, -500, and -600 series airplanes. AD 2014-15-09 was prompted by an MCAI originated by EASA, which is the Technical Agent for the Member States of the European Union. EASA issued AD 2013-0251 dated October 15, 2013; Correction dated October 16, 2013 (EASA AD 2013-0251), to correct an unsafe condition.

AD 2014-15-09 requires repetitive operational tests of the hydraulic locking function on certain SSCs and replacement if necessary. The FAA issued AD 2014-15-09 to address loss of the hydraulic locking function during take-off, which, in combination with one inoperative engine, could result in reduced controllability of the airplane.

The FAA issued AD 2020-15-09, Amendment 39-21172 (85 FR 45767, July 30, 2020) (AD 2020-15-09) for all Airbus SAS Model A330-941 airplanes. AD 2020-15-09 was prompted by an MCAI originated by EASA. EASA issued AD 2020-0054, dated March 11, 2020 (EASA AD 2020-0054) to correct an unsafe condition.

AD 2020-15-09 requires repetitive operational tests of the hydraulic locking function on certain SSCs and replacement if necessary. The FAA issued AD 2020-15-09 to address loss of hydraulic locking function on the SSCs, which in combination with one engine inoperative at takeoff, could result in reduced controllability of the airplane.

The FAA issued AD 2022-16-07, Amendment 39-22136 (87 FR 51585, August 23, 2022) (AD 2022-16-07) for certain Airbus SAS Model A330-200, A330-200 Freighter, and A330-300 series airplanes. AD 2022-16-07 was prompted by an MCAI originated by EASA. EASA issued AD 2021-0248, dated November 15, 2021 (EASA AD 2021-0248) to correct an unsafe condition.

AD 2022-16-07 requires revising the existing maintenance or inspection program, as applicable, to incorporate new or more restrictive airworthiness limitations. The FAA issued AD 2022-16-07 to address a safety-significant latent failure (that is not annunciated) that, in combination with one or more other specific failures or events, could result in a hazardous or catastrophic failure condition.

Since the FAA issued AD 2022-16-07, EASA superseded AD 2020-0054 and 2021-0248R1, dated October 12, 2022, and issued EASA AD 2023-0199, dated November 17, 2023 (EASA AD 2023-0199) (referred to after this as the MCAI), for all Airbus SAS Model A330-201, A330-202, A330-203, A330-223, A330-223F, A330-243, A330-243F, A330-301, A330-302, A330-303, A330-321, A330-322, A330-323, A330-341, A330-342, A330-343, A330-841 and A330-941 airplanes. The MCAI states that new or more restrictive airworthiness limitations have been developed.

Airplanes with an original airworthiness certificate or original export certificate of airworthiness issued after October 2, 2023, must comply with the airworthiness limitations specified as part of the approved type design and referenced on the type certificate data sheet; this proposed AD therefore does not include those airplanes in the applicability.

The FAA is proposing this AD to address a safety-significant latent failure (that is not annunciated) that, in combination with one or more other specific failures or events, could result in a hazardous or catastrophic failure condition. You may examine the MCAI in the AD docket at regulations.gov under Docket No. FAA-2024-0040.

The FAA reviewed EASA AD 2023-0199. This service information specifies new or more restrictive airworthiness limitations for airplane structures, including the repetitive operational tests required by EASA AD 2013-0251 and EASA AD 2020-0054 (which correspond to FAA AD 2014-15-09 and FAA AD 2020-15-09).

This proposed AD would also require EASA AD 2021-0248, which the Director of the Federal Register approved for incorporation by reference as of September 27, 2022 (87 FR 51585, August 23, 2022).

This proposed AD would also require EASA AD 2020-0054, which the Director of the Federal Register approved for incorporation by reference as of September 3, 2020 (85 FR 45767, July 30, 2020).

This proposed AD would also require Airbus Service Bulletin A330-27-3195, Revision 01, dated February 6, 2014, which the Director of the Federal Register approved for incorporation by reference as of September 5, 2014 (79 FR 44663, August 1, 2014).

This material is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in ADDRESSES .

This product has been approved by the aviation authority of another country and is approved for operation in the United States. Pursuant to the FAA's bilateral agreement with this State of Design Authority, it has notified the FAA of the unsafe condition described in the MCAI and service information referenced above. The FAA is issuing this NPRM after determining that the unsafe condition described previously is likely to exist or develop in other products of the same type design.

This proposed AD would retain certain requirements of AD 2014-15-09, AD 2020-15-09, and AD 2022-16-07. This proposed AD would also require revising the existing maintenance or inspection program, as applicable, to incorporate additional new or more restrictive airworthiness limitations, which are specified in EASA AD 2023-0199 already described, as proposed for incorporation by reference. Any differences with EASA AD 2023-0199 are identified as exceptions in the regulatory text of this AD.

This proposed AD would require revisions to certain operator maintenance documents to include new actions ( e.g., inspections). Compliance with these actions is required by 14 CFR 91.403(c). For airplanes that have been previously modified, altered, or repaired in the areas addressed by this proposed AD, the operator may not be able to accomplish the actions described in the revisions. In this situation, to comply with 14 CFR 91.403(c), the operator must request approval for an alternative method of compliance (AMOC) according to paragraph (s)(1) of this proposed AD.

In the FAA's ongoing efforts to improve the efficiency of the AD process, the FAA developed a process to use some civil aviation authority (CAA) ADs as the primary source of information for compliance with requirements for corresponding FAA ADs. The FAA has been coordinating this process with manufacturers and CAAs. As a result, the FAA proposes to retain the IBR of EASA AD 2020-0054 and EASA AD 2021-0248 and incorporate EASA AD 2023-0199 by reference in the FAA final rule. This proposed AD would, therefore, require compliance with EASA AD 2020-0054, EASA AD 2021-0248 and EASA AD 2023-0199 through that incorporation, except for any differences identified as exceptions in the regulatory text of this proposed AD. Using common terms that are the same as the heading of a particular section in EASA AD 2020-0054, EASA AD 2021-0248 or EASA AD 2023-0199 does not mean that operators need comply only with that section. For example, where the AD requirement refers to “all required actions and compliance times,” compliance with this AD requirement is not limited to the section titled “Required Action(s) and Compliance Time(s)” in EASA AD 2020-0054, EASA AD 2021-0248, or EASA AD 2023-0199. Service information required by EASA AD 2020-0054, EASA AD 2021-0248, and EASA AD 2023-0199 for compliance will be available at regulations.gov by searching for and locating Docket No. FAA-2024-0040 after the FAA final rule is published.

The FAA's process of incorporating by reference MCAI ADs as the primary source of information for compliance with corresponding FAA ADs has been limited to certain MCAI ADs (primarily those with service bulletins as the primary source of information for accomplishing the actions required by the FAA AD). However, the FAA is now expanding the process to include MCAI ADs that require a change to airworthiness limitation documents, such as airworthiness limitation sections.

For these ADs that incorporate by reference an MCAI AD that changes airworthiness limitations, the FAA requirements are unchanged. Operators must revise the existing maintenance or inspection program, as applicable, to incorporate the information specified in the new airworthiness limitation document. The airworthiness limitations must be followed according to 14 CFR 91.403(c) and 91.409(e).

The previous format of the airworthiness limitation ADs included a paragraph that specified that no alternative actions ( e.g., inspections) or intervals may be used unless the actions and intervals are approved as an AMOC in accordance with the procedures specified in the AMOCs paragraph under “Additional AD Provisions.” This new format includes a “New Provisions for Alternative Actions and Intervals” paragraph that does not specifically refer to AMOCs, but operators may still request an AMOC to use an alternative action or interval.

This proposed AD does not include Model A340 airplanes in the applicability. EASA issued AD 2023-0200, dated November 17, 2023 (EASA AD 2023-0200), which currently addresses the identified unsafe conditions for the Model A340 airplanes that were included in FAA AD 2014-15-09. The FAA has added EASA AD 2023-0200 to the required airworthiness action list (RAAL) for the Model A340 airplanes. There currently are no Model A340 airplanes on the U.S. register. However, if a U.S. operator imports a Model A340 airplane, they will then be required to show compliance with EASA AD 2023-0200 as specified in the RAAL.

The FAA estimates that this AD, if adopted as proposed, would affect 142 airplanes of U.S. registry. The FAA estimates the following costs to comply with this proposed AD:

The FAA estimates the total cost per operator for the retained actions from AD 2022-16-07 to be $7,650 (90 work-hours × $85 per work-hour).

The FAA has determined that revising the existing maintenance or inspection program takes an average of 90 work-hours per operator, although the agency recognizes that this number may vary from operator to operator. Since operators incorporate maintenance or inspection program changes for their affected fleet(s), the FAA has determined that a per-operator estimate is more accurate than a per-airplane estimate.

The FAA estimates the total cost per operator for the new proposed actions to be $7,650 (90 work-hours × $85 per work-hour).

The FAA estimates the following costs to do any necessary on-condition actions that would be required based on the results of any required actions. The agency has no way of determining the number of aircraft that might need on-condition actions:

Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. Subtitle VII: Aviation Programs, describes in more detail the scope of the Agency's authority.

The FAA is issuing this rulemaking under the authority described in Subtitle VII, Part A, Subpart III, Section 44701: General requirements. Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.

The FAA determined that this proposed AD would not have federalism implications under Executive Order 13132. This proposed AD would not have a substantial direct effect on the States, on the relationship between the national Government and the States, or on the distribution of power and responsibilities among the various levels of government.

For the reasons discussed above, I certify this proposed regulation:

(1) Is not a “significant regulatory action” under Executive Order 12866,

(2) Would not affect intrastate aviation in Alaska, and

(3) Would not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

Accordingly, under the authority delegated to me by the Administrator, the FAA proposes to amend 14 CFR part 39 as follows:

The FAA proposes to revise certain rules for small, corporate-sized, and unmanned aircraft maintenance inspections. The most substantial change would be the increase in inspection program options for owners and operators of single-engine turbine-powered airplanes and unmanned aircraft. Currently, when operating under the rules in part 91 of title 14 of the Code of Federal Regulations (14 CFR), owners and operators of these aircraft must comply with annual or 100-hour inspection requirements or adopt progressive inspection programs in lieu of those requirements. For single-engine turbine-powered airplanes, this proposed rule would expand inspection options to include, among others, an inspection program recommended by the manufacturer or an inspection program established by the registered owner or operator and approved by the Administrator. For unmanned aircraft, including unmanned aircraft operating under 14 CFR part 135 that are authorized to use the inspection rules in part 91, this proposal would enable the selection of either an inspection program recommended by the manufacturer or a program established by the registered owner or operator and approved by the Administrator. The FAA believes this change would enhance safety and would provide unmanned and single-engine turbine-powered aircraft owners and operators with greater flexibility with aircraft maintenance.

Additionally, for aircraft operating under part 91, subpart K, fractional ownership rules, the FAA proposes to lengthen the reporting interval for aircraft mechanical reliability reports from 72 to 96 hours and to allow electronic report submissions. This would align the reporting interval requirement with those found in other regulations ( e.g., 14 CFR 121.703, 135.415, and 145.221).

Finally, the FAA proposes several changes to clarify and simplify various maintenance-related regulations in areas that have confusing or ambiguous language, to include maintenance and inspection requirements for part 91 and 125 operators and document retention. It also proposes to clarify part 145 regulations pertaining to repair station maintenance documentation and contract maintenance.

Subpart E of 14 CFR part 91 prescribes general rules governing the maintenance, preventive maintenance, and alterations of United States (U.S.)-registered civil aircraft operating within or outside of the United States. For aircraft operated under, or otherwise subject to, part 91, subpart E, § 91.409 contains the requirements for aircraft inspections, including requirements for annual inspections and 100-hour inspections. Section 91.409(c) provides exceptions to those inspection requirements; aircraft with special flight permits, experimental certificates, light-sport category, or provisional airworthiness certificates, and aircraft for which progressive inspection programs have been adopted are not required to meet the annual and 100-hour inspection requirements.

Paragraph (c)(3) excludes the types of airplanes identified in § 91.409(e). These types of airplanes—large airplanes (to which part 125 is not applicable), turbojet multiengine airplanes, and turbopropeller-powered multiengine airplanes—must be inspected in accordance with one of the inspection program options specified in § 91.409(f) in lieu of the annual or 100-hour inspection. These options include: (1) a continuous airworthiness inspection program under a part 121 or 135 operator's Continuous Airworthiness Maintenance Program (CAMP); (2) an approved aircraft inspection program under part 135; (3) a current inspection program recommended by the manufacturer; or (4) any other inspection program established by the owner or operator and approved by the FAA.

Certain rotorcraft may, but are not required to, use one of these inspection program options. See § 91.409(c)(4) and (e). In 1989, the FAA amended § 91.409 [54 FR 34284, Aug. 18, 1989] to allow turbine-powered rotorcraft (both single- and multiengine) owners and operators to choose between performing an annual, a progressive, or an inspection program under § 91.409(f).

In 2016, an aircraft manufacturer petitioned the FAA for rulemaking to include single-engine turbine-powered airplanes within the scope of § 91.409(e) and (f). 1 Single-engine turbine-powered airplanes are not currently permitted to use one of the inspection options in § 91.409(f) as an alternative to the annual or 100-hour inspection. Since single-engine turbine-powered airplanes were rare at the time the options were introduced for turbine-powered rotorcraft, they were not included in that rule. Today, there are over 4,500 registered single-engine turbine-powered airplanes.

Additionally, unmanned aircraft systems (UAS) commercial utilization and National Airspace System integration has increased since 2016. While 14 CFR part 107 addresses small UAS operations, the FAA has also granted exemptions and waivers from certain part 91 and part 135 rules to permit UAS operations under those parts. Under these exemptions (in the conditions and limitations), the FAA has generally required that unmanned aircraft be inspected in accordance with the manufacturer's inspection instructions or for those instructions to be incorporated into the operator's approved maintenance or inspection program.

The FAA's authority to issue rules on aviation safety is found in title 49 of the United States Code. Subtitle I, section 106 describes the authority of the FAA Administrator. Subtitle VII, Aviation Programs, describes in more detail the scope of the agency's authority.

This rulemaking is issued under the authority described in Subtitle VII, part A, subpart III, section 447, section 44701(a)(2)(A) and (B) and (a)(5), and section 44707. Under section 44701(a)(2)(A) and (B), the FAA is charged with prescribing regulations and minimum standards in the interest of safety for inspecting, servicing, and overhauling aircraft, aircraft engines, propellers, and appliances, and equipment and facilities for, and the timing of and manner of, the inspecting, servicing, and overhauling the FAA finds necessary for safety and commerce. Section 44701(a)(5) authorizes the FAA to prescribe regulations and minimum standards for other practices, methods, and procedures the Administrator finds necessary for safety in air commerce and national security. Under section 44707, the FAA may examine and rate repair stations. Specifically, under section 44707(2), the FAA is charged with inspecting and rating repair stations on the adequacy and suitability of the equipment, facilities, and materials for, and methods of, repair and overhaul, and the competency of the individuals doing the work or giving instruction in the work. The regulations proposed are within the scope of that authority.

Currently, § 91.409(e) prohibits the operation of a large airplane, turbojet multiengine airplane, turbopropeller-powered multiengine airplane, or turbine-powered rotorcraft unless the replacement times for life-limited parts specified in the aircraft specifications, type data sheets, or other documents approved by the Administrator are complied with and the airplane or turbine-powered rotorcraft is inspected in accordance with an inspection program selected under § 91.409(f), except that the owner or operator of a turbine-powered rotorcraft may elect to use the inspection provisions of § 91.409(a), (b), (c), or (d) instead. We propose to expand § 91.409(e) to apply to single-engine turbine-powered airplanes and unmanned aircraft. Unmanned aircraft would be required to be inspected in accordance with an inspection program selected under § 91.409(f). Owners and operators of single-engine turbine-powered airplanes would be able to select a § 91.409(f) inspection program or use the inspection provisions of § 91.409(a), (b), (c), or (d).

This change would provide single-engine turbine-powered airplane owners and operators more options for inspecting their aircraft. It would give those owners and operators the same choice of inspection program options currently available to owners and operators of turbine-powered rotorcraft. Providing these additional options would harmonize the requirements for similarly-sized turbine-powered airplanes and rotorcraft. Owners and operators would retain the ability to use their existing annual inspection program if they do not want to select any of the newly available options.

Currently, if operating under part 91, single-engine turbine-powered airplane owners and operators only have several inspection options: an annual, a 100-hour, or adopt a progressive inspection program. This proposed rule would expand inspection options to include the types of inspection programs authorized under § 91.409(f). This includes, among others, a manufacturer- recommended inspection program, or an inspection program established by the registered owner, or operator, and approved by the Administrator.

The FAA believes this change increases regulatory flexibility and will allow owners and operators the ability to select the program that works best for them. In 1989, the FAA amended § 91.409(e) to allow more inspection options for turbine-powered rotorcraft, which enabled operators to schedule inspections in a manner that has allowed a higher level of rotorcraft utilization. At that time, in the early 1980s, the number of single-engine turbine-powered airplanes was small compared to turbine-powered rotorcraft, which estimated approximately 3,000 aircraft during that time. Today, there are over 4,500 registered single-engine turbine-powered airplanes. The FAA does not believe there are any safety reasons why single-engine turbine-powered airplanes should not be afforded the same regulatory flexibilities as turbine-powered rotorcraft regarding part 91 inspection options. A turbine-powered rotorcraft's use of a manufacturer-recommended inspection program has been shown to be a safe and effective aircraft inspection method instead of the annual or 100-hour inspection requirements. The FAA expects that the same will be true for single-engine turbine-powered airplane manufacturer-recommended inspection programs. In its rulemaking petition, Textron Aviation, Inc., argued that manufacturer-recommended inspection programs are in the public interest because they are geared more specifically to the manufacturer's aircraft model and involve less invasive scheduled maintenance compared to an annual or 100-hour inspection because of less frequent component disassembly, inspection, and reassembly. 2 The FAA agrees these inspection programs can provide these articulated benefits, when applicable, when compared to an annual or a 100-hour inspection. Additionally, a manufacturer-recommended inspection program can contain inspection intervals at more appropriate times for each product and article based on the design and functional history of the same, coupled with the manufacturer's detailed technical knowledge of how best to maintain them.

Existing regulations regarding maintenance and inspection development during the aircraft's part 21 certification process contain the requirements for how a manufacturer-recommended inspection program shall be developed—to include the inspection intervals for products and articles. Section 21.50 requires that the Instructions for Continued Airworthiness and manufacturer's maintenance manuals must be developed in accordance with 14 CFR parts 23, 25, 27, 29, etc., as appropriate. Within each of these parts, the applicable regulation references its appendix, which contains specific requirements that the maintenance inspection program must possess. For example, when developing inspection interval timing for an aircraft while complying with § 21.50, a part 23 aircraft manufacturer is referred to § 23.1529 (Instructions for continued airworthiness), which states an applicant must prepare the same and further refers the applicant to appendix A for part 23. Appendix A, instruction A.23.3(b)(1) requires the manufacturer to develop maintenance/inspection scheduling instructions for all products and articles and must include an inspection program that includes the inspection frequency and extent necessary to provide for the aircraft's continued airworthiness. The recommended inspection intervals are part of the overall Instructions for Continued Airworthiness that would subsequently be submitted to the FAA for acceptance.

During the unmanned aircraft's certification process, whether it undergoes a traditional part 21 type certification or a 49 U.S.C. 44807 exemption request, 3 the manufacturer must submit an aircraft inspection program, for FAA approval, that meets certain requirements for life-limited part replacement times specified in the aircraft specifications, type certificate data sheets, or “other documents approved by the Administrator ( i.e., the sec. 44807 exemption and its associated Conditions & Limitations).”  4 These manufacturer-recommended inspection programs—to include inspection intervals for products and articles—must include the airframe, engines, propellers, rotors, appliances, emergency equipment, etc., which are ultimately approved by the FAA only when they are found to be adequate.

Regarding unmanned aircraft inspection program selection, excluding those operated under part 107, it is necessary for owners and operators to have the ability to select a program that is most appropriate for the design and configuration of their specific aircraft because of the wide variety in aircraft, which cannot be done in the existing regulations. Currently, part 135 unmanned aircraft applicants and approved operators can only use a CAMP, under § 135.411(a)(2), or an approved aircraft inspection program, under §§ 135.411(a)(1) and 135.419, because other inspection program options cannot be selected, as these aircraft are not incorporated in the regulations. The FAA has not approved part 135 unmanned aircraft operators to use an annual or a 100-hour inspection because the FAA has determined the scope and detail criteria  5 contained in these two options do not adequately cover the component characteristics that are typically installed on these aircraft ( e.g., multiple electric motors, circuit boards, batteries, etc.). Additionally, a manufacturer-recommended inspection program—that traditional aircraft may currently select—is not available to unmanned aircraft, despite CAMPs and AAIPs being primarily based on a manufacturer-recommended inspection program. Because of these issues, a CAMP or an AAIP has been the only option for part 135 unmanned aircraft operators to select.

Therefore, the FAA proposes to include unmanned aircraft, excluding part 107 aircraft, in § 91.409(e), which would apply to unmanned aircraft operating under, or otherwise required to be inspected in accordance with, part 91. In particular, the FAA intends for this proposal to apply to unmanned aircraft being operated under part 91 or 135 and that are required to select a maintenance program in accordance with § 91.409(f). While an unmanned aircraft operator would have the option to select a manufacturer-recommended inspection program, they could still continue to use an AAIP or CAMP. This proposal would be applicable to the unmanned aircraft inspections and not unmanned aircraft systems, as defined in 14 CFR 1.1.

The following discusses our proposal to amend certain § 91.409 paragraphs to reflect these changes and additional proposed revisions to this section to enhance clarification.

For the reasons discussed above, we propose to expand § 91.409(e) to include all turbine-powered aircraft, including unmanned aircraft, and separate it into § 91.409(e)(1) and (2) to better organize the different regulatory frameworks.

Currently, paragraph (e) is limited to large airplanes (to which part 125 is not applicable), turbojet multiengine airplanes, turbopropeller-powered multiengine airplanes, and turbine-powered rotorcraft. Owners and operators of these covered aircraft, except for turbine-powered rotorcraft, are required to comply with replacement times for life-limited parts and have their airplanes inspected using one of the inspection programs specified in paragraph (f) instead of the annual or 100-hour inspection provisions. Owners and operators of turbine-powered rotorcraft, in contrast, can use one of the inspection program options in paragraph (f), or they can elect to use the annual, 100-hour, or progressive inspection provisions (paragraphs (a), (b), and (d), respectively)).

This proposed rule would add single-engine turbine-powered airplanes to § 91.409(e) and provide these owners and operators with the same inspection options that are currently available to owners and operators of turbine-powered rotorcraft. With the proposed addition of single-engine turbine-powered airplanes, § 91.409(e) would apply to all turbine-powered airplanes. These amendments will enable owners and operators of single-engine turbine-powered airplanes to inspect their aircraft using one of the inspection program options in paragraph (f) or elect to use the annual, 100-hour, or progressive inspection provisions.

We also propose to revise § 91.409(e) to include unmanned aircraft. Unmanned aircraft owners and operators subject to the regulation would be required to select one of the inspection programs in paragraph (f). This proposed change would incorporate the requirement, in the conditions & limitations section, that has been required in the existing UAS sec. 44807 exemptions  6 for unmanned aircraft inspections using the UAS manufacturer's inspection program.

We propose to separate § 91.409(e) into two paragraphs to increase clarity and readability, as stated above. Proposed paragraph (e)(1) would cover all current and proposed aircraft that would be required to be inspected in accordance with a § 91.409(f) program ( i.e., large airplanes, multiengine turbine-powered airplanes, and unmanned aircraft). Regarding large airplanes and multiengine turbine-powered airplanes, the proposed rule would not make any changes to the currently available inspection programs. Regarding unmanned aircraft, as previously described, the annual, 100-hour, and progressive inspection options are not viable inspection programs because of the significant differences between unmanned aircraft and traditional manned aircraft for which those provisions were designed. Unmanned aircraft would be included under the new § 91.409(e)(1) because they should comply with time-limited parts replacement and the better-suited inspection programs contained in paragraph (f). Proposed paragraph (e)(2) would cover all current and proposed aircraft that have the option to use the inspection options in paragraph (f) in lieu of the inspection provisions of § 91.409(a), (b), or (d) ( i.e., turbine-powered rotorcraft and single-engine turbine-powered airplanes).

We intend to make several clarifying amendments to the inspection program options specified in § 91.409(f) and the manner in which these programs are to be submitted.

Paragraph (f)(1) currently specifies the first inspection program option available. The registered aircraft owner or operator under § 91.409(e) may use “[a] continuous airworthiness inspection program” that is part of a CAMP currently in use by a part 121 or 135 operator and operating that make and model aircraft under part 121 or operating that make and model under part 135 and maintaining it under § 135.411(a)(2). The FAA proposes to clarify the intent of this section by replacing the phrase “[a] continuous airworthiness inspection program” because it is not defined or referenced anywhere else in regulations. Instead, the FAA proposes to revise the phrase so that the paragraph refers only to “[a]n inspection program” that is part of a [CAMP]. This change would have no substantive effect and is only proposed to eliminate confusion by the phrase “[a] continuous airworthiness inspection program.”

We will also amend paragraph (f)(1) to remove the word “operating” from the phrase “air carrier operating certificate.” This change would leave separate references to “air carrier certificate” and “operating certificate,” a change consistent with the separate usage of the terms in 14 CFR 119.5.

Current paragraph (f)(3) provides the third inspection program option: “A current inspection program recommended by the manufacturer.” The FAA proposes to revise paragraph (f)(3) to clarify that “current inspection program” means one that is available for selection at the time the selection is made. That inspection program would remain the “current” program to be used by that operator for that aircraft during subsequent inspections, without regard to changes that the manufacturer may have made to the recommended inspection program since the date of selection. This is consistent with an FAA legal interpretation on the subject, which states, “to comply with § 91.409(f)(3) an operator need only adopt a manufacturer's inspection program that is ‘current' as of the time they adopt it, and that program remains ‘current' unless the FAA mandates revisions to it in accordance with § 91.415(a).”  7

We do not intend for future changes to inspection programs issued by manufacturers to be binding on an owner or operator who had already selected a specific program that was current at the time of selection. 8 Therefore, to comply with § 91.409(f)(3), an owner or operator need only select a manufacturer-recommended inspection program that is “current” at the time of selection, and that program would remain “current” for purposes of complying with the regulation—unless the FAA mandated a revision with an Airworthiness Directive or an amendment to an applicable operating rule. Although operators would not be required to revise their inspection programs when a manufacturer issues inspection program revisions, operators may choose to incorporate these revisions if they are applicable. This practice would comply with § 91.409(f)(3). In keeping with this interpretation and to clarify the requirement of paragraph (f)(3), we propose to revise the phrase “current inspection program” and replace it with the following: a program “that was the most current program available at the time of selection and identified in the aircraft maintenance records.”

Current paragraph (f)(4) provides the fourth inspection program option, which is the option to select any other inspection program established by the registered owner or operator “of that airplane or turbine-powered rotorcraft” and approved by the Administrator. The FAA proposes to revise § 91.409(f)(4) to remove the phrase “of that airplane or turbine-powered rotorcraft” and replace it with “for that aircraft” for simplicity because it would cover all the types of aircraft referenced in the proposed revisions to paragraph (e) of the section, including unmanned aircraft.

Also, the phrase “and approved by the Administrator” would be moved from preceding the phrase “under paragraph (g) of this section,” to follow the phrase “established by the registered owner or operator” that appears earlier in the sentence. Accordingly, it would precede the phrase “for that aircraft.” This change would help clarify that the inspection program approval is specific to the specific aircraft.

Additionally, in the undesignated, concluding text of § 91.409(f), the FAA proposes to remove the requirement to include the name and address of the person responsible for scheduling inspections in the selected program. This requirement has resulted in unnecessary administrative revisions as personnel and addresses change. This is a burden to both the FAA and industry and has little or no safety benefit, as the owner and operator of the aircraft are ultimately responsible for ensuring all the required inspections are accomplished.

The FAA proposes to amend § 91.401 (the applicability section for subpart E to part 91) to incorporate certain applicability provisions that are currently found in other sections of subpart E. These provisions would be better suited in subpart E's overall applicability section. The agency also proposes to make other clarifying changes to this section.

Specifically, § 91.401 would be revised to incorporate two provisions in § 91.409(c) that exempt certain aircraft from inspection requirements. As noted above, current § 91.409(c) provides, in part, that the requirements for annual inspections, airworthiness certification inspections, and 100-hour inspections (paragraphs (a) and (b) of § 91.409)) do not apply to certain aircraft under specified circumstances. This includes, in pertinent part, the following:

1. An aircraft that carries a special flight permit, a current experimental certificate, or a light-sport, or provisional airworthiness certificate (§ 91.409(c)(1)); and

2. An aircraft inspected in accordance with an approved aircraft inspection program under part 125 or 135 and so identified by the registration number in the operations specifications of the certificate holder having the approved inspection program (§ 91.409(c)(2)).

As § 91.409(c) is currently written, it excludes these aircraft from the inspection requirements in paragraphs (a) and (b) only and does not expressly exclude them from the alternative inspection programs in paragraphs (d) and (e). This language may be construed incorrectly to suggest that these aircraft are subject to the alternative inspection programs in paragraphs (d) and (e). It was not the FAA's intent to require that those covered aircraft comply with any other inspection program in § 91.409.

The FAA proposes to move the exception in § 91.409(c)(1) for aircraft that carry a special flight permit into a new § 91.401(c)(3). The FAA issues special flight permits for specific purposes under § 21.197 to aircraft that may not at the time meet applicable airworthiness standards but remain capable of safe flight for the intended purpose; therefore, under these circumstances, it is inconsistent to require compliance with an inspection program in subpart E. Accordingly, such aircraft should be excluded from the inspections required by paragraphs § 91.409(a) and (b), the other inspection requirements of that section, and § 91.405 because the special flight permit itself, when issued to the operator, already assures the aircraft has been inspected and found to be in a condition for safe flight for the intended operation.

The FAA also proposes to move the current § 91.409(c)(2) exceptions to new § 91.401(c)(1) and (2). The current § 91.409(c)(2) provides that paragraphs (a) and (b) do not apply to aircraft inspected in accordance with an approved aircraft inspection program under part 125 or 135. The current language in § 91.409 could be misread to suggest the other § 91.409 inspection program requirements apply to those aircraft in addition to those of part 125 or § 135.419, as applicable; this was not the FAA's intent. By moving this exception requirement to § 91.401, we would clarify that an aircraft inspected in accordance with part 125 or an approved aircraft inspection program, under § 135.419, is not subject to the other inspection requirements of § 91.409 or § 91.405.

Similarly, the FAA proposes to move the inspection exception provision for aircraft that carry a current experimental certificate, a light-sport airworthiness certificate, or a provisional airworthiness certificate in § 91.409(c)(1) to a new § 91.401(c)(4) because § 91.409(c)(1) does not expressly exclude these aircraft from the alternative inspection programs in paragraphs (d) and (e). However, the FAA also proposes to clarify that these aircraft types must comply with any portions of § 91.409 that are specified in the operating limitations under § 91.317 or § 91.319. This would remove conflicting requirements that occur when the current regulation excepts these aircraft from the requirements of paragraphs (a) and (b), but the operating limitations issued by the FAA for the aircraft require compliance with specified portions of the regulation.

We propose to amend § 91.403(c) by revising the text and dividing the alternative compliance options located in that single paragraph into three new paragraphs (c)(1), (2), and (3) for clarity. The paragraph currently holds the requirement that no person may operate an aircraft for which a manufacturer's maintenance manual or instructions for continued airworthiness has been issued that contains an airworthiness limitations section unless the person has complied with any mandatory replacement times, inspection intervals, and related procedures specified in that section or alternative inspection intervals and related procedures set forth in an operations specification approved by the Administrator under part 121 or 135 or in accordance with an inspection program approved under § 91.409(e). The proposed revision is intended to more clearly convey the alternative options available to maintain compliance with the FAA-approved Airworthiness Limitations Section of the Instructions for Continued Airworthiness (ICA) provided by the manufacturer.

The proposed options follow closely those in the current rule but with minor changes. The first option in paragraph (c)(1) would still mandate compliance with the replacement times, inspection intervals, and related procedures found in the airworthiness limitations section of the manufacturer's maintenance manual or ICA. The second option in paragraph (c)(2) would provide for alternative inspection intervals and related procedures set forth in a CAMP for parts 121 and 135 operators, which would be approved by the FAA and authorized by operations specifications issued to the operator. In addition to including operations under parts 121 and 135 as provided in the current rule, this alternative would include operations under subpart K of part 91 if the operators are utilizing a CAMP under § 91.1411. This is because the authorization process for a CAMP under part 91, subpart K, would be similar to the process for CAMPs under parts 121 and 135. The FAA may review and authorize any potential changes to an approved airworthiness limitations section during the review process of the CAMP.

The third option in § 91.403(c)(3) would be to use any alternative inspection intervals and related procedures set forth in an inspection program identified under § 91.409(f). Section 91.409(f) lists the inspection programs that the FAA authorizes for use. The FAA considers these inspection programs to be permissible inspection options for these aircraft. Currently, the reference in § 91.403(c), now proposed as § 91.403(c)(3), referred to inspection intervals within authorized inspection programs under § 91.409(e). This reference has been updated for clarity to § 91.409(f) because that paragraph directly lists the inspection programs.

Finally, the FAA proposes to add a new paragraph (e) to § 91.403 that clarifies that aircraft operating under a special flight permit must do so in accordance with conditions and limitations issued by the Administrator. The proposed revision would also state that the aircraft must be inspected, at least to the extent necessary, to determine the aircraft is in a condition for safe operation for the intended flight. While this is the current practice in the issuance of a special flight permit, the revision would make that requirement explicit. These requirements are necessary for safety because the aircraft in question would not otherwise meet applicable airworthiness requirements.

The FAA proposes to revise § 91.405(a) to state that, between required inspections, the owner or operator would be required to evaluate and disposition or correct, as appropriate, any discrepancies through inspection, overhaul, repair, preservation, or the replacement of parts, in accordance with part 43, or appropriately deferred as provided in § 91.213. The paragraph currently requires that each owner or operator of an aircraft “[s]hall have that aircraft inspected as prescribed in subpart E of this part and shall between required inspections, except as provided in paragraph (c) of this section, have discrepancies repaired as prescribed in part 43 of this chapter.”

The current text requires only that those discrepancies must be “repaired,” which does not properly include all “maintenance” elements, as it is defined in 14 CFR 1.1, and discrepancy disposition may be done through several different types of maintenance actions, such as inspection, preservation, or the replacement of parts. The FAA also proposes to add, in paragraph (a), a reference to § 91.213 (Inoperative instruments and equipment) as that section permits deferral of qualifying instruments and equipment under specific conditions and limitations.

The FAA also proposes to revise § 91.405(c), which provides an exception to the requirement in paragraph (a) to repair discrepancies. Paragraph (c) is narrowly tailored to only instruments or equipment permitted to be inoperative by § 91.213(d)(2), and those must be “repaired, replaced, removed, or inspected at the next required inspection.” The FAA proposes to change paragraph (c) to clarify that an inoperative instrument or item of equipment would be required to be inspected at each required inspection to ensure it will not have an adverse effect on the aircraft's continued safe operation.

We discussed this issue in the 1988  9 rule preamble in response to a commenter, who had requested clarification on the length of time an inoperative instrument or equipment item could remain inoperative after deactivation or removal. In the FAA's response, we explained that the rule required a person to determine whether an aircraft with inoperative instruments and equipment is in condition for safe operation. Additionally, at every required inspection thereafter, the aircraft owner or operator would need to have any inoperative instrument and equipment reevaluated to ensure the discrepancy would not affect the operation of any other installed instrument or equipment. Therefore, the FAA believed that the rule provided adequate safeguards without having to impose time limits on the repair or replacement of inoperative instruments and equipment. The intent of the rule was that if the inoperative instrument or item of equipment is not repaired, replaced, or removed at or before the next required inspection, the inoperative item must be inspected again ( i.e., reevaluated) at the required inspection to ensure that it will not have an adverse effect on the aircraft's safe operation. 10 Revised paragraph (c) would provide clarification that there is no time limitation as to how long the inoperative instrument or item of equipment could remain inoperative so long as it is inspected at each required inspection and there is no adverse effect on the aircraft's continued safe operation.

Finally, the FAA proposes to revise paragraph (d) to grammatically follow the unnumbered introductory text of § 91.405. That text states: “Each owner or operator of an aircraft—.” The beginning of revised paragraph (d) would grammatically follow the section's introductory text by stating: “Shall ensure that when inoperative instruments or equipment are present, a placard marking it `Inoperative' has been installed as required by § 43.11 of this chapter.” The FAA proposes to add the phrase “marking it `Inoperative' ” for clarity and to be consistent with the requirements in §§ 43.11(b) and 91.213(d)(3)(ii). The following table is added for clarity.

In addition to the proposal to extend the inspection program options in § 91.409(f) to single-engine turbine-powered airplanes and unmanned aircraft, we propose other minor clarifications to § 91.409. As discussed under the proposal to revise § 91.401, Applicability, aircraft that carry a special flight permit, a current experimental certificate, or a light-sport, or provisional airworthiness certificate as described in § 91.409(c)(1), are specifically excluded from the inspection requirements of § 91.409(a). The same is true for aircraft inspected in accordance with an approved aircraft inspection program under part 125 or 135 as described in § 91.409(c)(2). This proposal would relocate the exemption language of § 91.409(c)(1) and (2) placing it under § 91.401(c). This change would be part of our proposed clarification and streamlining of subpart E of part 91.

We also propose to revise § 91.409(c)(1) through (4), which provide an exception to the inspection requirements in paragraphs (a) and (b). As previously stated, § 91.409(c)(1) and (2) would be relocated to § 91.401(c), which will leave § 91.409(c)(1) and (2) vacant. We propose relocating § 91.409(c)(3), aircraft that are “subject to the requirements of paragraph (d) or (e) of this section,” into the vacant paragraphs (c)(1) and (2) positions. Additionally, we propose to relocate the progressive inspection program exception to paragraphs (a) and (b) from § 91.409(d) to paragraph (c)(1). We also propose to move the exception of large airplanes, multiengine turbine-powered airplanes, and unmanned aircraft that are subject to the proposed § 91.409(e)(1) into the vacant § 91.409(c)(2) position. Furthermore, we propose to move § 91.409(c)(4), aircraft that are subject to the proposed § 91.409(e)(2) ( i.e., turbine-powered rotorcraft and single-engine turbine-powered airplanes) into § 91.409(c)(3). Existing § 91.409(c)(4) will be deleted because these changes leave it vacant. Headings have been added for clarity and consistency to § 91.409(a), (b), and (c).

Finally, we propose to update the language in paragraph (g), which establishes the requirement for covered operators to submit new or changed inspection programs for FAA approval, to require simply that the program be submitted in a manner acceptable to the FAA. The proposed revision would provide both the FAA and operators more flexibility in the way these types of programs are submitted, reviewed, and approved. The FAA is also proposing conforming amendments to paragraphs (g) introductory text and (g)(1) to modify language that currently specifies “airplane” or “rotorcraft” so that it would read “aircraft,” to apply to airplanes, rotorcraft, and unmanned aircraft. The following table is added for clarity.

Section 311 of the USA PATRIOT Act (section 311), codified at 31 U.S.C. 5318A, grants the Secretary of the Treasury (Secretary) authority, upon finding that reasonable grounds exist for concluding that one or more financial institutions operating outside of the United States is of primary money laundering concern, to require domestic financial institutions and domestic financial agencies to take certain “special measures.”  1 The authority of the Secretary to administer the Bank Secrecy Act (BSA) and its implementing regulations has been delegated to FinCEN. 2

The five special measures set out in section 311 are safeguards that may be employed to defend the U.S. financial system from money laundering and terrorist financing risks. The Secretary may impose one or more of these special measures in order to protect the U.S. financial system from such threats. Through special measures one through four, the Secretary may impose additional recordkeeping, information collection, and reporting requirements on covered domestic financial institutions and domestic financial agencies—collectively, “covered financial institutions.”  3 Through special measure five, the Secretary may prohibit, or impose conditions on, the opening or maintaining in the United States of correspondent or payable- through accounts for or on behalf of a foreign banking institution, if such correspondent account or payable-through account involves the foreign financial institution found to be of primary money laundering concern. 4

Before making a finding that reasonable grounds exist for concluding that a foreign financial institution is of primary money laundering concern, the Secretary is required to consult with both the Secretary of State and the Attorney General. 5 The Secretary is also required to consider such information as the Secretary determines to be relevant, including the following potentially relevant factors:

• The extent to which such a financial institution is used to facilitate or promote money laundering in or through a jurisdiction outside the United States, including any money laundering activity by organized criminal groups, international terrorists, or entities involved in the proliferation of weapons of mass destruction (WMD) or missiles;

• The extent to which such a foreign financial institution is used for legitimate business purposes in the jurisdiction; and

• The extent to which such action is sufficient to ensure that the purposes of section 311 are fulfilled and to guard against international money laundering and other financial crimes. 6

Upon finding that a foreign financial institution is of primary money laundering concern, the Secretary may require covered financial institutions to take one or more special measures. In selecting one or more special measures, the Secretary “shall consult with the Chairman of the Board of Governors of the Federal Reserve System, any other appropriate Federal banking agency (as defined in section 3 of the Federal Deposit Insurance Act), the Secretary of State, the Securities and Exchange Commission, the Commodity Futures Trading Commission, the National Credit Union Administration Board, and in the sole discretion of the Secretary, such other agencies and interested parties as the Secretary may find appropriate.”  7 When imposing special measure five, the Secretary must do so “in consultation with the Secretary of State, the Attorney General, and the Chairman of the Board of Governors of the Federal Reserve System.”  8

In addition, the Secretary is required to consider the following factors when selecting special measures:

• Whether similar action has been or is being taken by other nations or multilateral groups;

• Whether the imposition of any particular special measure would create a significant competitive disadvantage, including any undue cost or burden associated with compliance, for financial institutions organized or licensed in the United States;

• The extent to which the action or the timing of the action would have a significant adverse systemic impact on the international payment, clearance, and settlement system, or on legitimate business activities involving the particular jurisdiction, institution, class of transactions, or type of account; and

• The effect of the action on United States national security and foreign policy. 9

For years, Al-Huda Bank has exploited its access to U.S. dollars (USD) to support designated foreign terrorist organizations (FTOs), including Iran's Islamic Revolutionary Guard Corps (IRGC) and IRGC-Quds Force (IRGC-QF) as well as Iran-aligned Iraqi militias Kata'ib Hizballah (KH) and Asa'ib Ahl al-Haq (AAH). 10 Since its establishment, Al-Huda Bank has been controlled and operated by the IRGC and IRGC-QF. Moreover, the chairman of Al-Huda Bank is complicit in Al-Huda Bank's illicit financial activities, including money laundering through front companies that conceal the true nature of and parties involved in illicit transactions, ultimately enabling the financing of terrorism.

Given the nature of Iraq's economy and trade relationships, Iraqi businesses that import goods into Iraq rely on wire transfers of USD from the account of the Central Bank of Iraq (CBI) at the Federal Reserve Bank of New York (FRBNY), a process known as the wire auction, or more generally the “CBI dollar auction.”  11 Many Iraqi businesses and financial institutions use the CBI dollar auction for legitimate purposes. However, FinCEN assesses that Al-Huda Bank has deliberately embarked on a strategy that relies on exploiting the CBI dollar auction to support designated FTOs, including the IRGC, IRGC-QF, KH, and AAH, with the support of the Iranian government. Al-Huda Bank has actively supported terrorist groups and abused the CBI dollar auction through numerous money laundering typologies, including use of fraudulent documentation to obscure the ultimate beneficiaries of the transactions. Given these facts, FinCEN assesses that there is a high risk of Al-Huda Bank exploiting USD correspondent relationships to support its money laundering and terrorist financing activity.

This NPRM (1) sets forth FinCEN's finding that Al-Huda Bank is a foreign financial institution of primary money laundering concern; and (2) proposes that, under special measure five, covered financial institutions be prohibited from opening or maintaining a correspondent account for, or on behalf of, Al-Huda Bank.

Pursuant to 31 U.S.C. 5318A(a)(1), FinCEN finds that reasonable grounds exist for concluding that Al-Huda Bank is a foreign financial institution of primary money laundering concern. Below is a discussion of the relevant statutory factors FinCEN considered in making this finding related to this Iraq-based financial institution.

FinCEN assesses that Al-Huda Bank is used to facilitate or promote money laundering outside the United States, particularly money laundering activity to support designated FTOs. FinCEN based this assessment on information available through both public and non-public reporting, and after thorough consideration of each of the following factors: (1) that Al-Huda Bank is a foreign financial institution; and (2) that Al-Huda Bank exploits its access to USD through the dollar auction; and (3) that through the exploitation of the dollar auction, Al-Huda Bank provides support to designated FTOs, in particular the IRGC and IRGC-QF, as well as Iran-aligned Iraqi militias KH and AAH.

Al-Huda Bank is a private commercial bank registered and headquartered in Baghdad, Iraq, with five domestic branch locations. These domestic branches are in Baghdad, Karbala, and Nasiriyah. Al-Huda Bank has no subsidiaries or branches outside of Iraq, and is regulated by the CBI.

Al-Huda Bank has no direct U.S. correspondent banking relationships but interacts with the U.S. financial system indirectly through USD correspondent accounts at six foreign financial institutions. In other words, Al-Huda Bank interacts with foreign banks that themselves have correspondent accounts with U.S. banks. Al-Huda Bank also accesses USD through the CBI dollar auction.

Individual Iraqi businesses that import goods into Iraq rely on wire transfers of USD from CBI's account at the FRBNY. The CBI wire auction is the mechanism by which the CBI provides USD to facilitate the purchase of imports. When Iraq sells oil in the international petroleum markets, the revenues are credited in USD to the CBI's account at the FRBNY. Iraqi companies with accounts at Iraqi banks can then access the CBI dollar auction to purchase USD with Iraqi dinar (IQD) to pay for imports. USD are transferred from the CBI's FRBNY account to an Iraqi bank, and onward to a third-country bank on behalf of a third-country exporter.

Many Iraqi businesses and their banks use the CBI dollar auction for its intended, legitimate purpose of facilitating imports of goods. However, as discussed in section III.A.3, FinCEN assesses that Al-Huda Bank has deliberately embarked on a strategy that relies on illegitimate exploitation of the dollar auction to support designated FTOs, including the IRGC, IRGC-QF, KH, and AAH, with the support of the Iranian government.

With the knowledge of Al-Huda Bank's chairman, Al-Huda Bank's abuse of the dollar auction is obfuscated through the application of numerous money laundering typologies, including the use of fraudulent documentation, fake deposits, identity documents of the deceased, fake companies, and counterfeit IQD, which are used to purchase USD and support terrorist groups and militias. For years, Al-Huda Bank has been involved in these deceptive money laundering activities. Examples of three of these money laundering typologies are discussed below: (1) fraudulent documentation; (2) stolen identities; and (3) counterfeit IQD. Al-Huda Bank's use of these money laundering typologies also risks exposing covered financial institutions to Al-Huda Bank's exploitation of USD correspondent banking relationships to support its terrorist financing activities, discussed in section III.A.3.

Since at least 2012, Al-Huda Bank has used fraudulent documentation to purchase foreign currency—including USD—from the CBI at dollar auctions. Based on media reporting, during 2012 to 2014, Al-Huda Bank filed false documentation to justify international transfers of over $6 billion to banks and companies. 12 On at least one occasion, government authorities detected Al-Huda Bank's filing of fraudulent documentation, which resulted in freezing of a transfer of a significant amount of money. In another scheme, Al-Huda Bank would deposit fake checks to make the balance seem higher on the account Al-Huda Bank used in dollar auctions. The fake check deposits would allow Al-Huda Bank to purchase USD using that false higher balance before the fake check bounced, which Al-Huda Bank would then write off.

Al-Huda Bank, with its chairman's knowledge, has also abused the dollar auction by utilizing stolen identities. In one scheme, the Al-Huda Bank chairman and other Al-Huda Bank officials would use the identification documents of deceased individuals to purchase USD in dollar auctions. Al-Huda Bank officials would also pay living people for use of their identification documents. The illicit use of identification documents allowed Al-Huda Bank to circumvent limits on currency purchases.

With the knowledge of Al-Huda Bank's chairman, Al-Huda Bank has also been involved in funneling of counterfeit IQD through fake businesses in Iraq. The counterfeit IQD would be printed in Iran, funneled through Iraqi businesses, and then exchanged for USD. The use of counterfeit IQD greatly increases the amount of illicit profit gained from exchanging IQD for USD at the CBI dollar auction, and the funneling of counterfeit IQD through Iraqi businesses disguises the counterfeit IQD's source in Iran.

Iran has exploited its relationship with Iraq-based, Iran-backed militias to influence Iraqi businesses and officials to generate illicit revenue for the militias' operations. As part of this effort, Iran has developed a network of commercial platforms, including financial institutions, to move funds and misrepresent trade-based financial transactions that obscure the ultimate beneficiary, namely Iran-backed terrorist groups and militias.

Since its establishment, Al-Huda Bank has been controlled and operated by the IRGC and IRGC-QF. In 2008, the chairman of Al-Huda Bank established the bank specifically for the benefit of KH and has met with and taken orders from IRGC-QF leadership in Tehran, Iran. After establishing the bank, the Al-Huda Bank chairman began money laundering operations on behalf of the IRGC-QF and KH.

Al-Huda Bank has funded Iran-aligned militias through a scheme in which Al-Huda Bank and other Iraqi banks have falsely claimed imports that did not exist into Iraq worth billions of dollars to justify the purchase of USD in the CBI dollar auction. Al-Huda Bank would purchase the USD with counterfeit IQD printed in Iran. Al-Huda Bank was not allowed to conduct financial transactions without the Iran-aligned militias' involvement and Al-Huda Bank would provide part of Al-Huda Bank's revenue from this scheme to those Iran-aligned militias.

This fraudulent scheme has been a substantial source of funding for Iran-aligned militias' operations. The Iran-aligned Iraqi militia AAH has used companies based across Iraq to generate revenue, launder illicit profits, and convert IQD to USD. AAH has used Al-Huda Bank to maintain accounts for some of these companies, as well as to access the currency auction. The use of false imports, counterfeit currency, and front companies are essential components of exploitation of the CBI dollar auction by obscuring the source of funds and the purpose and ultimate beneficiaries of the transactions that support Iran-aligned Iraqi militias. Overall, IRGC and IRGC-QF use of Al-Huda Bank and several other Iraqi banks to access the dollar auction resulted in approximately $70 billion USD in profit from 2019 through 2020.

Al-Huda Bank is the 30th largest bank in Iraq and approximately the 11,000th largest in the world, with 416 billion IQD ($285 million USD) in total assets in 2020, which is approximately 0.2 percent of total Iraqi banking system assets. 13 Records collected by FinCEN show Al-Huda Bank engaged in approximately $4.7 billion USD in USD-cleared international transactions through U.S. correspondent bank accounts between July 2017 and December 2022, the vast majority being CBI dollar auction-related transactions.

In 2020, Al-Huda Bank's self-reported total revenues were 8,937,678,000 IQD ($6,115,456 USD) with a gross profit of 2,753,653,000 IQD ($1,884,140 USD). As of December 31, 2020, Al-Huda Bank held 55,057,239,000 IQD ($37,671,991 USD) in customer account deposits, approximately 1,110,270,000 IQD ($760,000 USD) of which were current accounts belonging to private individuals. 14

The assets noted above, based on Al-Huda Bank financial statements, are indicative of at least a portion of legitimate business transiting the financial institution. However, FinCEN assesses that Al-Huda Bank's legitimate business activities do not outweigh the money laundering risks posed by the bank, as the variety and type of the illicit finance risks presented by Al-Huda Bank are such that even a higher volume of legitimate activity would not allay FinCEN's significant money laundering concern. 15 As demonstrated above, Al-Huda Bank facilitates the financing of a wide variety of terrorists and terrorist groups, many of whom have attacked citizens and partners of the United States. Further, there is significant information indicating that the owner and chairman of Al-Huda Bank is a witting and active participant in the illicit finance involving and perpetrated by Al-Huda Bank.

As noted by the U.S. Department of State in 2023, corruption is a significant impediment to conducting business in Iraq, and Iran-aligned militias threaten U.S. citizens and companies throughout Iraq. 16 Al-Huda Bank has engaged in transactions that facilitate the financing of FTOs, including the IRGC, IRGC-QF, and Iran-aligned militias KH and AAH, with the support of the Iranian government. A finding that Al-Huda Bank is of primary money laundering concern would make clear to foreign correspondents Al-Huda Bank's illicit finance risk, and this awareness may cause those financial institutions or their regulators to take their own action to address the risk. Moreover, such a finding and subsequent imposition of one or more special measures would guard against money laundering and other financial crimes by severing Al-Huda Bank's access to the U.S. financial system.

Having found that Al-Huda Bank is a financial institution of primary money laundering concern, particularly with regard to its misuse of the dollar auction to finance designated terrorist organizations, FinCEN proposes imposing a prohibition on covered financial institutions under special measure five. Special measure five authorizes the Secretary to impose conditions upon the opening or maintaining in the United States of a correspondent account or payable-through account, if such account “involves” a financial institution of primary money laundering concern. Although Al-Huda Bank does not have correspondent accounts with U.S. financial institutions, it has accounts with foreign financial institutions that maintain U.S. correspondent accounts. Those U.S. correspondent accounts involve Al-Huda Bank when transactions involving the bank are processed through those accounts. Thus, FinCEN has determined that special measure five will most effectively mitigate the risks posed by Al-Huda Bank.

FinCEN considered the other special measures available under section 311. As discussed further in Section IV.E. below, it determined that none of them would appropriately address the risks posed by Al-Huda Bank.

In proposing this special measure, FinCEN consulted with the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Secretary of State, the staff of the Securities and Exchange Commission, the Commodity Futures Trading Commission, staff of the National Credit Union Administration, the Federal Deposit Insurance Corporation, and the Attorney General. These consultations involved obtaining interagency views on the imposition of special measure five and the effects that such a prohibition would have on the U.S. domestic and international financial systems.

Below is a discussion of the relevant statutory factors FinCEN considered in proposing the prohibition under special measure five.

FinCEN is not aware of any other nation or multilateral group that has imposed, or is currently imposing, similar action against Al-Huda Bank.

While FinCEN assesses that the prohibition proposed in this NPRM would place some cost and burden on covered financial institutions, these burdens are neither undue nor inappropriate in view of the threat posed by the illicit activity facilitated by Al-Huda Bank. As described above, Al-Huda Bank has had access to USD through the CBI dollar auction, which does not require Iraqi banks to have direct USD correspondent relationships. Also as described above, Al-Huda Bank has no direct USD correspondent relationships with U.S. financial institutions. Rather, it accesses USD through its nested correspondent relationships, including but not limited to six USD accounts outside the United States. These accounts may be used for commercial payments, as well as foreign exchange and money markets. Covered financial institutions and transaction partners have ample opportunity to arrange for alternative payment mechanisms in the absence of correspondent banking relationships with Al-Huda Bank.

As such, a prohibition on correspondent banking with Al-Huda Bank would impose minimal additional compliance costs for covered financial institutions, which would most commonly involve merely involve adding Al-Huda Bank to existing sanctions and money laundering screening tools. FinCEN assesses that given the risks posed by Al-Huda Bank's facilitation of money laundering, the additional burden on covered financial institutions in preventing the opening of correspondent accounts with Al-Huda Bank, as well as conducting due diligence on foreign correspondent account holders and notifying them of the prohibition, will be minimal and not undue.

FinCEN assesses that imposing the proposed special measure would have minimal impact upon the international payment, clearance, and settlement system. As a comparatively small bank, responsible for a nominal amount of transaction volume in the region, Al-Huda Bank is not a systemically important financial institution in Iraq, regionally, or globally. FinCEN views that prohibiting Al-Huda Bank's access to U.S.-Iraq correspondent banking channels would not affect overall cross-border transaction volumes.

Further, a prohibition under special measure five would not prevent Al-Huda Bank from conducting legitimate business activities in other foreign currencies. In addition to the six correspondent accounts used to access USD noted above, Al-Huda Bank currently holds two Euro accounts and two United Arab Emirates (UAE) dirham (AED) accounts as well. 17 Provided that its legitimate activities do not involve a correspondent account maintained in the United States, the bank could continue to engage in them.

As described above, evidence available to FinCEN has demonstrated that Al-Huda Bank served as a significant conduit for the financing of FTOs in violation of U.S. and international sanctions. Imposing special measure five will: (1) close Al-Huda Bank's access to USD; (2) remove Al-Huda Bank as an illicit finance facilitator within an international network of front companies and sanctions evasion infrastructure supporting these FTOs; and (3) raise awareness of the way illicit actors exploit weaknesses in vulnerable jurisdictions to circumvent sanctions and finance terrorism.

In assessing the appropriate special measure to impose, FinCEN considered alternatives to a prohibition on the opening or maintaining in the United States of correspondent accounts or payable-through accounts, including the imposition of one or more of the first four special measures, or imposing conditions on the opening or maintaining of correspondent accounts under special measure five. Having considered these alternatives and for the reasons set out below, FinCEN assesses that none of the other special measures available under section 311 would appropriately address the risks posed by Al-Huda Bank and the urgent need to prevent it from accessing USD through correspondent banking entirely.

With the knowledge of Al-Huda Bank's chairman, Al-Huda Bank's abuse of the dollar auction is obfuscated through the application of numerous money laundering typologies, including the use of fraudulent documentation, fake deposits, identity documents of the deceased, fake companies, and counterfeit IQD, which are used to purchase USD and support terrorist groups and militias. Taken as a whole, Al-Huda Bank's illicit activities present a heightened risk of obscured transaction counterparty identification that would be undetectable by covered financial institutions. Indeed, a key feature of the facilitation of funding for Iranian and Iran-aligned FTOs through Al-Huda Bank is the use of fake companies to obscure the true beneficial owners and ultimate destinations of funds involved in the transactions. Moreover, this behavior provides opportunities for obscuring the identities of transaction counterparties to correspondent banking relationship providers.

Because of the nature, extent, and purpose of the obfuscation engaged in by Al-Huda Bank, any special measure intended to mandate additional information collection would likely be ineffective and insufficient to determine the true identity of illicit finance actors. For example, the provision under special measure one, that “the identity and address of the participants in a transaction or relationship, including the identity of the originator of any funds transfer” be collected in records and reports, could be circumvented by the operations of shell companies, wherein the reported identity of the originator serves to obscure the true beneficial owner or originator. This would accordingly be ineffective in preventing illicit transactions. Al-Huda Bank's record of such circumvention suggests special measure one would not adequately protect the U.S. financial system from the threats posed by the bank.

Further, the requirements under special measures three and four, that domestic financial institutions obtain “with respect to each customer (and each such representative), information that is substantially comparable to that which the depository institution obtains in the ordinary course of business with respect to its customers residing in the United States”, are also likely to be ineffective. First, Al-Huda Bank's use of nested correspondent account access through layers of payment systems would render these alternative measures ineffective. Only significant effort and expense by U.S. institutions could fill this gap, which would impose a disproportionate compliance burden and with no guarantee that the money laundering threat would be addressed through customer due diligence research.

FinCEN also considered special measure two, which may require domestic financial institutions to “obtain and retain information concerning the beneficial ownership of any account opened or maintained in the United States by a foreign person.” The agency determined this special measure to be largely irrelevant since the concerns involving Al-Huda Bank do not involve the opening or maintaining of accounts in the U.S. by foreign persons.

FinCEN similarly assesses that merely imposing conditions under special measure five would be inadequate to address the risks posed by Al-Huda Bank's activities. Special measure five also enables FinCEN to impose conditions as an alternative to a prohibition on the opening or maintaining of correspondent accounts. Given Al-Huda Bank's consistent and longstanding ties to terrorist financing organizations since its inception, and its track record of obfuscating transactions and account holders, FinCEN determined that imposing any condition would not be an effective measure to safeguard the U.S. financial system. FinCEN assesses that the billions of dollars supplied to terrorist groups through Al-Huda Bank's exploitation of its access to USD, and the exposure of U.S. financial institutions to Al-Huda Bank's illicit activity outweigh the value in providing conditioned access to the U.S. financial system for any purportedly legitimate business activity. Conditions on the opening or maintaining of correspondent accounts would likely be insufficient to prevent illicit financial flows through the U.S. financial system, given Al-Huda Bank's use of fraudulent documentation and front companies to obscure its financing of terrorist groups in order to access USD. Given Al-Huda Bank's deliberate use of money laundering typologies, FinCEN cannot craft sufficient conditions to enable covered financial institutions to open or maintain correspondent accounts for Al-Huda Bank without introducing severe risk to those financial institutions in processing transactions that ultimately finance terrorism.

FinCEN, thus, assesses that any condition or additional recordkeeping or reporting requirement would be an ineffective measure to safeguard the U.S. financial system. Such measures would not prevent Al-Huda Bank from accessing the correspondent accounts of U.S. financial institutions, thus leaving the U.S. financial system vulnerable to processing illicit transfers that are likely to finance terrorist groups, posing a significant national security and money laundering risk. In addition, no recordkeeping or reporting requirements or conditions would be sufficient to guard against the risks posed by a bank that processes transactions that are designed to obscure the transactions' true nature and are ultimately for the benefit of terrorist groups. Therefore, FinCEN has determined that a prohibition on opening or maintaining correspondent banking relationships is the only special measure out of the special measures available under section 311 that can adequately protect the U.S. financial system from the illicit finance risk posed by Al-Huda Bank. For these reasons, and after thorough consideration of alternate measures, FinCEN assesses that no measures short of full prohibition on correspondent or payable-through banking access would be sufficient to address the money laundering risks posed by Al-Huda Bank.

The goal of this proposed rule is to combat and deter money laundering in facilitation of terrorist financing associated with Al-Huda Bank and prevent Al-Huda Bank from using the U.S. financial system to enable its illicit finance behavior.

The term “Al-Huda Bank” means all subsidiaries, branches, and offices of Al-Huda Bank operating as a bank in any jurisdiction. FinCEN is not currently aware of any subsidiary banks or branches outside of Iraq.

The term “correspondent account” has the same meaning as the definition contained in 31 CFR 1010.605(c)(1)(ii). In the case of a U.S. depository institution, this broad definition includes most types of banking relationships between a U.S. depository institution and a foreign bank that are established to provide regular services, dealings, and other financial transactions, including a demand deposit, savings deposit, or other transaction or asset account, and a credit account or other extension of credit. FinCEN is using the same definition of “account” for purposes of this proposed rule as is established for depository institutions in the final rule implementing the provisions of section 312 of the USA PATRIOT Act, requiring enhanced due diligence for correspondent accounts maintained for certain foreign banks. 18 Under this definition, “payable-through accounts” are a type of correspondent account.

In the case of securities broker-dealers, futures commission merchants, introducing brokers in commodities, and investment companies that are open-end companies (mutual funds), FinCEN is also using the same definition of “account” for purposes of this proposed rule as was established for these entities in the final rule implementing the provisions of section 312 of the USA PATRIOT Act, requiring due diligence for correspondent accounts maintained for certain foreign banks. 19

The term “covered financial institution” is defined 31 CFR 1010.100(t), which in general includes the following:

• A bank (except bank credit card systems);

• A broker or dealer in securities;

• A money services business, as defined in 31 CFR 1010.100(ff);

• A telegraph company;

• A casino;

• A card club;

• A person subject to supervision by any state or Federal bank supervisory authority;

• A futures commission merchant or an introducing broker-commodities; and

• A mutual fund.

The term “foreign banking institution” means a bank organized under foreign law, or an agency, branch, or office located outside the United States of a bank. The term does not include an agent, agency, branch, or office within the United States of a bank organized under foreign law. This is consistent with the definition of “foreign bank” under 31 CFR 1010.100. This proposed rule interprets Al-Huda Bank to be a foreign banking institution.

The term “subsidiary” means a company of which more than 50 percent of the voting stock or analogous equity interest is owned by another company.

Section 1010.663(b)(1) of the proposed rule would prohibit covered financial institutions from opening or maintaining in the United States a correspondent account for, or on behalf of, Al-Huda Bank.

Section 1010.663(b)(2) of the proposed rule would require covered financial institutions to take reasonable steps to not process a transaction for the correspondent account of a foreign banking institution in the United States if such a transaction involves Al-Huda Bank. Such reasonable steps are described in 1010.663(b)(3), which sets forth the special due diligence requirements a covered financial institution would be required to take when it knows or has reason to believe that a transaction involves Al-Huda Bank.

As a corollary to the prohibition set forth in section 1010.663(b)(1) and (2), section 1010.663(b)(3) of the proposed rule would require covered financial institutions to apply special due diligence to all of their foreign correspondent accounts that is reasonably designed to guard against such accounts being used to process transactions involving Al-Huda Bank. As part of that special due diligence, covered financial institutions would be required to notify those foreign correspondent account holders that the covered financial institutions know or have reason to believe provide services to Al-Huda Bank, that such correspondents may not provide Al-Huda Bank with access to the correspondent account maintained at the covered financial institution. A covered financial institution may satisfy this notification requirement using the following notice:

The purpose of the notice requirement is to aid cooperation with correspondent account holders in preventing transactions involving Al-Huda Bank from accessing the U.S. financial system. FinCEN does not require or expect a covered financial institution to obtain a certification from any of its correspondent account holders that access will not be provided to comply with this notice requirement.

Methods of compliance with the notice requirement could include, for example, transmitting a notice by mail, fax, or email. The notice should be transmitted whenever a covered financial institution knows or has reason to believe that a foreign correspondent account holder provides services to Al-Huda Bank.

Special due diligence also includes implementing risk-based procedures designed to identify any use of correspondent accounts to process transactions involving Al-Huda Bank. A covered financial institution would be expected to apply an appropriate screening mechanism to identify a funds transfer order that on its face listed Al-Huda Bank as the financial institution of the originator or beneficiary, or otherwise referenced Al-Huda Bank in a manner detectable under the financial institution's normal screening mechanisms. An appropriate screening mechanism could be the mechanisms used by a covered financial institution to comply with various legal requirements, such as commercially available software programs used to comply with the economic sanctions programs administered by the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC).

Section 1010.663(b)(4) of the proposed rule would clarify that the proposed rule does not impose any reporting requirement upon any covered financial institution that is not otherwise required by applicable law or regulation. A covered financial institution must, however, document its compliance with the notification requirement described above in section 1010.663(b)(3).

FinCEN is requesting comments for 30 days after the publication of this NPRM. Given Al-Huda Bank's consistent and longstanding ties to terrorist financing and its track record of obfuscating transactions, FinCEN assesses that a 30-day comment period for this NPRM strikes an appropriate balance between ensuring sufficient time for notice to the public and opportunity for comment on the proposed rule, while minimizing undue risk posed to the U.S. financial system in processing illicit transfers that are likely to finance terrorist groups. FinCEN invites comments on all aspects of the proposed rule, including the following specific matters:

1. FinCEN's proposal of a prohibition under the fifth special measure under 31 U.S.C. 5318A(b), as opposed to imposing special measures one through four or imposing conditions under the fifth special measure;

2. The form and scope of the notice to certain correspondent account holders that would be required under the rule; and

3. The appropriate scope of the due diligence requirements in this proposed rule.

FinCEN has analyzed this proposed rule under Executive Orders 12866, 13563, and 14094, the Regulatory Flexibility Act, 20 the Unfunded Mandates Reform Act, 21 and the Paperwork Reduction Act. 22

As discussed above, the intended effects of the imposition of special measure five to Al-Huda Bank are twofold. The rule is expected to (1) combat and deter money laundering in facilitation of terrorist financing associated with Al-Huda Bank, and (2) prevent Al-Huda Bank from using the U.S. financial system to enable its illicit finance behavior. In the analysis below, FinCEN discusses the economic effects that are expected to accompany adoption of the rule as proposed and assess such expectations in more granular detail. This discussion includes detailed explanation of certain ways FinCEN's conclusions may be sensitive to methodological choices and underlying assumptions made in drawing inferences from available data. Throughout, these have been outlined so that the public may review and provide comment. 23

Executive Orders 12866, 13563, and 14094 direct agencies to assess costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility.

It has been determined that this proposed rule is not a significant regulatory action under section 3(f) of Executive Order 12866, as amended by Executive Order 14094. Accordingly, a regulatory impact analysis is not required.

When an agency issues a rulemaking proposal, the Regulatory Flexibility Act (RFA) requires the agency to “prepare and make available for public comment an initial regulatory flexibility analysis” (IRFA) that will “describe the impact of the proposed rule on small entities.”  24 However, Section 605 of the RFA allows an agency to certify a rule, in lieu of preparing an analysis, if the proposed rulemaking is not expected to have a significant economic impact on a substantial number of small entities. This proposed rule would apply to all covered financial institutions and would affect a substantial number of small entities. However, for the reasons described below, FinCEN assesses that these changes would be unlikely to have a significant economic impact on such entities.

Covered financial institutions would also be required to take reasonable measures to detect use of their correspondent accounts to process transactions involving Al-Huda Bank. All U.S. persons, including U.S. financial institutions, currently must comply with OFAC sanctions, and U.S. financial institutions generally have suspicious activity reporting requirements and systems in place to screen transactions to comply with OFAC sanctions and section 311 special measures administered by FinCEN. The systems that U.S. financial institutions have in place to comply with these requirements can easily be modified to adapt to this proposed rule. Thus, the special due diligence that would be required under the proposed rule — i.e., preventing the processing of transactions involving Al-Huda Bank and the transmittal of notification to certain correspondent account holders—would not impose a significant additional economic burden upon small U.S. financial institutions. For these reasons, FinCEN certifies that the proposals contained in this rulemaking would not have a significant impact on a substantial number of small businesses.

FinCEN invites comments from members of the public who believe there would be a significant economic impact on small entities from the imposition of a prohibition under the fifth special measure regarding Al-Huda Bank.

Section 202 of the Unfunded Mandates Reform Act of 1995  25 (Unfunded Mandates Reform Act), requires that an agency prepare a budgetary impact statement before promulgating a rule that may result in expenditure by the state, local, and tribal governments, in the aggregate, or by the private sector, of $100 million or more in any one year, adjusted for inflation. 26 If a budgetary impact statement is required, section 202 of the Unfunded Mandates Reform Act also requires an agency to identify and consider a reasonable number of regulatory alternatives before promulgating a rule. 27

FinCEN has determined that this proposed rule will not result in expenditures by state, local, and tribal governments, in the aggregate, or by the private sector, of an annual $100 million or more, adjusted for inflation ($184.7 million). 28 Accordingly, FinCEN has not prepared a budgetary impact statement or specifically addressed the regulatory alternatives considered.

The recordkeeping and reporting requirements, referred to by the Office of Management and Budget (OMB) as a collection of information, contained in this proposed rule will be submitted by FinCEN to the OMB for review in accordance with the Paperwork Reduction Act of 1995 (PRA). 29 Under the PRA, an agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the OMB. Written comments and recommendations for the proposed prohibition can be submitted by visiting www.reginfo.gov/public/do/PRAMain. Find this particular document by selecting “Currently under Review—Open for Public Comments” or by using the search function. Comments are welcome and must be received by [30 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER]. In accordance with requirements of the PRA and its implementing regulations, 5 CFR part 1320, the following information concerning the collection of information as required by 31 CFR 1010.663 is presented to assist those persons wishing to comment on the information collections.

The provisions in this proposed rule pertaining to the collection of information can be found in section 1010.663(b)(4). The information required to be maintained by that section will be used by federal agencies and certain self-regulatory organizations to verify compliance by covered financial institutions with the notification requirements in 31 CFR 1010.663(b)(3)(i)(A), which are intended to aid cooperation from correspondent account holders in denying the Al Huda Bank access to the U.S. financial system. The collection of information would be mandatory.

Frequency: As required.

Description of Affected Financial Institutions: Only those covered financial institutions defined in section 1010.663(a)(3) engaged in correspondent banking with, or processing transactions potentially involving, Al-Huda Bank as defined in section 1010.663(b)(1) and (2) would be affected.

Estimated Number of Affected Financial Institutions: Approximately 15,000. 30

Estimated Average Annual Burden in Hours per Affected Financial Institution: The estimated average annual burden associated with the collection of information in this proposed rule is one hour per affected financial institution.

Estimated Total Annual Burden: Approximately 15,000 hours.

FinCEN specifically invites comments on: (a) whether the proposed collection of information found in section 1010.663(b)(4) is necessary for the proper performance of the mission of FinCEN, including whether the information would have practical utility; (b) the accuracy of FinCEN's estimate of the burden of the proposed collection of information; (c) ways to enhance the quality, utility, and clarity of the information required to be maintained; (d) ways to minimize the burden of the required collection of information, including through the use of automated collection techniques or other forms of information technology; and (e) estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to report the information.

For the reasons set forth in the preamble, FinCEN proposes amending 31 CFR part 1010 as follows:

Throughout this document whenever “we,” “us,” or “our” is used, we mean EPA.

On September 22, 2022, the State of New Hampshire submitted a formal revision to its State Implementation Plan (SIP). The submitted SIP revision included amendments to the New Hampshire Code of Administrative Rules Chapter Saf-C 3200 entitled, “Official Motor Vehicle Inspection Requirements,” which update the Enhanced Motor Vehicle Inspection and Maintenance (I/M) program in New Hampshire.

New Hampshire first submitted an I/M program SIP revision on November 17, 2011, which EPA approved into the New Hampshire SIP on January 25, 2013 (78 FR 5292). New Hampshire's November 17, 2011 revision included all the regulatory and technical documentation required in an I/M SIP submittal to address the requirements of EPA's I/M regulations at 40 CFR 51 subpart S. The emissions modeling, I/M SIP narrative, and other technical documentation, included in New Hampshire's November 17, 2011 submittal continue to be applicable as the technical demonstration that New Hampshire's implemented I/M program meets the requirements of EPA's I/M regulations at 40 CFR 51 subpart S.

More recently, the State of New Hampshire submitted a formal revision to its SIP on June 7, 2016, which included amendments to the New Hampshire Code of Administrative Rules Chapter Saf-C 3200. This revision updated several regulatory provisions by adding language to clarify the I/M program requirements in New Hampshire. These updates did not reflect any changes to the technical implementation characteristics of the New Hampshire I/M program and thus resulted in no changes to the EPA-approved emissions modeling analysis. EPA approved this revision into the New Hampshire SIP on September 25, 2018 (83 FR 48385).

New Hampshire's amended Saf-C 3200 regulation, submitted as a SIP revision on September 22, 2022, updates a number of regulatory provisions by adding language to clarify the I/M program requirements in New Hampshire. A summary of the most substantial changes made to New Hampshire's SIP-approved regulation follows. New Hampshire (1) added clarifying definitions to Saf-C 3202; (2) amended Saf-C 3204.02 to update the required information for an application to become a fleet inspection station; (3) amended 3205.8 to extend the expiration date of inspection station certificates from once a year to biennially; (4) revised 3209.01 to reflect the updated sticker order form and respective revision date; (5) made multiple amendments to Saf-C 3209 regarding obtaining inspection stickers; (6) made multiple amendments to Saf-C 3222.08 to clarify criteria for an economic hardship waiver; and (7) amended Saf-C 3222.09 to replace exemption from visual inspection requirements with application requirements for a low mileage waiver.

In this document, EPA is only proposing to update New Hampshire's I/M regulation by revising subsections or provisions of the regulation as it currently exists in the New Hampshire SIP. 1 As stated earlier in this document, the remaining technical aspects ( i.e., I/M SIP narrative, the emissions modeling, and other technical documentation) included in New Hampshire's November 17, 2011 SIP revision, as approved by EPA on January 25, 2013 (78 FR 5292) continue to be applicable as the technical demonstration that New Hampshire's implemented I/M program meets the requirements of EPA's I/M regulations at 40 CFR 51 Subpart S.

EPA is proposing to approve New Hampshire's September 22, 2022 SIP revision request. This SIP revision request contains New Hampshire's revised motor vehicle I/M program regulation. Specifically, EPA is proposing to approve amendments to the following New Hampshire Department of Safety Regulation Saf-C 3200 subsections or provisions as they currently exist in the New Hampshire SIP: amendments to Saf-C 3202, Saf-C 3203, Saf-C 3204, Saf-C 3205, Saf-C 3206.04, Saf-C 3207.01, Saf-C 3209, Saf-C 3210.02, and Saf-C 3222.

EPA is proposing to approve New Hampshire's September 22, 2022 SIP revision, containing New Hampshire's updated I/M program regulation, because it is consistent with the CAA's I/M requirements and EPA's I/M regulations at 40 CFR 51 Subpart S, and will strengthen the SIP. The New Hampshire September 22, 2022 SIP that EPA is proposing to approve did not reflect any changes to the technical implementation characteristics of the New Hampshire I/M program and thus resulted in no changes to the EPA-approved emissions modeling analysis. EPA is soliciting public comments on the issues discussed in this notice or on other relevant matters. These comments will be considered before taking final action. Interested parties may participate in the Federal rulemaking procedure by submitting written comments to this proposed rule by following the instructions listed in the ADDRESSES section of this Federal Register .

In this rule, the EPA is proposing to include in a final EPA rule regulatory text that includes incorporation by reference. In accordance with requirements of 1 CFR 51.5, the EPA is proposing to incorporate by reference the aforementioned New Hampshire Department of Safety Regulation Saf-C 3200 subsections identified in section IV of this proposal, except as set forth below. The EPA has made, and will continue to make, these documents generally available through www.regulations.gov and at the EPA Region 1 Office (please contact the person identified in the FOR FURTHER INFORMATION CONTACT section of this preamble for more information).

New Hampshire's I/M program regulation contains enforcement provisions that detail state enforcement procedures, including administrative, civil, and criminal penalties, and administrative and judicial procedures. Such enforcement-related provisions are required elements of an I/M SIP under 40 CFR 61.364, and EPA is proposing to approve the provisions as meeting those requirements. However, EPA is not proposing to incorporate those provisions by reference into the EPA-approved federal regulations at 40 CFR part 52. In any federal action to enforce violations of the substantive requirements of the New Hampshire I/M program, the relevant provisions of Section 113 or 304 of the CAA, rather than state enforcement provisions would govern. Similarly, the applicable procedures in any federal action would be the applicable federal court rules or EPA's rules for administrative proceedings at 40 CFR part 22, rather than state administrative procedures. Since the state enforcement provisions would not be applicable in a federal action, incorporating these state-only enforcement provisions into the federal regulations would have no effect. To avoid confusion to the public and regulated parties, EPA is not proposing to incorporate these provisions by reference into the EPA-approved federal regulations in the New Hampshire plan identification in 40 CFR part 52. Specifically, EPA is not proposing to incorporate New Hampshire's regulations Saf-C 3222.04(d) and Saf-C 3248 into the federal regulations at 40 CFR 52.1520(c).

Under the Clean Air Act, the Administrator is required to approve a SIP submission that complies with the provisions of the Act and applicable Federal regulations. See 42 U.S.C. 7410(k); 40 CFR 52.02(a). Thus, in reviewing SIP submissions, EPA's role is to approve state choices, provided that they meet the criteria of the Clean Air Act. Accordingly, this proposed action merely approves state law as meeting Federal requirements and does not impose additional requirements beyond those imposed by state law. For that reason, this proposed action:

• Is not a significant regulatory action subject to review by the Office of Management and Budget under Executive Orders 12866 (58 FR 51735, October 4, 1993) and 13563 (76 FR 3821, January 21, 2011);

• Does not impose an information collection burden under the provisions of the Paperwork Reduction Act (44 U.S.C. 3501 et seq. );

• Is certified as not having a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601 et seq. );

• Does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4);

• Does not have federalism implications as specified in Executive Order 13132 (64 FR 43255, August 10, 1999);

• Is not an economically significant regulatory action based on health or safety risks subject to Executive Order 13045 (62 FR 19885, April 23, 1997);

• Is not a significant regulatory action subject to Executive Order 13211 (66 FR 28355, May 22, 2001); and

• Is not subject to requirements of Section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) because application of those requirements would be inconsistent with the Clean Air Act.

In addition, the SIP is not approved to apply on any Indian reservation land or in any other area where EPA or an Indian tribe has demonstrated that a tribe has jurisdiction. In those areas of Indian country, the rule does not have tribal implications and will not impose substantial direct costs on tribal governments or preempt tribal law as specified by Executive Order 13175 (65 FR 67249, November 9, 2000).

Executive Order 12898 (Federal Actions To Address Environmental Justice in Minority Populations and Low-Income Populations, 59 FR 7629, Feb. 16, 1994) directs Federal agencies to identify and address “disproportionately high and adverse human health or environmental effects” of their actions on minority populations and low-income populations to the greatest extent practicable and permitted by law. EPA defines environmental justice (EJ) as “the fair treatment and meaningful involvement of all people regardless of race, color, national origin, or income with respect to the development, implementation, and enforcement of environmental laws, regulations, and policies.” EPA further defines the term fair treatment to mean that “no group of people should bear a disproportionate burden of environmental harms and risks, including those resulting from the negative environmental consequences of industrial, governmental, and commercial operations or programs and policies.”

New Hampshire did not evaluate environmental justice considerations as part of its SIP submittal; the CAA and applicable implementing regulations neither prohibit nor require such an evaluation. Due to the nature of the action being taken here, this action is expected to have a neutral to positive impact on the air quality of the affected area. EPA did not perform an EJ analysis and did not consider EJ in this action. Consideration of EJ is not required as part of this action, and there is no information in the record inconsistent with the stated goal of E.O. 12898 of achieving environmental justice for people of color, low-income populations, and Indigenous peoples.

The Puerto Rico, St. Croix, and St. Thomas and St. John fisheries include spiny lobster, and are managed under the island-based FMPs. The island-based FMPs were prepared by the Caribbean Fishery Management Council (Council) and NMFS. NMFS implements the island-based FMPs through regulations at 50 CFR part 622 under the authority of the Magnuson-Stevens Fishery Conservation and Management Act (Magnuson-Stevens Act).

The Magnuson-Stevens Act requires NMFS and regional fishery management councils to prevent overfishing and to achieve, on a continuing basis, the OY from federally managed fish stocks to ensure that fishery resources are managed for the greatest overall benefit to the Nation, particularly with respect to providing food production and recreational opportunities, and protecting marine ecosystems.

For Puerto Rico and the U.S. Virgin Islands (USVI), NMFS, with the advice of the Council, manages fisheries under the island-based FMPs. The island-based FMPs contain management measures applicable for Federal waters off the respective island group. Federal waters around Puerto Rico extend seaward from 9 nautical miles (nmi; 16.7 km) from shore to the offshore boundary of the EEZ. Federal waters around St. Croix, and St. Thomas and St. John extend seaward from 3 nmi (5.6 km) from shore to the offshore boundary of the EEZ.

For spiny lobster in the U.S. Caribbean EEZ, only commercial landings data are collected. Because recreational landings data are not available, the ACLs for spiny lobster are based on commercial landings and apply to all harvest for the stock, whether commercial or recreational.

In 2019, the Southeast Data, Assessment, and Review (SEDAR) completed separate stock assessments for spiny lobster for the Puerto Rico, St. Croix, and St. Thomas and St. John management areas (SEDAR 57). The Council's Scientific and Statistical Committee (SSC) reviewed SEDAR 57, determined it to be suitable for management advice, and provided catch level recommendations. In response to SEDAR 57 and the SSC's advice, the Council prepared Framework Amendment 1 to the island-based FMPs to update the OFLs, ABCs, and ACLs, and accountability measures (AMs) for spiny lobster. Framework Amendment 1 set ACLs for spiny lobster based on recommendations from its SSC. NMFS published the final rule to implement Framework Amendment 1 on March 16, 2023 (88 FR 16194).

Subsequent to the implementation of Framework Amendment 1, the Council requested that the NMFS Southeast Fisheries Science Center (SEFSC) conduct an update to SEDAR 57 to provide overfishing limits (OFL) and acceptable biological catch (ABC) estimates for spiny lobster for each island group for 2024 to 2026. Update assessments occur between regular, more comprehensive SEDAR assessments to determine trends in stock condition and project future catch advice. The SEFSC presented results of the 2022 Update Assessment to SEDAR 57 (SEDAR 57 Update) to the Council's SSC at its November-December 2022 meeting. The SSC accepted the SEDAR 57 Update and recommended both variable- and constant-catch OFLs and ABCs for spiny lobster under each FMP. The constant-catch values recommended by the SSC were equal to the average OFL or ABC values projected for 2024 to 2026 in the 2022 Update Assessment. The Council reviewed these recommendations in December 2022.

Consistent with the SEDAR 57 Update, and recommendations from the SSC, the Council developed Framework Amendment 2 to prevent overfishing of spiny lobster and achieve OY for each stock, consistent with the requirements of the Magnuson-Stevens Act. For each FMP, the Council recommended constant-catch ACLs for spiny lobster equal to 95 percent of the constant-catch ABCs recommended by the SSC, which reflects the Council's management uncertainty buffer.

All weights described in this proposed rule are in round weight.

This proposed rule would revise the ACLs for spiny lobster in the EEZ around Puerto Rico, St. Croix, and St. Thomas and St. John.

For the Puerto Rico FMP, the ACL for spiny lobster would decrease from the current ACL of 366,965 lb (166,452 kg) to 357,629 lb (162,218 kg).

For the St. Croix FMP, the ACL for spiny lobster would increase from the current ACL of 120,830 lb (54,807 kg) to 137,254 lb (62,257 kg).

For the St. Thomas and St. John FMP, the ACL for spiny lobster would increase from the current ACL of 126,089 lb (57,193 kg) to 133,207 lb (60,422 kg).

NMFS notes that Puerto Rico commercial landings of spiny lobster in recent years have come close to or exceeded the ACL. Therefore, NMFS reduced the length of the 2021 and 2022 fishing seasons as required by the AMs specified in 622.440(c)(2) (87 FR 38008, June 27, 2022 and 86 FR 40787, July 29, 2021). Conversely, commercial landings of spiny lobster in St. Croix, and St. Thomas and St. John in recent years have been below the respective ACLs, and therefore no reduction in the length of their fishing seasons was required.

In addition to the revised ACLs described in this proposed rule, Framework Amendment 2 would revise the spiny lobster OFLs and ABCs for Puerto Rico, St. Croix, and St. Thomas and St. John.

For the Puerto Rico FMP, the OFL for spiny lobster would decrease from 438,001 lb (198,673 kg) to 426,858 lb (193,620 kg) and the ABC for spiny lobster would decrease from 386,279 lb (175,213 kg) to 376,452 lb (170,756 kg).

For the St. Croix FMP, the OFL for spiny lobster would increase from 144,219 lb (65,416 kg) to 163,823 lb (74,309 kg) and the ABC for spiny lobster would increase from 127,189 lb (57,691 kg) to 144,478 lb (65,534 kg).

For the St. Thomas and St. John FMP, the OFL for spiny lobster would increase from 150,497 lb (68,264 kg) to 158,993 lb (75,118 kg) and the ABC for spiny lobster would increase from 132,725 lb (60,203 kg) to 140,218 (63,602 kg).

Pursuant to section 304(b)(1)(A) of the Magnuson-Stevens Act, the NMFS Assistant Administrator has determined that this proposed rule is consistent with the FMPs for Puerto Rico, St. Croix, and St. Thomas and St. John, other provisions of the Magnuson-Stevens Act, and other applicable law, subject to further consideration after public comment.

This proposed rule has been determined to be not significant for purposes of Executive Order 12866.

The Chief Counsel for Regulation of the Department of Commerce certified to the Chief Counsel for Advocacy of the Small Business Administration that this proposed rule, if adopted, would not have a significant economic impact on a substantial number of small entities. A description of this proposed rule, why it is being considered, and the purpose of this proposed rule are contained in the SUPPLEMENTARY INFORMATION section of the preamble. A copy of the full analysis is available from NMFS (see ADDRESSES ). The factual basis of this determination follows. The purpose of this proposed rule is to update the OFLs, ABCs, and ACLs for spiny lobster, consistent with the best scientific information available, with the objective to prevent overfishing and achieve OY. The Magnuson-Stevens Act provides the legal basis for this proposed rule. No duplicative, overlapping, or conflicting Federal rules have been identified. No new reporting and record-keeping requirements are introduced by this proposed rule. All monetary estimates in the following analysis are in 2021 dollars.

The proposed action would directly affect both anglers (recreational fishers) and commercial fishing businesses that harvest spiny lobster in the U.S. Caribbean EEZ. Anglers, however, are not considered small entities as that term is defined in 5 U.S.C. 601(6), whether fishing from for-hire fishing, privately owned, or leased vessels. Therefore, neither estimates of the number of anglers nor the impacts on them are required or provided in this analysis.

Any business that operates a commercial fishing vessel that lands spiny lobster in Puerto Rico or the USVI must be licensed to do so by the respective territorial government. Each licensed fisher represents a unique commercial fishing business.

For RFA purposes, NMFS has established a small business size standard for businesses, including their affiliates, whose primary industry is commercial fishing (see 50 CFR 200.2). A business primarily involved in commercial fishing (North American Industry Classification System 11411) is classified as a small business if it is independently owned and operated, is not dominant in its field of operation (including its affiliates), and its combined annual receipts are not in excess of $11 million for all of its affiliated operations worldwide.

From 2017 through 2021, the commercial sector of the Puerto Rico fishery as a whole generated average annual direct revenues of about $9.58 million. Therefore, all commercial fishing businesses in Puerto Rico are small. During the same 5 years, an annual average of 710 commercial fishers reported landings; however, not all small businesses reported operating in the EEZ and harvesting spiny lobster. From 2017 through 2021, an average of 64 (9.0 percent) of Puerto Rico's small businesses reported landings of spiny lobster from the EEZ annually. These 64 small businesses collectively accounted for about 6.6 percent of all spiny lobster commercial landings by weight and value.

From 2015 through 2019, which is the most recent revenue data available for the USVI, the commercial fishing sector collectively generated average annual direct revenues of $4.39 million. Therefore, all commercial fishing businesses in the USVI (St. Croix, and St. Thomas and St. John) are small.

During the same 5-year period, an annual average of 59 small businesses reported landings in St. Croix. Not all of these 59 active commercial fishing businesses operated in the EEZ and harvested spiny lobster. From 2015 through 2019, an average of 11 (18.3 percent) of St. Croix's 59 active small businesses reported landings of spiny lobster from the EEZ. These 11 small businesses collectively accounted for 33.5 percent of all spiny lobster commercial landings in St. Croix by weight and 34.2 percent by value.

During the period from 2015 through 2019, an annual average of 67 small businesses reported landings in St. Thomas and St. John. Not all of these active businesses landed spiny lobster from the EEZ. During that time period, an annual average of 20 (30.1 percent) of St. Thomas and St. John's 67 active small businesses reported landings of spiny lobster from the EEZ. These 20 small businesses collectively accounted for 61.8 percent of all spiny lobster landings in St. Thomas and St. John by weight and 61.3 percent by value.

In summary, 64 small commercial fishing businesses in Puerto Rico, 11 in St. Croix, and 20 in St. Thomas and St. John would be directly affected by the proposed rule annually.

This proposed rule would decrease the spiny lobster ACL for Puerto Rico from 366,965 lb (166,452 kg) to 357,629 lb (162,218 kg). The average of the 3 most recent years of landings is compared to the ACL. In 2022, the 3 most recent years of landings were 2017 through 2019 and NMFS compared the average of those landings to the ACL and found the average to exceed the ACL at that time. In 2024, the most recent 3 years of landings are from 2019 through 2021. From 2019 through 2021, an annual average of 313,837 lb (142,354 kg) of spiny lobster was landed in Puerto Rico, and that annual average is less than the proposed ACL. More recently, from 2020 through 2022, the annual average was 228,522 lb (103,656 kg), and that average is less than the proposed ACL. Because those more recent averages are less than the proposed ACL, there is expected to be no economic impact on small commercial fishing businesses in Puerto Rico that harvest spiny lobster in the EEZ.

This proposed rule would increase the spiny lobster ACL for St. Croix from 120,830 lb (54,807 kg) to 137,254 lb (62,257 kg). From 2015 through 2019, 3-year averages of landings of spiny lobster in St. Croix have been much lower than the current and proposed ACLs every year. As such, the proposed rule is expected to have no economic impact on small businesses of St. Croix.

This proposed rule would increase the spiny lobster ACL for St. Thomas and St. John from 126,089 lb (57,193 kg) to 133,207 lb (60,422 kg). From 2015 through 2019, 3-year averages of landings of spiny lobster in St. Thomas and St. John have been much lower than the current and proposed ACLs every year. As such, the proposed rule is expected to have no economic impact on small businesses of St. Thomas and St. John.

In summary, this proposed rule is expected to have no significant economic impact on a substantial number of small entities of Puerto Rico, St. Croix, and St. Thomas and St. John. As a result, an initial regulatory flexibility analysis is not required and none has been prepared.

This proposed rule contains no information collection requirements under the Paperwork Reduction Act of 1995.

For the reasons set out in the preamble, NMFS proposes to amend 50 CFR part 622 as follows: