[Federal Register Volume 89, Number 37 (Friday, February 23, 2024)]
[Proposed Rules]
[Pages 13852-13908]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-01095]
[[Page 13851]]
Vol. 89
Friday,
No. 37
February 23, 2024
Part III
Consumer Financial Protection Bureau
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12 CFR Parts 1005 and 1026
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Overdraft Lending: Very Large Financial Institutions; Proposed Rule
Federal Register / Vol. 89 , No. 37 / Friday, February 23, 2024 /
Proposed Rules
[[Page 13852]]
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CONSUMER FINANCIAL PROTECTION BUREAU
12 CFR Parts 1005 and 1026
[Docket No. CFPB-2024-0002]
RIN 3170-AA42
Overdraft Lending: Very Large Financial Institutions
AGENCY: Consumer Financial Protection Bureau.
ACTION: Proposed rule; request for public comment.
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SUMMARY: The Consumer Financial Protection Bureau (CFPB) proposes to
amend Regulations E and Z to update regulatory exceptions for overdraft
credit provided by very large financial institutions, thereby ensuring
that extensions of overdraft credit adhere to consumer protections
required of similarly situated products, unless the overdraft fee is a
small amount that only recovers applicable costs and losses. The
proposal would allow consumers to better comparison shop across credit
products and provide substantive protections that apply to other
consumer credit.
DATES: Comments must be received on or before April 1, 2024.
ADDRESSES: You may submit comments, identified by Docket No. CFPB-2024-
0002 or RIN 3170-AA42, by any of the following methods:
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments. A brief summary of
this document will be available at https://www.regulations.gov/docket/CFPB-2024-0002.
Email: [email protected]. Include Docket No.
CFPB-2024-0002 or RIN 3170-AA42 in the subject line of the message.
Mail/Hand Delivery/Courier: Comment Intake--2024 NPRM
Overdraft, c/o Legal Division Docket Manager, Consumer Financial
Protection Bureau, 1700 G Street NW, Washington, DC 20552.
Instructions: The CFPB encourages the early submission of comments.
All submissions should include the agency name and docket number or
Regulatory Information Number (RIN) for this rulemaking. Commenters are
encouraged to submit comments electronically. In general, all comments
received will be posted without change to https://www.regulations.gov.
All submissions, including attachments and other supporting
materials, will become part of the public record and subject to public
disclosure. Proprietary information or sensitive personal information,
such as account numbers or Social Security numbers, or names of other
individuals, should not be included. Submissions will not be edited to
remove any identifying or contact information.
FOR FURTHER INFORMATION CONTACT: Anna Boadwee, Attorney-Advisor; Joseph
Baressi, Pedro De Oliveira, Thomas Dowell, Brandy Hood, Kristin
McPartland, or Mark Morelli, Senior Counsels, Office of Regulations, at
202-435-7700 or https://reginquiries.consumerfinance.gov/. If you
require this document in an alternative electronic format, please
contact [email protected].
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Summary of Proposed Rule
II. Background
A. Overview of Overdraft Credit
B. Evolution and Growth of Non-Covered Overdraft
C. Non-Covered Overdraft Credit Today
D. Consumer Impact of Overdraft Fees
E. Growing Regulatory Concerns About Non-Covered Overdraft
Credit
F. Need for CFPB Action
III. Outreach and Related Research
IV. Legal Authority
A. Truth in Lending Act
B. Electronic Fund Transfer Act
C. Consumer Financial Protection Act
V. Discussion of the Proposed Rule
A. Who is covered? (Sec. 1026.62(b)(8))
B. What transactions and accounts are covered?
C. Changes to the Definition of ``Finance Charge'' (Sec.
1026.4(b)(2), (b)(12), and (c)(3); Sec. 1026.62(d))
D. Changes to Covered Overdraft Credit Offered by Very Large
Financial Institutions
VI. Proposed Effective Date
VII. Severability
VIII. CFPA Section 1022(b) Analysis
A. Overview
B. Data Limitations and Quantification of Benefits, Costs, and
Impacts
C. Baseline for Analysis
D. Potential Benefits and Costs to Consumers and Covered Persons
of the Proposed Changes That Affect Charges for Non-Covered and
Covered Overdraft Credit
E. Potential Benefits and Costs to Consumers and Covered Persons
of Further Provisions of the Proposed Rule
F. Potential Specific Impacts of the Proposed Rule on Depository
Institutions and Credit Unions With $10 Billion or Less in Total
Assets, as Described in CFPA Section 1026
G. Potential Specific Impacts of the Proposed Rule on Consumer
Access to Credit and on Consumers in Rural Areas
IX. Regulatory Flexibility Act Analysis
X. Paperwork Reduction Act
I. Summary of Proposed Rule
Overview
This proposed rule would update non-statutory exceptions in
Regulations Z and E that have allowed very large financial institutions
to avoid statutory requirements when extending certain overdraft
credit.\1\
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\1\ When amending commentary, the Office of the Federal Register
(OFR) requires reprinting of certain subsections being amended in
their entirety rather than providing more targeted amendatory
instructions. The sections of regulatory text and commentary
included in this document show the language of those sections if the
Bureau adopts its changes as proposed. In addition, the Bureau is
releasing an unofficial, informal redline to assist industry and
other stakeholders in reviewing the changes that it proposes to make
to the regulatory text and commentary of Regulation E and Regulation
Z. This redline may be found on the Bureau's website, https://files.consumerfinance.gov/f/documents/cfpb_unofficial-redline_overdraft-credit-very-large-financial-institutions-proposed-rule_2024-01.pdf. If any conflicts exist between the redline and the
text of Regulation E or Regulation Z, its commentary, or this
proposed rule, the documents published in the Federal Register are
the controlling documents.
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Consumer credit is subject to Regulation Z if the creditor imposes
a finance charge, which generally includes any charge payable directly
or indirectly by the consumer and imposed directly or indirectly by the
creditor as an incident to or a condition of the extension of
credit.\2\ However, when the Board of Governors of the Federal Reserve
System (Board) first adopted Regulation Z in 1969,\3\ it excepted from
Regulation Z's definition of finance charge any charges for honoring
checks that overdraw a checking account unless the payment of the check
and imposition of the fee were previously agreed upon in writing. The
Board subsequently made ``minor editorial changes'' to this exception,
e.g., to reflect ``items that are similar to checks, such as negotiable
orders of withdrawal.'' \4\ This exception is unique to credit extended
to pay account overdrafts. In adopting this exception, the Board did
not rely on an interpretation of the statute; rather, the Board used
its authority to create regulatory exceptions. Similar consumer credit
products are subject to Regulation Z.
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\2\ Consumer credit is also subject to Regulation Z in other
circumstances. See, e.g., 12 CFR 1026.1(c).
\3\ 34 FR 2002 (Feb. 11, 1969).
\4\ 46 FR 20848, 20855 (Apr. 7, 1981).
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This exception was evidently intended to allow banks to continue
providing limited overdraft services, as a courtesy to consumers who
inadvertently overdrew their account, without the banks complying with
Regulation Z. In the early years of the regulation, decisions to pay an
item that
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overdraws an account instead of returning it unpaid were made as a
relatively infrequent part of administering asset accounts. At the
time, consumers typically withdrew funds from their bank accounts
through in-person withdrawals or by writing checks. If a consumer
mistimed when funds from a check deposit would be available for
withdrawal \5\ and inadvertently overdrew their account and the
overdrawing check were returned unpaid, the bank would typically charge
the consumer a nonsufficient funds (NSF) fee and the consumer could be
subject to additional fees imposed by the payee and other negative
consequences from bounced checks. If, instead of returning the check,
the financial institution paid it notwithstanding the unavailable or
insufficient funds in the account, such courtesy payment could provide
a benefit to the consumer, who would avoid all of the negative
consequences of a bounced check without being charged any additional
fees beyond the amount charged for nonsufficient funds.
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\5\ In 1987, Congress enacted the Expedited Funds Availability
Act (12 U.S.C. 4001 et seq.) to provide depositors of checks with
prompt funds availability and to foster improvements in the check
collection and return processes. See 82 FR 27552, 27552 (June 15,
2017). Section 229.2(d) of Regulation CC (12 CFR 229), which
implements that act, defines ``available for withdrawal.''
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Over the last 30 years, in conjunction with widespread financial
institution adoption of information technology systems as well as the
expansion of debit card transactions that can overdraw an account,
overdraft credit products provided under the exception have morphed
from an occasional courtesy provided to consumers into frequently used
and promoted products that increase costs to consumers (in certain
instances) and generate a substantial portion of the direct fee revenue
that financial institutions make from checking accounts (and much of
the total revenue that financial institutions make from low-balance
accounts). The volume of overdrawing transactions rose drastically over
the years, including on transactions where the consumer may have
suffered no negative consequences if the transaction were declined.
Since the CFPB focused substantial enforcement and supervision
attention on overdraft fees in 2021, overdraft fee revenue has
contracted somewhat. However, it is still a source of billions of
dollars in profits every year, and most very large financial
institutions continue to charge $35 today. Financial institutions today
generally make pay/no-pay decisions in advance--for example, by setting
overdraft limits that the consumer may not be aware of and using
information technology systems to make automated pay/no-pay decisions.
They sometimes calibrate these systems with the goal of generating fee
revenue. Because of these market changes, which increase the risk that
a consumer will unwittingly incur high overdraft fees, helping
consumers make informed decisions about overdraft credit has become a
much more serious concern.
Key Changes
Given these changes over the past 30 years and consistent with
TILA's purpose of promoting the informed use of credit, the CFPB is
proposing to update several non-statutory exceptions in Regulation Z to
extend consumer credit protections that generally apply to other forms
of consumer credit to certain overdraft credit provided by very large
financial institutions. These changes would allow consumers to better
compare certain overdraft credit to other types of credit and would
provide consumers with several substantive protections that already
apply to other consumer credit.
These amendments would apply only to very large financial
institutions--i.e., insured depository institutions and credit unions
with more than $10 billion in assets. The proposal would not change the
regulatory framework for overdraft services offered by financial
institutions with assets of $10 billion or less. The CFPB plans to
monitor the market's response to this rule before determining whether
to alter the regulatory framework for financial institutions with
assets less than or equal to $10 billion.
Under this proposal, Regulation Z would generally apply to
overdraft credit provided by very large institutions unless it is
provided at or below costs and losses as a true courtesy to consumers.
The proposed rule would accomplish this result by updating two
regulatory exceptions from the statutory definition of finance charge.
First, the proposal would update an exception that currently provides
that a charge for overdraft is not a finance charge if the financial
institution has not previously agreed in writing to pay items that
overdraw an account \6\ so that the exception would not apply to
``above breakeven overdraft credit'' offered by a very large financial
institution. The proposal would give financial institutions the ability
to determine whether an overdraft charge is considered above breakeven
overdraft credit by either: (1) calculating its own costs and losses
using standards set forth in the proposal; or (2) relying on a
benchmark fee set by the CFPB in the proposal. The CFPB is considering
setting the benchmark fee at $3, $6, $7, or $14. Second, the proposal
would update a related exception that provides that a charge imposed in
connection with an overdraft credit feature (e.g., a charge for each
item that results in an overdraft) is not a finance charge if the
charge does not exceed the charge for a similar transaction account
without a credit feature (e.g., the charge for returning each item).\7\
As a result of the proposed change, all transfer charges that very
large financial institutions impose on asset accounts with linked
overdraft lines of credit (i.e., fees imposed for transferring funds to
an asset account from an overdraft line of credit to cover an item that
would otherwise take the asset account's balance negative) would be
finance charges.
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\6\ 12 CFR 1026.4(c)(3).
\7\ 12 CFR 1026.4(b)(2).
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If the proposal is finalized, above breakeven overdraft credit that
is not currently subject to Regulation Z would become subject to
Regulation Z, including provisions in subpart B that govern open-end
credit (e.g., the account opening disclosures, periodic statements, and
advertising rules). For ease of reference, this proposal generally
refers to overdraft credit that is not subject to Regulation Z as non-
covered overdraft credit and overdraft credit that is subject to
Regulation Z as covered overdraft credit. Above breakeven overdraft
credit is currently a type of non-covered overdraft credit, but it
would become covered overdraft credit if this proposal is finalized.
The proposal would also require covered overdraft credit offered by
very large financial institutions to be put in a credit account
separate from the asset account, and it would update exceptions
relating to credit cards. Among other changes, it would apply the
portions of Regulation Z that implement the Credit Card Accountability
Responsibility and Disclosure Act of 2009 (CARD Act) to covered
overdraft credit that can be accessed by a hybrid debit-credit card,
such as a debit card or other single credit device (including certain
account numbers) that a consumer may use from time to time to obtain
covered overdraft credit from a very large financial institution.
Provisions of the CARD Act that would apply to such overdraft credit
include, but are not limited to, ability-to-pay underwriting
requirements, limitations on penalty fees including certain fees on
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transactions that are declined due to nonsufficient funds, and various
requirements related to rate changes.
The proposal would also prohibit compulsory use of preauthorized
electronic fund transfers (EFTs) for repayment of covered overdraft
credit provided by very large financial institutions, which would
ensure that consumers using those products have a choice of at least
one alternative method of repayment. As a result of this change,
covered overdraft credit offered by very large financial institutions
could not be conditioned on consumers agreeing to automatic debits from
their checking account. Consumers could still opt into automatic
payments on a periodic basis if offered by their financial institution,
but they would have the right to repay this overdraft credit manually
if they prefer.
The CFPB proposes that the final rule, if adopted, would take
effect on the October 1 which follows by at least six months the date
it is published in the Federal Register, consistent with 15 U.S.C.
1604(d). The CFPB expects that would likely fall on October 1, 2025.
The CFPB invites comment on all aspects of this notice of proposed
rulemaking and on the specific issues on which it solicits comment
elsewhere herein, including on any appropriate modifications or
exceptions to the Proposed Rule.
II. Background
A. Overview of Overdraft Credit
An overdraft occurs when consumers do not have a sufficient balance
in their asset account to pay a transaction, but the financial
institution pays the transaction anyway. Typically, the financial
institution pays an overdraft transaction by either transferring the
consumer's own funds from another asset account held by the financial
institution, such as a savings account, or by extending overdraft
credit (i.e., using the financial institution's own funds and requiring
the consumer to repay).
Currently, not all overdraft credit is subject to Regulation Z. For
example, when the Board first adopted Regulation Z in 1969,\8\ it
excepted from Regulation Z's coverage charges for honoring checks that
overdraw a checking account unless the payment of the check and
imposition of the fee were previously agreed upon in writing. A Board
official interpretation stated that this exception for ad hoc credit
decisions applies only to ``regular demand deposit accounts which carry
no credit features and in which a bank may occasionally, as an
accommodation to its customer, honor a check which inadvertently
overdraws that account.'' \9\ The Board subsequently adopted commentary
excluding debit cards with no credit agreement from Regulation Z's
definition of ``credit card.'' \10\ While the Board did not explain
this exception, it appears it was intended to exclude discretionary
overdraft services from being subject to Regulation Z when they are
accessed by a debit card, consistent with the exclusion for overdraft
charges from the definition of finance charge.\11\
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\8\ 34 FR 2002 (Feb. 11, 1969).
\9\ 42 FR 22360, 22362 (May 3, 1977).
\10\ 46 FR 50288, 50293 (Oct. 9, 1981) (providing that a
``credit card'' does not include ``[a] check-guarantee or debit card
with no credit feature or agreement, even if the creditor
occasionally honors an inadvertent overdraft''); see also Regulation
Z comment 2(a)(15)-2.ii.A.
\11\ Under Regulation Z, an issuer of a credit card can be a
creditor regardless of whether the credit is subject to a finance
charge. 12 CFR 1026.2(a)(17)(iii); see also 12 CFR 1026.2(a)(7)
(defining ``card issuer''). Thus, without the 1981 exception, a
financial institution that extends overdrafts could be a
``creditor'' for purposes of subpart B of TILA even with an
exemption of overdraft fees from the finance charge.
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Some overdraft credit is previously agreed upon in writing and is
currently covered by Regulation Z. Such covered overdraft credit
enables consumers to link a checking account to a credit account, like
an overdraft line of credit or a credit card, from which funds are
transferred automatically to pay transactions when the checking account
balance is insufficient to pay them. Some financial institutions charge
a fee, often referred to as an overdraft protection transfer fee, for
these transfers.\12\ Financial institutions may assess such a fee once
per day that a transfer is made, once to transfer a round dollar value
increment (e.g., a fee for $100 transferred to cover any overdraft(s)
less than $100), or, less commonly, once per overdraft transaction;
\13\ however, since late 2021, a number of financial institutions have
voluntarily eliminated such fees.\14\ Credit accounts used to cover
overdrafts also carry an interest rate applied to the outstanding
balance. Repayment of the overdrawn amount and interest is typically
made periodically according to a payment schedule. The ability to
obtain and use covered overdraft credit is typically limited to
consumers whose credit history allows them to qualify for an overdraft
line of credit or who have available credit on a credit card.
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\12\ Consumer Fin. Prot. Bureau (CFPB), CFPB Study of Overdraft
Programs: A white paper of initial data findings, at 55 (June 2013),
https://files.consumerfinance.gov/f/201306_cfpb_whitepaper_overdraft-practices.pdf (CFPB 2013 White
Paper) (noting 28 of a sample of 33 large institutions charged a
transfer fee in 2012, ranging from $3 to $20 per transfer, with a
median of $10, while smaller institutions charged a median of $5).
\13\ Id.
\14\ Between December 2022 and July 2023, CFPB reviewed publicly
available information describing the overdraft-related practices of
very large financial institutions (CFPB Market Monitoring of
Publicly Available Overdraft Practices, Dec. 2022-July 2023).
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Financial institutions may also pay overdrafts through currently
non-covered overdraft credit, where the financial institution typically
pays overdrafts up to certain limits but does not agree in advance to
pay the overdrawn transactions, reserving discretion to decline any
given overdraft transaction. This type of overdraft credit is currently
non-covered overdraft credit because it is currently not subject to
Regulation Z. This proposal may also refer to currently non-covered
overdraft credit as an overdraft service, overdraft services, or an
overdraft program. With certain exceptions provided for by internal
policies, the financial institution typically assesses a flat fee for
each overdraft transaction the financial institution pays. In addition,
some financial institutions charge an additional fee or fees, known as
extended or sustained overdraft fees, if the consumer does not bring
the account back to a positive balance within a specified period. To
collect repayment of the funds advanced to cover overdraft transactions
as well as payment of the fees assessed, the financial institution
typically deducts those amounts as a lump sum from the consumer's next
incoming deposit(s), usually within three days after the account became
overdrawn.\15\
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\15\ Trevor Bakker et al., CFPB, Data Point: Checking account
overdraft, at 5, 22 (July 2014), https://files.consumerfinance.gov/f/201407_cfpb_report_data-point_overdrafts.pdf (CFPB 2014 Data
Point).
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Financial institutions typically provide non-covered overdraft
credit for certain transaction types--primarily checks, automated
clearinghouse (ACH) transactions, and recurring debit card
transactions--as a default, up to certain coverage limits. For one-time
(non-recurring) debit card and ATM transactions, financial institutions
may not assess overdraft fees for paying such transactions without
first obtaining the consumer's opt-in following the process required by
Regulation E 12 CFR 1005.17(b).
Financial institutions employ a number of different practices and
policies when making pay/return decisions in connection with non-
covered overdraft.\16\ While, as noted above, overdraft credit must
technically be discretionary to be excepted from Regulation Z, in
practice, financial
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institutions typically assign each account an overdraft coverage limit
representing the maximum amount of overdraft coverage the financial
institution will extend on the account. Once an account reaches its
overdraft coverage limit, the financial institution will no longer pay
transactions into overdraft and will return those transactions unpaid.
Overdraft coverage limits may be static (i.e., the financial
institution assigns an unchanging limit to each customer) or dynamic
(i.e., the financial institution changes the limit for each account
periodically based on account usage patterns, market conditions, or
account and accountholder characteristics in an attempt to manage more
precisely credit risk, overdraft program revenues, and customer
retention).\17\ Financial institutions that use static limits may
communicate those limits to account holders, while financial
institutions that use dynamic limits generally do not communicate those
limits to account holders.
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\16\ CFPB 2013 White Paper at 48-52.
\17\ Common account and account holder characteristics include
account tenure, average balance, overdraft history, and deposit
patterns, as well as other relationships the accountholder may have
with the institution.
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Historically, financial institutions have charged an NSF fee when
they reject, rather than pay, transactions initiated by check or ACH or
other electronic payments; in contrast, financial institutions have
rarely if ever charged an NSF fee when declining a one-time debit card
purchase or an ATM withdrawal. Financial institutions typically have
charged the same amount for an NSF fee as for a non-covered overdraft
fee.\18\ As noted in part II.C, many financial institutions have
eliminated NSF fees over the past two years.
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\18\ See Consumers Guide to Banking: Staff Report on Commercial
Bank Charges in the New York and Washington, DC Metropolitan Area,
S. Comm. on Banking, Hous. and Urban Affairs, 94th Cong. 10-11 tbl.3
(1976) (Senate Staff Report); see also 70 FR 8428, 8429 (Feb. 18,
2005) (``Regardless of whether the overdraft is paid, institutions
typically charge the NSF fee when an overdraft occurs.''); 74 FR
59033, 59035 (Nov. 17, 2009) (``Second, a consumer will generally be
charged the same fee by the financial institution whether or not a
check is paid; yet if the institution covers an overdrawn check, the
consumer may avoid other adverse consequences, such as the
imposition of additional merchant fees); Fed. Deposit Ins. Corp.
(FDIC), 2008 FDIC Study of Bank Overdraft Programs, at 16 n.18 (Nov.
2008), https://www.fdic.gov/bank/analytical/overdraft/FDIC138_Report_Final_v508.pdf (FDIC 2008 Study) (``For most of the
survey population operating automated programs, the per-item fee
charged when items were paid under automated overdraft programs was
the same as the fee charged by the bank on NSF items that it did not
pay. These two fees were equal to each other for 98.1 percent of 451
institutions reporting the two fee items.'').
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B. Evolution and Growth of Non-Covered Overdraft
Non-covered overdraft credit started as a courtesy that financial
institutions provided when they would decide on a manual, ad hoc basis
to pay particular check transactions into overdraft rather than
returning those checks unpaid.\19\ This courtesy would help consumers
avoid NSF fees, merchant fees, and other negative consequences from
bounced checks. Over time, non-covered overdraft credit began to move
away from that historical model, as financial institutions shifted to a
system involving heavy reliance on automated programs to process
transactions and to make overdraft decisions.\20\ Financial
institutions also began to extend overdraft credit to debit card
transactions, even though a declined debit card transaction did not
pose the same risk to consumers of an NSF fee, a merchant fee, or
certain other consequences associated with a bounced check.\21\ Over
time, debit card transactions became more numerous than checks,
increasing the number of transactions that could generate overdrafts,
with typical debit card transactions involving smaller amounts than
typical check transactions.\22\ Even as transaction processing and
overdraft decisioning became more automated and overdraft transactions
increased in frequency and decreased in size, financial institutions
increased the size of overdraft fees. In 1976, when the process was
typically manual and included only checks, one survey of banks in
Washington, DC, and New York found that the median fee was $5, while
some banks charged zero.\23\ By 1994, concern had risen about the
increase in the average fee to over $15 ($5.77 in 1976 dollars); \24\
by 2000, the average had surpassed $20 ($6.61 in 1976 dollars) and
continued to increase thereafter.\25\
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\19\ See 42 FR 22360, 22362 (May 3, 1977) (describing the
exception from Regulation Z as applying when overdraft is provided
``as an accommodation . . . honoring a check which inadvertently
overdraws that account.''); see also Federal Reserve Board Staff
Opinion Letter No. 948 (Nov. 17, 1975) (explaining that the
exception ``relates only to regular demand deposit accounts which
carry no credit feature and in which a bank may occasionally, as an
accommodation to its customer, honor a check which inadvertently
overdraws that account'').
\20\ See 74 FR 59033, 59033 n.1 (Nov. 17, 2009) (citing FDIC's
Study of Bank Overdraft Programs (Nov. 2008), which found that
nearly 70 percent of banks surveyed implemented their automated
overdraft program after 2001).
\21\ See id. at 59035; see also id. at 59034 n.6 (citing
Overdraft Protection: Fair Practices for Consumers: Hearing before
the House Subcomm. On Financial Institutions and Consumer Credit,
House Comm. On Financial Services, 110th Cong., at 72 (2007))
(``noting that as recently as 2004, 80 percent of banks still
declined ATM and debit card transactions without charging a fee when
account holders did not have sufficient funds in their account.'').
\22\ Federal Reserve Payments Studies from 2004 to 2013 (exhibit
1 in each study) show that from 2000 to 2012, annual debit card
transactions increased from 8.3 billion to 47 billion, while annual
check transactions decreased from 41.9 billion to billion to 18.3
billion. By 2008, debit card transactions exceeded the number of
checks. See Bd. of Governors of the Fed. Rsrv. Sys. (FRS), Federal
Reserve Payments Study (FRPS)--Previous Studies, https://www.federalreserve.gov/paymentsystems/frps_previous.htm (last
updated Apr. 21, 2023); see also FRS, The 2013 Federal Reserve
Payments Study, at 9 ex.2 (Dec. 2013), https://www.frbservices.org/binaries/content/assets/crsocms/news/research/2013-fed-res-paymt-study-summary-rpt.pdf (showing the average debit card transaction
ranged from $37 to $40 from 2003-2012, while the average check
transaction ranged from $1,103 to $1,410). The CFPB has found that
the median transaction amount that leads to an overdraft fee in the
case of debit card transactions is $24, while the median check and
ACH transactions that lead to overdraft fees are $100 and $90,
respectively. See CFPB 2014 Data Point at 5; see also Fin. Health
Network (FHN), Overdraft Trends Amid Historic Policy Shifts (June 1,
2023), https://finhealthnetwork.org/research/overdraft-trends-amid-historic-policy-shifts/ (FHN Brief 2023) (finding almost half (45
percent) of overdrafters reported that their most recent overdraft
occurred on a transaction of $50 or less).
\23\ Senate Staff Report at 10-11.
\24\ See Bank Fees Associated with Maintaining Depository,
Checking, and Credit Card Accounts, Hearing Before the Subcomm. on
Consumer Credit and Ins., Comm. on Banking, Finance and Urban
Affairs, 103rd Cong. 73 tbl.3 (1993) (Testimony by Susan M.
Phillips, Member, Bd. of Governors of the Fed. Rsrv. Sys.) (showing
average overdraft fee of over $15 in 1993); see also id. at 95-96,
101-02 (Statement of Chris Lewis, Dir. of Banking and Hous. Pol'y,
Consumer Fed'n of Am.) (noting concerns about the rise in the size
of ``bounced check fees'', a term the organization used to describe
the fee assessed when funds were insufficient, whether the
transaction was returned unpaid or paid into overdraft).
\25\ Gov't Accountability Off., Bank Fees: Federal Banking
Regulators Could Better Ensure That Consumers Have Required
Disclosure Documents Prior to Opening Checking or Savings Accounts,
at 14 (Jan. 2008), https://www.gao.gov/assets/gao-08-281.pdf; see
also FDIC 2008 Study (by 2007, among primarily financial
institutions with less than $5 billion in assets, the average fee
was $27); CFPB 2013 White Paper at 52 (by 2012, among the nation's
largest financial institutions, the average fee was $34).
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As a result of these market shifts and operational changes, fee
revenue from non-covered overdraft credit began to significantly
influence the overall business model for many asset accounts. Financial
institutions became less likely to charge consumers upfront monthly
checking account fees, which consumers could more easily compare across
the market, and instead began to rely heavily overdraft fees.\26\ In
essence, the provision of non-covered overdraft credit moved away from
its original purpose--paying occasional or inadvertent overdrafts as a
courtesy--and became the dominant component of
[[Page 13856]]
a back-end pricing business model. By 2004, marketwide overdraft
revenue was estimated at approximately $10 billion and, by 2009, had
increased to an estimated $25 billion.\27\
---------------------------------------------------------------------------
\26\ CFPB 2013 White Paper at 16-17.
\27\ CFPB's estimates of marketwide overdraft revenue, before
banks with over $1 billion in assets began reporting overdraft/NSF
revenue on call reports in 2015, are based on the esitmated share of
aggregated fee revenue that banks and credit unions reported on call
reports that was attributable to overdraft fees. For more details on
methodology, see Jacqueline Duby et al., Ctr. for Responsible
Lending (CRL), High Cost & Hidden From View: The $10 Billion
Overdraft Loan Market (May 26, 2005), https://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/ip009-High_Cost_Overdraft-0505.pdf; see also Leslie
Parrish, CRL, Overdraft Explosion: Bank fees for overdrafts increase
35% in two years, at 4 (Oct. 6, 2009), https://www.responsiblelending.org/research-publication/overdraft-explosion-bank-fees-overdrafts-increase-35-two-years.
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C. Non-Covered Overdraft Credit Today
Marketwide overdraft revenue declined following the 2010
implementation of the Board's ``opt-in'' rule under Regulation E to an
estimated $12 billion in 2011 before beginning to increase again.\28\
In the several years preceding the COVID-19 pandemic, marketwide
overdraft revenue was persistent, climbing from an estimated $11.8
billion in 2015 to $12.6 billion in 2019.\29\ With the onset of the
pandemic in March 2020, overdraft revenue dropped significantly. The
drop was likely primarily due to pandemic-related stimulus payments
pushing up average checking account balances, as well as temporarily
decreased use of debit cards.\30\ In addition, Federal regulators
encouraged, and some State regulators encouraged or mandated, financial
institutions to offer leniency around imposition of overdraft fees in
light of the pandemic.\31\ Notwithstanding the trend downward during
the pandemic, estimated marketwide overdraft revenue exceeded $9
billion in 2020 and 2021.\32\
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\28\ Id.
\29\ CFPB's estimates of marketwide overdraft revenue for 2015
to 2022 extrapolate total overdraft/NSF revenue reported on call
reports by banks with over $1 billion in assets to banks with less
than $1 billion in assets and to credit unions in order to reach a
total marketwide estimate of overdraft/NSF revenue, and then
estimate the portion of that combined overdraft/NSF revenue that is
attributable to overdraft revenue alone. To extrapolate reported
overdraft/NSF revenue to banks with less than $1 billion in assets
and to credit unions, the CFPB uses data collected from core
processors for the number of accounts by asset size and the
overdraft/NSF revenue per account, and from 2014 call report data
for distribution of institutions by asset size, and then assumes
that overdraft/NSF revenue at small institutions saw the same growth
from 2014 to 2019 as at large banks to arrive at the 2019 estimate.
These extrapolations result in estimates where banks with over $1
billion in assets comprise 77.4 percent of marketwide overdraft/NSF
revenue, banks with less than $1 billion in assets comprise 7.3
percent of such revenue, and credit unions comprise 15.3 percent of
such revenue. See [Eacute]va Nagyp[aacute]l, Ph.D., CFPB, Data
Point: Overdraft/NSF Fee Reliance Since 2015--Evidence from Bank
Call Reports, at 7 (Dec. 2021), https://files.consumerfinance.gov/f/documents/cfpb_overdraft-call_report_2021-12.pdf (CFPB 2021 Data
Point). For the 2022 estimate, the CFPB assumes that banks with
assets over $1 billion, banks with assets below $1 billion, and all
credit unions represent the same relative portions of total
marketwide overdraft/NSF revenue in 2022 as they did in 2019.
\30\ CFPB 2021 Data Point at 22-24.
\31\ See Press Release, FRS, FDIC & Off. of the Comptroller of
the Currency (OCC), Joint Statement on CRA Consideration for
Activities in Response to COVID-19 (Mar. 19, 2020), https://www.occ.gov/news-issuances/bulletins/2020/bulletin-2020-19a.pdf;
Press Release, CFPB, Consumer Financial Protection Bureau Encourages
Financial Institutions and Debt Collectors to Allow Stimulus
Payments to Reach Consumers (Mar. 17, 2021), https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-encourages-financial-institutions-and-debt-collectors-to-allow-stimulus-payments-to-reach-consumers/; see also,
e.g., State of Cal. Bus., Consumer Servs. & Hous. Agency, Guidance
to Financial Institutions During the COVID-19 Pandemic (Mar. 22,
2020), https://www.bcsh.ca.gov/coronavirus19/dbo_banks.pdf; Press
Release, N.Y. State Dep't of Fin. Servs., DFS Issues New Emergency
Regulation Requiring New York Regulated Financial Institutions To
Provide Financial Relief To New Yorkers Demonstrating Financial
Hardship From COVID-19 Pandemic (Mar. 24, 2020), https://www.dfs.ny.gov/reports_and_publications/press_releases/pr202003241.
\32\ See discussion of methodology at FN 29.
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Beginning in late 2021, a number of large banks began announcing
and implementing changes to their overdraft policies.\33\ Some banks
eliminated overdraft fees altogether or reduced them to $10 or $15 per
transaction.\34\ Some banks made changes to their policies by expanding
their fee waiver policies, including establishing a daily limit of one
fee per day; \35\ establishing de minimis negative balance thresholds,
within which overdrafts do not result in a fee of $50 or more; and
implementing grace periods giving consumers time through the next
business day to bring their accounts positive before a fee is
assessed.\36\ Collectively these changes resulted in a sustained
reduction in overdraft revenues as compared to pre-pandemic levels.\37\
Marketwide overdraft revenue in 2022 was an estimated $9.1 billion
($7.9 billion in 2019 dollars, a 37 percent drop in real terms).\38\ Of
that, an estimated $6.16 billion, or 68 percent, was earned by
financial institutions with above $10 billion in assets.\39\ At the
same time, most very large financial institutions eliminated NSF
fees.\40\
---------------------------------------------------------------------------
\33\ Rebecca Born[eacute] & Amy Zirkle, Comparing overdraft fees
and policies across banks, CFPB (Feb. 10, 2022), https://www.consumerfinance.gov/about-us/blog/comparing-overdraft-fees-and-policies-across-banks/.
\34\ Id.
\35\ Id.
\36\ Id.
\37\ CFPB, Data Spotlight: Overdraft/NSF revenue down nearly 50%
versus pre-pandemic levels (May 24, 2023), https://www.consumerfinance.gov/data-research/research-reports/data-spotlight-overdraft-nsf-revenue-in-q4-2022-down-nearly-50-versus-pre-pandemic-levels/full-report/ (CFPB May 2023 Data Spotlight).
\38\ See discussion of methodology at FN 29.
\39\ Estimated using data from 2022 Federal Financial
Institutions Examination Council (FFIEC) Call Reports and
methodology discussed at FN 29.
\40\ CFPB, Data spotlight: Vast majority of NSF fees have been
eliminated, saving consumers nearly $2 billion annually (Oct. 11,
2023), https://www.consumerfinance.gov/data-research/research-reports/vast-majority-of-nsf-fees-have-been-eliminated-saving-consumers-nearly-2-billion-annually/ (CFPB October 2023 Data
Spotlight) (finding that nearly two-thirds of banks with over $10
billion in assets have eliminated NSF fees).
---------------------------------------------------------------------------
Despite these changes, the vast majority of banks and credit unions
with over $10 billion in assets continue to charge between $30 and $37
per overdraft fee, and more than half charge $35.\41\ Most financial
institutions' policies allow consumers to incur multiple overdraft fees
per day. Financial institutions continue charging these high fees even
though the fees far exceed institutions' costs and losses associated
with providing non-covered overdraft credit. CFPB data collections and
outreach have found that the single largest cost or loss to financial
institutions associated with overdraft programs is charged-off account
balances, which most frequently occur when a consumer's subsequent
deposits do not cover the negative balance created by the overdraft(s)
and associated fee(s).\42\ The CFPB's study of 2011 bank data found
that charge-offs were small relative to the fee revenue banks earned
through their overdraft programs.\43\ Among those banks, charged-off
principal account balances due to overdraft programs represented 14.4
percent of the net overdraft fees (not including NSF fees) at those
banks.\44\ During the first half of 2023, the CFPB collected additional
data from several banks, which again showed that charge-offs associated
with negative account balances were the largest cost or loss associated
with providing overdraft. As discussed further in part V.C.2, charge-
offs amounted to an average of $2 per overdraft transaction whether or
not such transaction incurred an overdraft fee, and an average of $5
per overdraft transaction that incurred an overdraft fee--representing
6 percent and 15 percent, respectively, of the average fee of $32.50
charged by the banks during the period studied.
---------------------------------------------------------------------------
\41\ CFPB Market Monitoring of Publicly Available Overdraft
Practices, Dec. 2022-July 2023.
\42\ CFPB 2013 White Paper at 17.
\43\ Id.
\44\ Id.
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[[Page 13857]]
D. Consumer Impact of Overdraft Fees
As cumulative overdraft fee revenue for financial institutions
increased, so did the cumulative burden of overdraft fees on consumers.
CFPB research found that 79 percent of combined overdraft and NSF fees
were paid by 9 percent of consumers who paid more than 10 such fees per
year, incurring a median of $380 in these fees in a year.\45\ Consumers
paying more than 20 such fees in a year accounted for about 5 percent
of accounts, while paying over 63 percent of the fees.\46\
---------------------------------------------------------------------------
\45\ David Low et al., CFPB, Data Point: Frequent Overdrafters,
at 5 (Aug. 2017), https://files.consumerfinance.gov/f/documents/201708_cfpb_data-point_frequent-overdrafters.pdf (CFPB 2017 Data
Point); CFPB 2014 Data Point at 12 (both analyzing 2011-2012 data).
\46\ CFPB 2017 Data Point at 5.
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High overdraft fees can make it more difficult for consumers to
return their account to a positive balance, contributing to account
charge-offs, involuntary account closures, and consumers blocked out of
the banking system. The CFPB found that the banks with the highest
share of accounts with frequent overdrafts tended to have the highest
rates of involuntary account closure; conversely, those with the lowest
share of accounts with frequent overdrafts tended to have the lowest
rates of involuntary closure.\47\ Account closures, in turn, are often
reported to account screening consumer reporting agencies, and a
negative report from an account screening company may limit a
consumer's ability to open an account at a bank or credit union in the
future. Negative experiences with overdraft fees likely also discourage
many consumers from wanting a bank account at all. The FDIC estimates
that there were nearly 6 million unbanked households in the U.S. in
2021,\48\ nearly half of which had a bank account in the past.\49\ Of
those previously banked households, more than two-thirds have little or
no interest in having a bank account again,\50\ with high fees,
unpredictable fees, and not enough funds to meet minimum balance
requirements among the most cited reasons.\51\
---------------------------------------------------------------------------
\47\ CFPB 2013 White Paper at 25.
\48\ FDIC, 2021 FDIC National Survey of Unbanked and Underbanked
Households, at 1, https://www.fdic.gov/analysis/household-survey/2021report.pdf (last updated July 24, 2023).
\49\ Id. at 17 tbl.3.3 (48.8 percent of unbanked households
previously had a bank account).
\50\ Id. at 18 fig.3.4 (49.4 percent of previously banked
households are not at all interested in having a bank account, and
18.3 percent are not very interested).
\51\ FDIC, 2021 FDIC National Survey of Unbanked and Underbanked
Households--Appendix Tables, at 11 tbl.A.6, https://www.fdic.gov/analysis/household-survey/2021appendix.pdf (last updated July 24,
2023) (FDIC Tables) (among previously banked households, 30.5
percent cited bank account fees are too high, 28.8 percent cited
bank account fees are too unpredictable, and 43 percent cited that
they do not have enough money to meet minimum balance requirements).
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Consumers can face significant uncertainty about whether they will
incur overdraft fees. Though financial institutions may provide
disclosures related to their transaction processing, deposit
availability, and overdraft assessment policies, these policies can be
extraordinarily complex.\52\ Even consumers who closely monitor their
account balances may not know with certainty when transactions will
post to their accounts, whether a particular transaction will be paid
or returned unpaid, and whether a particular paid transaction will be
deemed an overdraft and assessed an overdraft fee.\53\
---------------------------------------------------------------------------
\52\ See Press Release, CFPB, CFPB Orders Regions Bank to Pay
$191 Million for Illegal Surprise Overdraft Fees (Sept. 28, 2022),
https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-regions-bank-pay-191-million-for-illegal-surprise-overdraft-fees/.
\53\ Id.; see also 87 FR 66935, 66935-40 (Nov. 7, 2022).
---------------------------------------------------------------------------
In response to the CFPB's 2022 request for information regarding
fees that are not subject to competitive processes that ensure fair
pricing, which received over 80,000 responses,\54\ overdraft-related
fees were by far the most common issue raised. Common concerns included
that the fees were unclear or confusing, disproportionate compared to
the incidents resulting in the fees, and difficult or impossible to
avoid. These concerns were generally consistent with those reflected in
complaints about overdraft fees consumers have submitted to the CFPB's
Consumer Complaints Database since its inception in 2011.
---------------------------------------------------------------------------
\54\ 87 FR 5801 (Feb. 2, 2022).
---------------------------------------------------------------------------
The CFPB has also studied how consumers who are opted-in to
overdraft services on one-time debit card and ATM transactions--and
thus subject to overdraft fees on those transactions--fare compared to
those who are not opted-in. In total, opted-in accounts incurred more
than seven times as many overdraft fees as accounts that were not
opted-in.\55\ At the account level, opted-in accounts were three times
as likely to have more than 10 overdrafts per year as accounts that
were not opted-in.\56\ And among frequent overdrafters, those who were
opted-in appeared similar across a number of dimensions to frequent
overdrafters who were not opted-in, but incurred significantly more--at
the median, 13 more--overdraft/NSF fees per year.\57\ In addition,
involuntary account closure was about 2.5 times as likely for consumers
who had opted-in than for consumers who had not.\58\
---------------------------------------------------------------------------
\55\ CFPB 2014 Data Point at 21.
\56\ Id. at 13.
\57\ CFPB 2017 Data Point at 6, 32-33. This dynamic was likely
driven primarily by the scenario where a debit card or ATM
transaction is authorized against a sufficient balance but then
settles against an insufficient balance. A consumer who was not
opted-in would have had this transaction approved and assessed no
fee. A consumer who was opted-in may have been charged a fee. For
discussion of regulatory guidance and CFPB enforcement actions
addressing overdraft fees assessed on these ``authorize positive,
settle negative'' transactions, see part II.E.
\58\ CFPB, A Closer Look: Overdraft and the Impact of Opting-In
(Jan. 19, 2017), https://files.consumerfinance.gov/f/documents/201701_cfpb_Overdraft-and-Impact-of-Opting-In.pdf (citing a rate of
6.2 percent in a given year for non-opted-in consumers and 2.5
percent for opted-in consumers, based on calculations using the same
large bank data used in CFPB 2014 Data Point).
---------------------------------------------------------------------------
Consumers whose accounts are frequently overdrawn are typically
more financially insecure than those who do not overdraw or who do so
infrequently.\59\ Compared to non- or infrequent overdrafters, frequent
overdrafters tend to have lower incomes and lower end-of-day
balances.\60\ They are also less likely to have access to alternative
credit options: they have lower credit scores, are less likely to have
a general purpose credit card, and, if they do have such a card, they
have less credit available on it.\61\ Black households and Latino
households are more likely to incur overdraft fees than white
households.\62\
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\59\ CFPB has previously used ``frequent overdrafters'' to
describe those who incur more than 10 overdraft/NSF fees in one year
and ``very frequent overdrafters'' to describe those who incur more
than 20 overdraft/NSF fees in one year. See CFPB 2017 Data Point at
4-5.
\60\ CFPB 2017 Data Point at 15-16 (finding that as neighborhood
income decreases, overdraft frequency increases); id. at 6 (finding
that nearly 70 percent of frequent overdrafters had end-of-day
balances with medians between $237 and $439, while another 20
percent had median end-of-day balances of $140). See also FHN Brief
2023 (finding that households with incomes under $30,000 were twice
as likely to report at least one overdraft than those with incomes
of $100,000 or more).
\61\ CFPB 2017 Data Point at 15-16.
\62\ FHN Brief 2023 (finding that 26 percent of Black, 23
percent of Latinx, and 14 percent of White households reported
having overdrafted, making Black and Latinx households 1.9 and 1.6
times as likely as White households, respectively, to have
overdrafted); see also Meghan Greene et al., FHN, FinHealth Spend
Report 2022: What U.S. Households Spent on Financial Services During
COVID-19, at 14 (Apr. 2022), https://finhealthnetwork.org/wp-content/uploads/2022/05/FinHealth_Spend_Report_2022_Final.pdf
(finding in a 2021 survey that Black and Latinx households with a
savings or checking account were 1.8 and 1.4 times as likely as
White households to report having overdrafted).
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E. Growing Regulatory Concerns About Non-Covered Overdraft Credit
As financial institutions began to evolve provision of non-covered
overdraft away from the historical
[[Page 13858]]
model and toward increased automation, greater frequency, and higher
revenues, Federal regulators expressed increasing consumer protection
concerns. In 2001, in declining to issue a requested ``comfort letter''
for a financial institution's overdraft program, the OCC stated that
overdraft services are extensions of credit and that the associated
charges may be ``just as burdensome as those imposed on borrowers
utilizing other types of high interest rate credit.'' \63\ In 2002, the
Board noted that some non-covered overdraft credit may not be all that
different from overdraft lines of credit,\64\ and in 2004 the Board
stated that further consideration of the need for Regulation Z coverage
of overdraft services would be appropriate if consumer protection
concerns were to persist.\65\ In 2005, the Federal banking agencies
issued joint guidance on non-covered overdraft credit noting that ``the
existing regulatory exceptions [i.e., exceptions in Regulation Z such
that it does not apply] were created for the occasional payment of
overdrafts, and as such could be reevaluated by the Board in the
future, if necessary. Were the Board to address these issues more
specifically, it would do so separately under its clear [TILA]
authority.'' \66\ In 2009, the Board adopted a rule under Regulation E
prohibiting institutions from assessing overdraft fees on one-time
debit card and ATM transactions unless the institution obtained the
consumer's affirmative consent to such fees (``opt-in rule'').\67\
Following the adoption of the Board's rule, the FDIC issued additional
supervisory guidance,\68\ which advises, among other things, that where
transactions overdraw an account by a de minimis amount, the overdraft
fee should be eliminated or be reasonable and proportional to the
amount of the transaction.\69\
---------------------------------------------------------------------------
\63\ OCC, Interpretive Letter No. 914, at 6 (Sept. 2001),
https://www.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2001/int914.pdf.
\64\ 67 FR 72618, 72620 (Dec. 6, 2002). In 2003, the Board noted
that ``[t]he Board's staff is continuing to gather information on
these services, which are not addressed in the final rule.'' (68 FR
16185 (Apr. 3, 2003)).
\65\ 69 FR 31760, 31761 (June 7, 2004).
\66\ See 70 FR 9127, 9128-29 (Feb. 24, 2005).
\67\ 74 FR 5212 (Jan. 28, 2009).
\68\ FDIC, Final Overdraft Payment Supervisory Guidance, FIL-81-
2010 (Nov. 24, 2010), https://www.fdic.gov/news/news/financial/2010/fil10081.html.
\69\ Id.
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More recently, in October 2022, the CFPB issued a policy statement
stating that the assessment of overdraft fees that consumers would not
reasonably anticipate, including overdraft fees on debit card or ATM
transactions that are authorized when the consumer's available balance
is sufficient to cover the transaction but that later settle against a
negative balance due to intervening transactions or complex processes
(``authorize positive, settle negative'' or ``APSN'' transactions),
likely violates the Consumer Financial Protection Act of 2010 (CFPA)'s
statutory prohibition against unfair practices.\70\ In April 2023, the
OCC and FDIC issued guidance advising that overdraft fees charged on
such transactions raise heightened risk of unfair, deceptive, or
abusive acts or practices.\71\ The OCC's guidance also describes
certain practices that it notes may help to manage risks associated
with overdraft programs, including assisting consumers in avoiding
``unduly high costs'' in relation to the face value of the item being
presented, the amount of their regular deposits, and their average
account balances, and implementing fees and practices that bear a
reasonable relationship to the risks and costs of providing overdraft
programs.\72\
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\70\ CFPB Circular 2022-06: Unanticipated Overdraft Fee
Assessment Practices, 87 FR 66935 (Nov. 7, 2022). The CFPB, the
Board, and the FDIC also highlighted risks related to the imposition
of overdraft fees from 2015 to 2018. See CFPB, Supervisory
Highlights, at 8-9 (Winter 2015), https://files.consumerfinance.gov/f/201503_cfpb_supervisory-highlights-winter-2015.pdf (last visited
Jan. 4, 2024) (CFPB Winter 2015 Highlight); FRS, Interagency
Overdraft Services Consumer Compliance Discussion, Outlook Live
presentation slides, at 20-21 (Nov. 9, 2016), https://www.consumercomplianceoutlook.org/-/media/cco/Outlook-Live/2016/110916.pdf; FRS, Consumer Compliance Supervision Bulletin, at 12
(July 2018), https://www.federalreserve.gov/publications/files/201807-consumer-compliance-supervision-bulletin.pdf (FDIC 2018
Highlight); FDIC, Consumer Compliance Supervisory Highlights, at 2-3
(June 2019), https://www.fdic.gov/regulations/examinations/consumercomplsupervisoryhighlights.pdf?source=govdelivery&utm_medium=email&utm_source=govdelivery (FDIC 2019 Highlight).
\71\ OCC, OCC Bulletin 2023-12, Overdraft Protection Programs:
Risk Management Practices (Apr. 26, 2023), https://www.occ.treas.gov/news-issuances/bulletins/2023/bulletin-2023-12.html (OCC Bulletin 2023-12); FDIC, Supervisory Guidance on
Charging Overdraft Fees for Authorize Positive, Settle Negative
Transactions, FIL-19-2023 (Apr. 26, 2023), https://www.fdic.gov/news/financial-institution-letters/2023/fil23019a.pdf.
\72\ OCC Bulletin 2023-12.
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The CFPB has previously established rules governing overdraft
credit on prepaid accounts. In 2016, the CFPB amended Regulation Z to
provide that prepaid accounts that offer credit features are generally
covered under Regulation Z's credit card rules.\73\ The CFPB also
amended the compulsory-use provision under Regulation E to prohibit
prepaid card issuers from requiring consumers to set up preauthorized
EFTs to repay credit extended through an overdraft credit feature
accessible by a hybrid prepaid-credit card.\74\
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\73\ 81 FR 83934, 83934-35 (Nov. 22, 2016). The CFPB amended the
2016 Prepaid Final Rule in 2017 and 2018. See 82 FR 18975 (Apr. 25,
2017); 83 FR 6364 (Feb. 13, 2018). The 2016 Prepaid Final Rule and
subsequent amendments to that rule are referred to collectively
herein as the Prepaid Accounts Rule.
\74\ 81 FR 83934, 83935-36 (Nov. 22, 2016).
---------------------------------------------------------------------------
In applying Regulation Z to overdraft credit features on prepaid
accounts, the CFPB noted that the term ``credit'' in TILA includes
``the right to . . . incur debt and defer its payment'' \75\ and
explained that that definition ``covers the situation when a consumer
makes a transaction that exceeds the funds in the consumer's account
and a person elects to cover the transaction by advancing funds to the
consumer.'' \76\ The CFPB further stated that overdraft fees on prepaid
accounts ``generally constitute finance charges, because they are
directly payable by the consumer and imposed directly by the creditor
as a condition of the extension of credit.'' \77\ The CFPB also stated
that overdraft services offered in connection with prepaid accounts
``can be regulated by Regulation Z as a `plan' when the consumer is
contractually obligated to repay the debt, even if the creditor
retains, by contract, the discretion not to extend credit.'' \78\ At
that time, the CFPB stated that it was continuing to study overdraft
services on checking accounts and would propose any further regulatory
consumer protections in that space through a separate rulemaking.\79\
---------------------------------------------------------------------------
\75\ 15 U.S.C. 1602(f).
\76\ 81 FR 83934, 84168 (Nov. 22, 2016).
\77\ Id. at 84160.
\78\ Id.
\79\ Id. at 84162.
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F. Need for CFPB Action
As a result of the evolution of the overdraft market over the last
few decades, the overdraft-related exception to the definition of
finance charge in Regulation Z no longer serves its original purpose.
The CFPB is proposing to update the exception, and several others that
allow financial institutions to follow different rules for overdraft
credit than for other forms of consumer credit, to ensure that
overdraft credit offered by very large financial institutions is
generally treated no differently than any other form of consumer
credit, except in the narrow cases where it is provided as a courtesy
to consumers. Preserving a limited exception from Regulation Z may
encourage the availability of overdraft coverage, which can benefit
consumers, especially given that much overdraft
[[Page 13859]]
credit is incidental in nature, as consumers often do not know with
certainty whether or not a transaction will be presented against
sufficient funds. But a blanket exception for all of today's non-
covered overdraft credit--which poses serious risks to consumers as
reflected in the discussion of consumer impacts noted above, and
resembles other mass-marketed high-cost consumer credit products--
cannot be justified as an exception for a courtesy, nor as consistent
with TILA's purposes of promoting the informed use of credit and
comparison shopping across credit products. Therefore, the CFPB
proposes to limit the exception from TILA, for very large financial
institutions, to overdraft credit that is offered at a cost to the
consumer that does not exceed the financial institution's costs and
losses associated with providing such coverage.
III. Outreach and Related Research
The CFPB has engaged in outreach and research related to overdraft
fees since soon after the CFPB's inception. In 2012, the CFPB initiated
a broad inquiry into overdraft programs for consumer checking
accounts.\80\ This inquiry included a request for information on the
impacts of overdraft fees on consumers,\81\ and collection and analysis
of overdraft-related data from several large banks with over $10
billion in assets that provided a significant portion of all U.S.
consumer checking accounts.\82\ 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.\83\ These studies assessed, among other things, overdraft fee
size, prevalence, and related account closure; overdraft policies and
practices across institutions; the distribution of overdraft fee
incurrence across accounts; how overdraft transactions and fees vary
across opt-in status; the size of transactions that lead to overdrafts;
how long account balances stay negative after overdrafts; and the
characteristics of account holders (including end-of-day balance,
deposits, credit score, and available credit on a credit card) across
distributions of overdraft frequency. The CFPB also collected
anonymized institution-level information from several core processors,
which provide operations and accounting systems to financial
institutions. This data collection informed the CFPB's 2021 report
assessing policies and practices among a large sample of financial
institutions using core processors.\84\
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\80\ Press Release, CFPB, CFPB Launches Inquiry into Overdraft
Practices (Feb. 22, 2012), https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-launches-inquiry-into-overdraft-practices/.
\81\ 77 FR 12031 (Feb. 28, 2012).
\82\ See CFPB 2013 White Paper at 8; see also CFPB 2014 Data
Point at 6-7.
\83\ See CFPB 2013 White Paper; CFPB 2014 Data Point; CFPB 2017
Data Point.
\84\ Nicole Kelly & [Eacute]va Nagyp[aacute]l, Ph.D., CFPB, Data
Point: Checking Account Overdraft at Financial Institutions Served
by Core Processors (Dec. 2021), https://files.consumerfinance.gov/f/documents/cfpb_overdraft-core-processors_report_2021-12.pdf.
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In 2021, the CFPB examined financial institutions' reliance on
overdraft/NSF fees from 2015 to 2019, finding that it was
persistent.\85\ Since then, the CFPB has continued tracking trends in
the marketplace \86\ and evaluating some banks' key overdraft-related
metrics through the CFPB's supervision work.\87\ From December 2022 to
June 2023, the CFPB reviewed the publicly available overdraft practices
of financial institutions with assets over $10 billion.\88\ In
addition, the CFPB has recently collected information from several
financial institutions under the CFPB's supervision, including data
regarding financial institutions' costs associated with offering
overdraft credit, which is discussed further in part V.C.2 as well as
in a separate report titled Overdraft and NSF Practices at Very Large
Financial Institutions.
---------------------------------------------------------------------------
\85\ CFPB 2021 Data Point.
\86\ CFPB, Trends in overdraft/non-sufficient fund (NSF) fee
revenue and practices, https://content.consumerfinance.gov/data-research/research-reports/trends-in-overdraftnon-sufficient-fund-nsf-fee-revenue-and-practices/ (last updated Oct. 11, 2023)
(reflecting data and analysis published periodically from Dec. 1,
2021 to present).
\87\ See Patrick Gibson & Lisa Rosenthal, Measuring the impact
of financial institution overdraft programs on consumers, CFPB (June
16, 2022), https://www.consumerfinance.gov/about-us/blog/measuring-the-impact-of-financial-institution-overdraft-programs-on-consumers/
; CFPB, Fall 2023 Supervisory Highlights Junk Fees Update Special
Edition, at 7-9 (Oct. 2023), https://files.consumerfinance.gov/f/documents/cfpb_supervisory_highlights_junk_fees-update-special-ed_2023-09.pdf (CFPB Fall 2023 Highlight).
\88\ CFPB Market Monitoring of Publicly Available Overdraft
Practices, Dec. 2022-July 2023.
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Consistent with the CARD Act, the CFPB consulted with the following
agencies regarding rules that implement TILA section 149: (1) the
Office of the Comptroller of the Currency; (2) the Board of Directors
of the Federal Deposit Insurance Corporation; and (3) the National
Credit Union Administration Board. The CFPB also consulted with the
Board and several other Federal agencies, as discussed in [part VIII].
IV. Legal Authority
The CFPB is issuing this proposal pursuant to its authority under
TILA, EFTA, and the CFPA. This part includes a general discussion of
the provisions on which the CFPB relies in this rulemaking.
A. Truth in Lending Act
TILA section 105(a). TILA section 105(a) directs the CFPB to
prescribe regulations to carry out the purposes of TILA and provides
that such regulations may contain additional requirements,
classifications, differentiations, or other provisions, and may provide
for such adjustments and exceptions for all or any class of
transactions, that the CFPB judges are necessary or proper to
effectuate the purposes of TILA, to prevent circumvention or evasion
thereof, or to facilitate compliance therewith.\89\ A purpose of TILA
is to assure a meaningful disclosure of credit terms so that the
consumer will be able to compare more readily the various available
credit terms and avoid the uninformed use of credit.\90\ This stated
purpose is tied to Congress's finding that economic stabilization would
be enhanced and competition among the various financial institutions
and other firms engaged in the extension of consumer credit would be
strengthened by the informed use of credit.\91\ Thus, strengthened
competition among financial institutions is a goal of TILA, achieved
through the effectuation of TILA's purposes. A purpose of TILA is also
to protect the consumer against inaccurate and unfair credit billing
and credit card practices.\92\
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\89\ 15 U.S.C. 1604(a).
\90\ 15 U.S.C. 1601(a).
\91\ Id.
\92\ Id.
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CARD Act Section 2. Section 2 of the CARD Act, which amended TILA
to establish fair and transparent practices relating to the extension
of credit under an open-end consumer plan, and for other purposes, also
specifically grants the CFPB authority to issue rules and model forms
it considers necessary to carry out the CARD Act and amendments made by
the CARD Act.\93\
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\93\ Public Law 111-24; Sec. 2, 123 Stat. 1734, 1735 (2009).
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For the reasons discussed in this notice, the CFPB is proposing
amendments to Regulation Z with respect to overdraft credit to carry
out TILA's purposes. The CFPB at this time is proposing to retain
additional requirements, adjustments, and exceptions as, in the CFPB's
judgment, are necessary and proper to carry out the purposes of TILA,
prevent
[[Page 13860]]
circumvention or evasion thereof, or to facilitate compliance. In
developing these aspects of the proposal pursuant to its authority
under TILA section 105(a), the CFPB has considered the purposes of
TILA, including ensuring meaningful disclosures, facilitating
consumers' ability to compare credit terms, helping consumers avoid the
uninformed use of credit, and protecting consumers against inaccurate
and unfair credit billing and credit card practices, and the findings
of TILA, including strengthening competition among financial
institutions and promoting economic stabilization.
B. Electronic Fund Transfer Act
EFTA section 902 establishes that the purpose of the statute is to
provide a basic framework establishing the rights, liabilities, and
responsibilities of participants in EFT and remittance transfer systems
but that its primary objective is the provision of individual consumer
rights.\94\ Among other things, EFTA contains provisions regarding
compulsory use of EFTs.\95\
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\94\ 15 U.S.C. 1693.
\95\ 15 U.S.C. 1693k.
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EFTA section 904(a) authorizes the CFPB to prescribe regulations to
carry out the purposes of EFTA.\96\ EFTA section 904(c) provides that
regulations prescribed by the CFPB may contain such classifications,
differentiations, or other provisions, and may provide for such
adjustments or exceptions for any class of EFTs or remittance
transfers, that the CFPB deems necessary or proper to effectuate the
purposes of EFTA, to prevent circumvention or evasion, or to facilitate
compliance.\97\ The Senate Report accompanying EFTA noted that
regulations are ``essential to the act's effectiveness'' and ``will add
flexibility to the act by permitting the [CFPB] to modify the act's
requirements to suit the characteristics of individual EFT services.
Moreover, since no one can foresee EFT developments in the future,
regulations would keep pace with new services and assure that the act's
basic protections continue to apply.'' \98\
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\96\ 15 U.S.C. 1693b(a).
\97\ 15 U.S.C. 1693b(c).
\98\ See S. Rept. No. 95-1273, at 26 (1978).
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EFTA section 904(c) also provides that the ``CFPB shall by
regulation modify the requirements imposed by this subchapter on small
financial institutions if the CFPB determines that such modifications
are necessary to alleviate any undue compliance burden on small
financial institutions and such modifications are consistent with the
purpose and objective of this subchapter.''
As discussed in part V below, the CFPB is adopting amendments to
Regulation E, including with respect to compulsory use of preauthorized
repayment and the definition of overdraft services, pursuant to the
CFPB's authority under, as applicable, EFTA section 904(a) and (c). The
CFPB is proposing to retain existing rules for financial institutions
with less than $10 billion in assets because the CFPB has determined
that such exceptions will alleviate undue compliance burdens as the
CFPB continues to examine the market for smaller financial
institutions.
C. Consumer Financial Protection Act
CFPA section 1022(b)(1). Section 1022(b)(1) of the CFPA authorizes
the CFPB to prescribe rules ``as may be necessary or appropriate to
enable the [CFPB] to administer and carry out the purposes and
objectives of the Federal consumer financial laws, and to prevent
evasions thereof.'' \99\
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\99\ 12 U.S.C. 5512(b)(1).
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Among other statutes, TILA, EFTA, and the CFPA are Federal consumer
financial laws.\100\ Accordingly, in setting forth this proposal, the
CFPB is exercising its authority under CFPA section 1022(b) to
prescribe rules that carry out the purposes and objectives of TILA,
EFTA, and the CFPA and prevent evasion of those laws.
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\100\ CFPA section 1002(14), 12 U.S.C. 5481(14) (defining
``Federal consumer financial law'' to include the provisions of the
CFPA and enumerated consumer laws; ``enumerated consumer laws'' is
defined in CFPA section 1002(12), 12 U.S.C. 5481(12)).
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V. Discussion of the Proposed Rule
A. Who is covered? (Sec. 1026.62(b)(8))
This proposed rule would expand protections to consumers of
overdraft credit at financial institutions with more than $10 billion
in assets. This proposal would not change the regulatory framework for
overdraft credit offered by financial institutions with $10 billion or
less in assets.
To limit the proposed rule to overdraft credit offered by financial
institutions with assets of more than $10 billion, the proposed rule
would define in proposed Sec. 1026.62(b)(8) the term ``very large
financial institution'' as an insured depository institution or an
insured credit union with total assets of more than $10 billion and any
affiliate thereof. A financial institution may determine whether it has
total assets of more than $10 billion using the same determination that
is used to determine whether such institutions are subject to the
CFPB's supervisory authority under 12 U.S.C. 5515(a). The CFPB
currently publishes a list of such institutions at https://www.consumerfinance.gov/compliance/supervision-examinations/institutions/. As discussed below, the proposed rule then uses the term
``very large financial institution'' to limit the scope of overdraft
credit that would be subject to the proposed rule.
The CFPB has preliminarily determined that overdraft services
offered by financial institutions with more than $10 billion in assets
should be subject to this rule. As noted above, in the supervisory
context, Congress adopted in 12 U.S.C. 5515(a) a $10 billion threshold
to define the ``very large banks, savings associations, and credit
unions'' that would be subject to the CFPB's primary supervision
authority. The CFPB has preliminarily determined that a $10 billion
threshold similarly should be used to define ``very large financial
institution'' for limiting the scope of overdraft credit that would be
covered by the proposed rule.
The CFPB has preliminarily determined that consumers would benefit
from the CFPB's proceeding with a rule that would apply to very large
financial institutions--i.e., those with assets of $10 billion or more.
Such a rule would increase protections for the overwhelming majority of
consumers of overdraft credit. This proposal would cover financial
institutions holding approximately 80 percent of consumer deposits as
of December 2022 \101\ and responsible for approximately 68 percent of
overdraft charges as of December 2022.\102\ The CFPB believes that
consumers at very large financial institutions would benefit from the
expanded protections that would be provided by the proposed rule.
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\101\ Computed from 2022 FFIEC and National Credit Union
Administration call report data.
\102\ Estimated using data from 2022 FFIEC Call Reports and
methodology discussed at FN 29.
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In light of the different circumstances smaller financial
institutions may face in adapting to the proposed regulatory framework,
the CFPB is proposing not to extend the new rule to those institutions
with $10 billion or less in assets. While the CFPB is not proposing any
changes to the regulatory requirements for smaller financial
institutions, the CFPB will continue to monitor the market in
coordination with State and Federal supervisors.
The CFPB seeks comment on its preliminary determination to apply
the proposed rule only to very large financial institutions and on
whether $10 billion is an appropriate threshold for defining very large
financial institutions.
[[Page 13861]]
B. What transactions and accounts are covered?
The CFPB proposes to add Sec. 1026.62(a) and (b) to define the
scope of transactions and accounts that would be covered under the
proposed rule. The proposed rule would introduce new terms and amend
several existing Regulation Z definitions and their commentary to state
that overdraft credit is credit and assist with ease of reference to
various types of overdraft credit. First, the proposal would define
overdraft credit in proposed Sec. 1026.62(a)(2), and proposed comment
2(a)(14)-4 would provide a brief example to illustrate that overdraft
credit is credit under TILA and Regulation Z.
The CFPB's proposed rule would add commentary to the definition of
open-end credit in Sec. 1026.2(a)(20) to confirm that overdraft credit
that is subject to a finance charge is generally open-end credit and is
therefore subject to the Regulation Z provisions that apply to open-end
credit. The proposed definitions of covered overdraft credit and non-
covered overdraft credit in new Sec. 1026.62(b) would assist with
referencing overdraft credit that would be or not be credit subject to
Regulation Z under this proposal. Covered overdraft credit under this
proposal would be overdraft credit that is subject to a finance charge
or is payable by written agreement in more than four installments, and
would be subject to Regulation Z. Non-covered overdraft credit under
this proposal would be overdraft credit that is neither subject to a
finance charge nor payable by written agreement in more than four
installments, and would not be subject to Regulation Z. Additionally,
the CFPB proposes to add a new definition of covered overdraft credit
account to facilitate ease of reference to credit accounts through
which the financial institutions extend or can extend covered overdraft
credit.
1. Overdraft Credit (Sec. Sec. 1026.2(a)(14) and 1026.62(a))
TILA defines ``credit'' to mean the right granted by a creditor to
a debtor to defer payment of debt or to incur debt and defer its
payment.\103\ Regulation Z similarly defines ``credit'' in existing
Sec. 1026.2(a)(14) to mean the right to defer payment of debt or to
incur debt and defer its payment. To facilitate compliance with the
proposed rule, proposed comment 2(a)(14)-4 would provide a brief,
illustrative example of overdraft credit. The 2016 Prepaid Final Rule
similarly notes that a ``person, in extending overdraft funds, has
provided the consumer with `the right . . . to incur debt and defer its
payment.' '' \104\
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\103\ 15 U.S.C. 1602(f).
\104\ 81 FR 83934, 84168 (Nov. 22, 2016).
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The CFPB is proposing to update several exceptions in Regulation Z,
increasing consumer protections that apply to overdraft credit offered
by very large financial institutions. To that end, the CFPB would add a
definition of ``overdraft credit'' in proposed Sec. 1026.62(a) to help
clarify the scope of transactions covered by the proposed rule.
Proposed Sec. 1026.62(a) would define ``overdraft credit'' as any
consumer credit extended by a financial institution to pay a
transaction from a checking or other transaction account (other than a
prepaid account as defined in Sec. 1026.61) held at the financial
institution when the consumer has insufficient or unavailable funds in
that account. Proposed Sec. 1026.62(a) would provide non-exhaustive
examples, such as consumer credit extended through a transfer from a
credit card account or overdraft line of credit.
The proposed definition of ``overdraft credit'' would not cover
credit features with respect to a prepaid account as defined in Sec.
1026.61. The CFPB has preliminarily determined that it would be
unnecessary and unduly burdensome to include prepaid accounts within
the scope of this proposed rule. The CFPB's Prepaid Accounts Rule
already provides comprehensive consumer protections tailored to prepaid
accounts.\105\
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\105\ The 2016 Prepaid Final Rule and subsequent amendments to
that rule are referred to collectively herein as the Prepaid
Accounts Rule.
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Proposed Sec. 1026.62(a) would also clarify that the term
``overdraft credit'' does not include credit exempt from Regulation Z
pursuant to existing Sec. 1026.3. For example, consistent with TILA
section 104(2),\106\ transactions in securities or commodities accounts
in which credit is extended by a broker-dealer registered with the
Securities and Exchange Commission or the Commodity Futures Trading
Commission are not subject to Regulation Z pursuant to existing Sec.
1026.3(d).
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\106\ 15 U.S.C. 1603(2).
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2. Open-End Credit (Sec. 1026.2(a)(20))
The term ``open-end credit'' is defined in Sec. 1026.2(a)(20) as
(1) consumer ``credit,'' (2) that is extended under a ``plan,'' (3)
where the person extending the credit may impose a ``finance charge''
from time to time on an outstanding unpaid balance, (4) the person
extending the credit is a ``creditor,'' (5) the person extending the
credit reasonably contemplates repeated transactions, and (6) the
amount of credit that may be extended to the consumer during the term
of the plan (up to any limit set by the creditor) is generally made
available to the extent that any outstanding balance is repaid.
For the reasons discussed below, the CFPB has preliminarily
determined that virtually all overdraft credit that financial
institutions provide today, such as through negative balances on
checking accounts, would meet the Regulation Z definition of open-end
credit, but for Regulation Z excepting overdraft fees from the
definition of finance charge. Specifically, but for those exceptions,
the typical $35 overdraft fee plainly constitutes a finance charge and
a financial institution that regularly assesses such a finance charge
is a creditor.\107\
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\107\ See Sec. 1026.2(a)(17)(i) (defining ``creditor'' as ``[a]
person who regularly extends consumer credit that is subject to a
finance charge. . . .'').
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The CFPB has preliminarily determined that overdraft credit that is
typical in the market today would become covered overdraft credit under
the proposed rule and would meet the six elements of open-end credit
under Regulation Z. For clarity and to facilitate compliance, the CFPB
is proposing additional commentary regarding two terms used in the
definition of open-end credit: ``plan'' and ``finance charge.'' The
following discusses each of the six elements in turn.
(1) Credit. As discussed above, a person extending overdraft funds
has provided credit under TILA and Regulation Z.\108\ Because the
consumer is obligated to repay the funds, the financial institution is
allowing the consumer to incur debt and defer its payment consistent
with the TILA and Regulation Z definitions of ``credit.''
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\108\ 15 U.S.C. 1602(f); 12 CFR 1026.2(a)(14).
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(2) Plan. The CFPB has preliminarily determined that a checking
account agreement offered in connection with overdraft credit would--
but for the Regulation Z exceptions of overdraft fees from the
definition of finance charge--constitute a ``plan'' consistent with the
definition of ``open-end credit plan'' in TILA.\109\ Specifically, but
for the Regulation Z exceptions, the checking account agreement--
consistent with the language of comment 2(a)(20)-2.i--would be ``a
contractual arrangement between the creditor [the institution offering
checking account overdraft credit] and the consumer.'' As noted, the
CFPB's proposed rule would modify those exceptions. The CFPB has
preliminarily determined that an
[[Page 13862]]
institution offering checking account overdraft credit would be a
creditor (discussed under (4) Person extending credit is a creditor,
below) and the account agreement would be ``a contractual arrangement
between the creditor and the consumer.'' The CFPB proposes to add
comment 2(a)(20)-2.iv to clarify that with respect to covered overdraft
credit, a plan means a program where the consumer is obligated
contractually to repay any credit extended by the creditor, even if the
creditor retains discretion not to extend credit in individual
transactions.
---------------------------------------------------------------------------
\109\ 15 U.S.C. 1602(j).
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The CFPB has preliminarily determined that the reservation of such
discretion in connection with covered overdraft credit does not connote
the absence of an open-end credit plan. The CFPB understands that
financial institutions offering automated overdraft services include in
their agreements provisions about how the overdraft service will
operate and information about overdraft fees. These terms-and-
conditions documents typically stipulate that consumers using overdraft
programs must and do agree to repay the debt created by an overdraft
and the related fee, indicating that a contractual arrangement between
the creditor and the consumer exists. Although these agreements
typically state that the financial institution retains discretion to
authorize or decline any particular overdraft, as a practical matter,
financial institutions operating automated overdraft programs exercise
limited if any discretion in authorizing particular transactions so
long as the overdraft transaction is within the overdraft coverage
limit that the institution internally established. The CFPB notes that
credit card issuers similarly reserve the right to reject individual
transactions in their contractual agreements, yet credit card programs
are treated as open-end credit plans under TILA and Regulation Z.
Treating the provision of automated overdraft credit in a comparable
way would promote consistency. Therefore, the CFPB has preliminarily
determined that a checking account agreement offered in connection with
overdraft credit is a plan notwithstanding that the person offering the
agreement reserves the right to not extend credit on individual
transactions.
(3) Imposing a ``finance charge'' from time to time. The CFPB has
preliminarily determined that overdraft credit is generally subject to
fees that would be finance charges but for Regulation Z's exceptions to
the statutory finance charge definition. As noted, the CFPB's proposed
rule would modify those exceptions such that checking account overdraft
fees would generally be finance charges. In the absence of the
exceptions, the CFPB has preliminarily determined that an institution
offering checking account overdraft credit would be imposing a finance
charge from time to time.
While the proposed definition of covered overdraft credit includes
overdraft credit that is subject to a finance charge as well as
overdraft credit payable by a written agreement in more than four
installments, the CFPB anticipates that most overdraft credit would
meet the definition of covered overdraft credit because it is subject
to a finance charge rather than because it is payable in more than four
installments.\110\ The CFPB proposes comment 2(a)(20)-4.iii to explain
that charges for paying a transaction that overdraws a consumer's
account generally would be finance charges unless they are expressly
excluded from the definition of finance charge by the proposed rule.
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\110\ A card issuer that extends covered overdraft credit that
takes the form of closed-end credit and is subject to a finance
charge or payable by a written agreement in more than four
installments (including closed-end credit accessed by a hybrid
debit-credit card) would be a creditor under Sec. 1026.2(a)(17)(iv)
and subject to the special rules in that paragraph. A person who is
not a card issuer and regularly extends covered overdraft credit
that takes the form of closed-end credit and is subject to a finance
charge or is payable by written agreement in more installments would
be a creditor under Sec. 1026.2(a)(17)(i) and subject to the
closed-end credit rules in Regulation Z, subpart C.
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Proposed comment 2(a)(20)-4.iii would clarify that these are
charges ``imposed from time to time on an outstanding unpaid balance''
as long as there is no specific amount financed for the plan for which
the finance charge, total of payments, and payment schedule can be
calculated. The CFPB does not anticipate that there will be a specific
amount financed for overdraft credit at the time the credit plan is
established because the CFPB anticipates that the credit lines on these
credit plans generally will be replenishing (discussed under (6) Amount
of credit replenishes when outstanding balance is repaid, below). In
such cases, an amount financed for the plan could not be calculated
because the creditor will not know at the time the plan is established
the amount of credit that will be extended under the plan. Thus, to the
extent that any finance charge may be imposed in connection with such a
credit plan, the credit plan will meet this criterion.
(4) Person extending credit is a creditor. Assuming overdraft fees
are finance charges, the CFPB has preliminarily determined that an
institution providing covered overdraft credit is a ``creditor'' for
purposes of the definition of ``open-end credit.'' A ``creditor'' is
generally defined under Regulation Z to mean a person who regularly
extends consumer credit that is subject to a finance charge or is
payable by written agreement in more than four installments (not
including a down payment), and to whom the obligation is initially
payable, either on the face of the note or contract, or by agreement
when there is no contract.\111\ Therefore, to the extent that overdraft
credit is subject to a finance charge and is accordingly covered
overdraft credit, it is also extended by a creditor if the creditor
``regularly extends'' overdraft credit. The CFPB anticipates that most
persons offering covered overdraft credit regularly extend overdraft
credit and therefore would meet the definition of ``creditor.'' If an
institution providing open-end covered overdraft credit is considered a
``card issuer,'' then it would also be considered a creditor under
current Sec. 1026.2(a)(17)(iii) for purposes of Regulation Z, subpart
B.
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\111\ See Sec. 1026.2(a)(17)(i).
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(5) Reasonably contemplates repeated transactions. The CFPB has
preliminarily determined that institutions providing checking account
overdraft credit typically contemplate repeated overdraft transactions
as the CFPB found that 93.2 percent of overdraft and NSF fees were
assessed on consumers with four or more overdraft and NSF transactions
per year.\112\ The CFPB has therefore preliminarily determined that
this fifth element of the open-end credit definition is satisfied.
---------------------------------------------------------------------------
\112\ CFPB 2017 Data Point at 13.
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(6) Amount of credit replenishes when outstanding balance is
repaid. The CFPB has preliminarily determined that institutions
providing checking account overdraft credit generally replenish the
amount of overdraft credit available to consumers up to any overdraft
coverage limit (i.e., consumers' ``shadow lines'') to the extent that
any outstanding overdraft balance is repaid. This replenishable credit
distinguishes open-end credit from a series of advances made pursuant
to a closed-end credit loan commitment, but it does not mean that the
credit plan must always be replenished to the original amount. The
creditor may refuse to extend new credit in a particular case due to
changes in the creditor's financial condition or the consumer's
creditworthiness, if permitted by Regulation Z. While consumers should
have a reasonable expectation of obtaining credit as long as they
remain current, further extensions of credit need not be an
[[Page 13863]]
absolute right in order for the plan to meet the self-replenishing
criterion. Because the CFPB anticipates that financial institutions
will generally replenish overdraft credit to the extent that any
outstanding overdraft balance is repaid, the CFPB has preliminarily
determined that covered overdraft credit plans are generally
replenishing.
3. Covered Overdraft Credit (Sec. 1026.62(b)(3)), Non-Covered
Overdraft Credit (Sec. 1026.62(b)(6)), and Card Issuer (Sec.
1026.2(a)(7))
The CFPB proposes to define ``covered overdraft credit'' as
overdraft credit that is subject to a finance charge or is payable by
written agreement in more than four installments and ``non-covered
overdraft credit'' as overdraft credit that is not subject to a finance
charge and is not payable by written agreement in more than four
installments. The purpose of the proposed definitions is to assist with
ease of reference to overdraft credit that is subject to, or covered
by, Regulation Z. As discussed in more detail in part V.C, some charges
imposed in connection with overdraft credit are not considered finance
charges. Thus, use of the proposed definitions will also help a person
extending overdraft credit to readily ascertain whether they are
subject to the requirements of the regulation.
The proposed definition of ``overdraft credit'' is limited to
consumer credit, but, even with that qualification, not all overdraft
credit would be subject to Regulation Z if the definition is finalized
as proposed. Many provisions of Regulation Z apply to a ``creditor,''
which generally is defined at Sec. 1026.2(a)(17)(i) as ``[a] person
who regularly extends consumer credit that is subject to a finance
charge or is payable by written agreement in more than four
installments.'' Thus, a financial institution must offer overdraft
credit that is subject to a finance charge or is payable by written
agreement in more than four installments (i.e., covered overdraft
credit) to be considered a creditor under Regulation Z. (Any financial
institution offering overdraft credit will generally satisfy the
definition of ``regularly'' under Sec. 1026.2(a)(17)(v).) Because some
charges imposed in connection with overdraft credit are not considered
finance charges, a financial institution may charge for overdraft
credit without being considered a creditor under Regulation Z if
certain requirements are met.
Section 1026.2(a)(7) defines ``card issuer'' as a person that
issues a credit card or that person's agent with respect to the card.
Unlike other creditors, card issuers are subject to Regulation Z even
if they extend credit that is not subject to a finance charge and is
not payable by written agreement in more than four installments.\113\
However, this does not apply to overdraft credit that is not subject to
a finance charge or repayable by written agreement in more than four
installments, even if the financial institution extending such credit
would otherwise be considered a card issuer.\114\ Under the proposal,
extensions of overdraft credit that are not subject to a finance charge
and are not payable by written agreement in more than four-installments
(non-covered overdraft credit) would continue to not be covered by
Regulation Z. Further, under the proposal, institutions providing debit
cards that access only non-covered overdraft credit would continue to
not be card issuers, and would therefore not be creditors under Sec.
1026.2(a)(17)(iii), because the CFPB has preliminarily determined that
allowing financial institutions to offer debit cards that access only
below breakeven overdraft credit without being subject to Regulation Z
would further the purposes of this proposal as discussed in part V.C.
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\113\ See 12 CFR 1026.1(c), and 1026.2(a)(17)(iii). Card issuers
are also covered by the general rule that subjects them to
Regulation Z if they extend open-end credit.
\114\ Comment 2(a)(15)-2.ii.A. This comment provides that a
debit card is not a credit card if there is no credit agreement,
even if the creditor occasionally honors an inadvertent overdraft.
Because the debit card is not considered a ``credit card'' under
Regulation Z, a financial institution offering a debit card that can
access non-covered overdraft credit is not considered a card issuer.
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For these reasons, the CFPB has preliminarily determined that a new
definition of ``covered overdraft credit'' that parallels the general
definition of creditor will assist with ease of reference to overdraft
credit that is subject to Regulation Z. Additionally, the CFPB has
preliminarily determined that a new definition of ``non-covered
overdraft credit'' will assist with ease of reference to overdraft
credit that is not subject to, or covered by, Regulation Z,
particularly in the proposed rule's costs and losses calculation in
Sec. 1026.62(d).
4. Covered Overdraft Credit Account (Sec. 1026.62(b)(4))
The CFPB proposes to define ``covered overdraft credit account'' as
a credit account through which a financial institution extends or can
extend covered overdraft credit. The term includes any line of credit,
credit card account, credit feature, credit line, credit plan, or
credit subaccount through which the financial institution extends or
can extend covered overdraft credit. Proposed Sec. 1026.62(c) would
require very large financial institutions to structure covered
overdraft credit as a separate credit account. Therefore, the term
``covered overdraft credit account'' would assist in ease of reference
to these separate credit accounts and in distinguishing them from tied
checking or other transaction accounts.
C. Changes to the Definition of ``finance charge'' (Sec. 1026.4(b)(2),
(b)(12), and (c)(3); Sec. 1026.62(d))
Under Regulation Z, the term ``finance charge'' generally is
defined in Sec. 1026.4(a) to mean ``the cost of consumer credit as a
dollar amount.'' It includes any charge payable directly or indirectly
by the consumer and imposed directly or indirectly by the creditor as
an incident to or a condition of the extension of credit. It does not
include any charge of a type payable in a comparable cash transaction.
Regulation Z currently excludes certain fees or charges imposed by
a financial institution for paying items that overdraw an account from
the definition of ``finance charge'' unless ``the payment of such items
and the imposition of the charge were previously agreed upon in
writing.'' \115\ Additionally, where the payment of such items and
imposition of the charge were previously agreed upon in writing, when a
creditor imposes a service, transaction, activity, or carrying charge
for each item that results in an overdraft on an account, such fees are
excluded from the definition of finance charge if they do not exceed
the charges imposed for paying or returning overdrafts on a similar
transaction account that does not have such a written agreement.\116\
Neither of these exclusions appear within the statutory text of TILA.
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\115\ 12 CFR 1026.4(c)(3).
\116\ 12 CFR 1026.4(b)(2).
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The proposal would amend the definition of ``finance charge'' in
Sec. 1026.4 in three ways. First, it would modify the partial
exception provided in Sec. 1026.4(b)(2) for certain charges imposed on
checking and other transaction accounts so that the partial exception
would no longer apply to ``covered asset accounts'' as defined in
proposed Sec. 1026.62. Second, it would add proposed Sec.
1026.4(b)(12) that would provide examples of charges imposed in
connection with covered overdraft credit that are finance charges.
Third, it would amend the exception provided in Sec. 1026.4(c)(3) so
that the exception would no longer apply to ``above breakeven overdraft
credit'' as defined
[[Page 13864]]
in proposed Sec. 1026.62. These proposed amendments are intended to
specify which overdraft transactions include a finance charge and,
therefore, may be subject to the requirements of TILA and Regulation Z.
1. Comparable Cash Transactions (Sec. 1026.4(b)(2))
Under TILA section 106(a) (15 U.S.C. 1605(a)), the term ``finance
charge'' generally provides that ``the amount of the finance charge in
connection with any consumer credit transaction shall be determined as
the sum of all charges, payable directly or indirectly by the person to
whom the credit is extended, and imposed directly or indirectly by the
creditor as an incident to the extension of credit.'' \117\ The finance
charge does not include any charge of a type payable in a comparable
cash transaction.\118\
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\117\ 12 CFR 1026.4(a). Current Sec. 1026.4 implements TILA
section 106 by largely mirroring the statutory definition of finance
charge and the specific exclusions from that definition. In
addition, Sec. 1026.4 specifies certain inclusions and exclusions
from the finance charge that are not specifically listed in the
statute. For example, Sec. 1026.4(c) specifically excludes
application fees and forfeited interest from the definition of
finance charge, whereas TILA does not.
\118\ See 15 U.S.C. 1605(a).
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The current official interpretations address comparable cash
transactions by stating that charges imposed uniformly in cash and
credit transactions are not finance charges and by instructing that, to
determine whether a transaction is a finance charge, the creditor
should compare the credit transaction to a similar cash
transaction.\119\ The Board updated the commentary addressing finance
charges numerous times.\120\
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\119\ Regulation Z comment 4(a)-1.
\120\ For example, the Board initially adopted comment 226.4(a)-
4 to indicate that a fee charged by a card issuer when a consumer
takes a cash advance on a credit card account using an ATM was not a
finance charge to the extent that it did not exceed the charge
imposed by the card issuer on its cardholders for using an ATM to
withdraw cash from a consumer asset account, such as a checking or
savings account. 48 FR 54642 (Dec. 6, 1983) and 49 FR 40560 (Oct.
17, 1984). After subsequent rulemaking activity, current comment
4(a)-4.1 provides that, for example, any charge imposed on a credit
cardholder by a card issuer for the use of an ATM to obtain a cash
advance is a finance charge regardless of whether the card issuer
imposes a charge on its debit cardholders for using the ATM to
withdraw cash from a consumer asset account, such as a checking or
savings account. 74 FR 5263 (Jan. 29, 2009).
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Section 1026.4(b) lists examples of the types of charges that
generally are finance charges. In particular, Sec. 1026.4(b)(2)
provides that the finance charge includes ``[s]ervice, transaction,
activity, and carrying charges, including any charge imposed on a
checking or other transaction account (except a prepaid account as
defined in Sec. 1026.61) to the extent that the charge exceeds the
charge for a similar account without a credit feature.''
The historical roots of Sec. 1026.4(b)(2) trace back to the first
version of Regulation Z, published by the Board in 1969. In that
version, Sec. 226.4(a)(2) indicated that the finance charge included
service, transaction, activity, or carrying charges. The 1969 version
of Sec. 226.4(a)(2) also included a footnote stating that the charges
listed in Sec. 226.4(a)(2) included ``any charges imposed by the
creditor in connection with a checking account to the extent that such
charges exceed any charges the customer is required to pay in
connection with such account when it is not being used to extend
credit.'' \121\
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\121\ 34 FR 2002, 2004 n.2 (Feb. 11, 1969).
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As part of its 1981 amendments to Regulation Z, the Board moved the
text of Sec. 226.4(a)(2) to its current location in Sec. 1026.4(b)(2)
and incorporated the language from the accompanying footnote into the
main regulation text.\122\ Later that year, the Board also published
comment 4(b)(2)-1, which provided two examples of service charges
assessed on asset accounts with tied overdraft lines of credit that are
not finance charges.\123\ In 1998, the Board revised comment 4(b)(2)-1
to clarify that a service charge on a checking or other transaction
account with a credit feature is a finance charge only if the charge
exceeds the charge for a similar account without a credit feature.\124\
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\122\ 46 FR 20848, 20894 (Apr. 7, 1981).
\123\ 46 FR 50288, 50299 (Oct. 9, 1981).
\124\ 63 FR 16669, 16675 (Apr. 6, 1998).
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The CFPA generally granted rulemaking authority under the TILA and
transferred primary oversight of Regulation Z to the CFPB.
Subsequently, the CFPB renumbered Sec. 226.4 to Sec. 1026.4.\125\ In
2016, the CFPB amended both Sec. 1026.4(b)(2) and comment 4(b)(2)-1 to
exclude prepaid accounts as defined in Sec. 1026.61.\126\ As part of
that rulemaking, the CFPB provided detailed guidance in comment
4(b)(11)(ii) regarding how fees on prepaid accounts with a covered
separate credit feature accessible by a hybrid prepaid-credit card
should be compared to fees imposed on prepaid accounts without a
covered separate credit feature. This guidance was more detailed and
more restrictive than the guidance provided under Sec. 1026.4(b)(2)
with regard to checking and transaction accounts other than prepaid
accounts.\127\ As part of this guidance, the CFPB noted that the per
transaction fee for a credit extension in the course of a transaction
from a covered separate credit feature cannot be compared to a fee for
declining to pay a transaction that is imposed on a prepaid account
without such a credit feature in the same prepaid account program.\128\
The CFPB was concerned about possible evasion of the rule, noting that
many prepaid cardholders who wish to use covered separate credit
features may not have other asset accounts or savings accounts from
which they can transfer funds to prevent an overdraft on the prepaid
account in the course of authorizing, settling, or otherwise completing
a transaction to obtain goods or services, obtain cash, or conduct
person-to-person (P2P) transfers.\129\ As a result, if such a
comparison were permitted, card issuers could charge a substantial fee
to transfer funds from the checking account or savings account during
the course of a transaction using the prepaid account (which many
prepaid cardholders who wish to use covered separate credit features
may not be able to use as a practical matter) and then charge that same
substantial per transactions fee for credit drawn or transferred from
the covered separate credit feature during the course of a transaction
without such fee being considered a finance charge.\130\ The CFPB thus
concluded that it was appropriate to limit the comparable fee in this
case to per transaction fees imposed on prepaid accounts for
transactions that access funds in the prepaid account in the same
prepaid account program that does not have a covered separate credit
feature because all prepaid accountholders can use prepaid accounts to
make transactions that access available funds in the prepaid account
and thus these types of transactions are available to all prepaid
accountholders.\131\
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\125\ 76 FR 79767 (Dec. 22, 2011).
\126\ 81 FR 83934, 84369, 84374 (Nov. 22, 2016).
\127\ Id. at 84185.
\128\ Id. at 84186.
\129\ Id.
\130\ Id. at 84186-87.
\131\ Id. at 84187.
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i. What is changing?
The proposal would revise Sec. 1026.4(b)(2) and comment 4(b)(2)-1
to provide that Sec. 1026.4(b)(2) does not apply to ``covered asset
accounts'' as defined in Sec. 1026.62. This proposed exception would
mirror the exception created by the CFPB's Prepaid Rule.
The proposal also would add a paragraph at Sec. 1026.4(b)(12).
Proposed Sec. 1026.4(b)(12) would add examples of finance charges with
regard to covered asset accounts, as defined in proposed Sec.
1026.62(b)(2). These proposed changes would broaden the definition of
[[Page 13865]]
``finance charge'' for covered asset accounts to apply the applicable
rules to such accounts so that the full cost of credit is more
accurately disclosed. The effect of the proposed changes would be to
limit the existing exclusion in Sec. 1026.4(b)(2) such that nearly all
service, transaction, activity, and carrying charges imposed on covered
asset accounts, including, in particular, fees commonly known as
``transfer fees'' for moving funds from overdraft lines of credit to
covered asset accounts, would be ``finance charges'' under Regulation Z
unless subject to another exclusion or limitation.\132\
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\132\ Under the proposal, fees would continue to be excluded
from the definition of finance charge if they are described in
existing Sec. 1026.4(c) through (e).
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ii. Charges Imposed on Credit Accounts Required by Sec. 1026.62(c)
(Sec. 1026.4(b)(12)(i))
Proposed Sec. 1026.4(b)(12)(i) would specify that any service,
transaction, activity, or carrying charge imposed on the separate
credit account required by Sec. 1026.62(c) is a finance charge. That
is, the fees described in proposed Sec. 1026.4(b)(12)(i) would be
finance charges without regard to a comparison to fees for a comparable
cash transaction.
Under Sec. 1026.62(c), the required credit account exists for the
purpose of providing credit. Therefore, service, transaction, activity,
or carrying charges on this separate credit account are, per the
finance charge definition in Sec. 1026.4(a), generally imposed as an
incident to or a condition of the extension of credit, separate and
distinct from any such fees applied to a separate checking or other
transaction account. Because of the nature of the credit account, it
would be difficult or impossible to determine which, if any, charge
applied to a checking or other asset account is a charge for a similar
or comparable cash transaction for the purpose of Sec. 1026.4(a). As
with the Board's analysis in the 2009 amendment regarding credit card
fee transactions, there is not necessarily a single or standard
checking account to use for fee comparison. For example, there may be
different fees applied to a checking account with a low balance minimum
versus another type of checking account. Thus, it would be difficult in
many cases to say which checking account provides the appropriate fee
for comparison. Even assuming a comparable transaction could be
identified, the disclosure a consumer might receive would depend on
whether the creditor provides other asset accounts and imposes service,
transaction, activity, or carrying charges on those accounts and
whether the fees applied to those accounts exceed the fees for those on
the separate credit account. As with the distinctions analyzed by the
Board in the 2009 amendment, it is not clear that these distinctions
are meaningful to consumers.\133\ The CFPB has thus preliminarily
determined that any service, transaction, activity, or carrying charge
imposed on the separate credit account required by Sec. 1026.62(c)
would be a finance charge, except for charges specifically excluded by
paragraphs (c) through (e) of section 1026.4.
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\133\ 74 FR 5263 (Jan. 29, 2009). As discussed above, the
purposes of TILA are to provide a meaningful disclosure of credit
terms to enable consumers to compare credit terms available in the
marketplace more readily and avoid the uninformed use of credit and
to protect consumers against inaccurate and unfair credit billing
and credit card practices. 15 U.S.C. 1601(a).
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iii. Charges Imposed on Covered Asset Accounts (Sec.
1026.4(b)(12)(ii))
Proposed Sec. 1026.4(b)(12)(ii) would specify that any service,
transaction, activity, or carrying charge imposed on the covered asset
account is a finance charge to the extent that the charge exceeds a
comparable charge imposed on a checking or other transaction account
that does not have covered overdraft credit tied to it. That is, any
such charge is a finance charge to the extent that it exceeds a
comparable charge imposed on a checking or other transaction account
that is not a covered asset account. This provision would largely
mirror existing Sec. 1026.4(b)(2) but with adjustments for covered
asset accounts.
iv. Examples of Charges Imposed on Covered Asset Accounts (Sec.
1026.4(b)(12)(iii)(A) Through (C))
Proposed Sec. 1026.4(b)(12)(iii) would describe certain charges on
a checking or other transaction account that does not have covered
overdraft credit tied to it that are not comparable to charges imposed
on a covered asset account, which, by definition, does have covered
overdraft credit tied to it. These charges would therefore not be
permitted to be subtracted from charges applied to the covered asset
account for the purpose of determining whether or not a charge on the
covered asset account is a finance charge.
Proposed Sec. 1026.4(b)(12)(iii)(A) would exclude from the
determination of a finance charge comparison of a charge for
authorizing or paying a transaction that overdraws the checking or
other transaction account that does not have covered overdraft credit.
Proposed Sec. 1026.4(b)(12)(iii)(B) would exclude from the
determination of a finance charge comparison of a charge for declining
to authorize or pay a transaction, and proposed Sec.
1026.4(b)(12)(iii)(C) would exclude from the determination of a finance
charge comparison of a charge for returning a transaction unpaid.\134\
Thus, under proposed Sec. 1026.4(b)(12)(iii)(A) through (C), a very
large financial institution may impose a service fee on a covered asset
account when the institution transfers funds into the account from a
covered overdraft credit account to cover a transaction that would
otherwise overdraw the covered asset account. The institution may also
impose a fee on a checking or other transaction account that does not
have covered overdraft credit (i.e., is not a covered asset account)
when the institution authorizes or pays a transaction that would
otherwise overdraw the checking or other transaction account, declines
to authorize or pay a transaction that would otherwise overdraw the
checking or other transaction account, or returns unpaid a transaction
that would otherwise overdraw the checking or other transaction
account. However, the fee applied to a checking or other transaction
account that does not have covered overdraft credit may not be compared
to the fee on a covered asset account for the transfer of funds to
cover a transaction. Accordingly, under proposed Sec.
1026.4(b)(12)(iii)(A) through (C), the full amount of the service fee
on a covered asset account when a very large financial institution
transfers funds into the account from a covered overdraft credit
account to cover a transaction that would otherwise overdraw the
covered asset account would be a finance charge. Taken together, these
three provisions would clarify that the service, transaction, activity,
or carrying charges imposed on covered asset accounts may not, for the
purposes of determining whether such fees are ``finance charges,'' be
reduced by fees that relate to granting or denying a transaction that
would overdraw an account without covered overdraft credit.
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\134\ Some or all of the fees described in proposed Sec.
1026.4(b)(12)(iii)(A) through (C) are sometimes referred to as
``overdraft fees,'' ``declination fees,'' or ``NSF fees.'' Proposed
Sec. 1026.4(b)(12)(iii)(A) through (C) are broadly inclusive of the
types of fees described therein, regardless of how such fees are
labeled.
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The CFPB has made the preliminary determination to exclude from the
determination of a finance charge these categories of charges for two
reasons.
[[Page 13866]]
First, these types of charges are charges associated with decisions
regarding whether or not to extend credit. The charges described in
proposed Sec. 1026.4(b)(12)(iii)(A) are applied if credit is extended;
the charges described in proposed Sec. 1026.4(b)(12)(iii)(B) and (C)
are applied if credit is denied. As such, they are not charges
associated with cash transactions, comparable or otherwise, and should
not be compared to or subtracted from fees associated with covered
overdraft credit. Additionally, the charges described in proposed Sec.
1026.4(b)(12)(iii)(B) may be described as a penalty, while the charges
described in proposed Sec. 1026.4(b)(12)(iii)(C) may be described as a
service charge. In neither case are the charges of a type payable in
comparable cash transactions.
v. Additional Examples of Charges Imposed on Covered Asset Accounts
(Sec. 1026.4(b)(12)(iii)(D) and (E))
Proposed Sec. 1026.4(b)(12)(iii)(D) would exclude, for purposes of
determining whether the fee is a finance charge, comparison of a charge
for transferring funds from any credit account into a checking or other
transaction account that does not have covered overdraft credit.
Proposed Sec. 1026.4(b)(12)(iii)(E) would exclude, for purposes of
determining whether the fee is a finance charge, comparison of a charge
for transferring funds from any other asset account, such as a savings
account, into a checking or other transaction account that does not
have covered overdraft credit. Thus, under proposed Sec.
1026.4(b)(12)(iii)(D) and (E), a very large financial institution may
impose a service fee on a covered asset account when the institution
transfers funds into the account from a covered overdraft credit
account to cover a transaction that would otherwise overdraw the
covered asset account. The institution may also impose a fee to
transfer funds into the checking or other transaction account (i.e., an
account that is not a covered asset account) from any credit account or
from any other asset account, such as a savings account, to cover a
transaction that would otherwise overdraw the checking or other
transaction account. But the fee applied to a checking or other
transaction account that does not have covered overdraft credit may not
be compared to the fee on a covered asset account for the transfer of
funds to cover a transaction. Accordingly, under proposed Sec.
1026.4(b)(12)(iii)(D) and (E), the full amount of the service fee on a
covered asset account when a very large financial institution transfers
funds into the account from a covered overdraft credit account to cover
a transaction that would otherwise overdraw the covered asset account
would be a finance charge.
The exclusion in proposed Sec. 1026.4(b)(12)(iii)(D) addresses
charges in connection with an extension of credit that is regulated as
credit, albeit not overdraft credit. Because these are charges payable
in a credit transaction, the CFPB has preliminarily determined that
these are not charges payable in a comparable cash transaction and
should not be used for comparison in the determination of a finance
charge.
The exclusion in proposed Sec. 1026.4(b)(12)(iii)(E) addresses
charges to transfer funds into a checking or other transaction account
that is not a covered asset account from any other asset account to
cover a transaction that would otherwise overdraw the checking or other
transaction account. This is because the CFPB is concerned about the
possibility for evasion from the requirements of Regulation Z if
comparison of the charges described in Sec. 1026.4(b)(12)(iii)(E) were
to be permitted.
The majority of combined overdraft and NSF fees are paid by a small
subset of consumers. CFPB research found that 79 percent of combined
overdraft and NSF fees were paid by 9 percent of consumers who paid
more than 10 such fees per year, incurring a median of $380 in these
fees in a year.\135\ Consumers paying more than 20 such fees in a year
accounted for about 5 percent of accounts, while paying over 63 percent
of the fees.\136\
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\135\ CFPB 2017 Data Point at 5; CFPB 2014 Data Point at 12.
\136\ CFPB 2017 Data Point at 5.
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Consumers whose accounts are frequently overdrawn are typically
more financially insecure than those who do not overdraw or who do so
infrequently.\137\ Accordingly, many consumers who overdraft may not
have other asset accounts or may not have sufficient funds in those
accounts from which they can transfer funds to prevent such overdraft.
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\137\ See id. at 5-6.
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If such a comparison were permitted, a bank could potentially avoid
the definition of ``finance charge'' by charging a substantial fee for
transferring funds into a checking or other transaction account that is
not a covered asset account from any other asset account and then
charge that same substantial amount for any service, transaction,
activity, or carrying charge imposed on the covered asset account. By
comparing the two substantial fees to each other, the amount of the
charge on the covered asset account would not be considered a finance
charge. For the subset of consumers who pay the majority of overdraft
and NSF fees, however, this comparison of fees would be a comparison
between a product that such consumers can readily access (i.e., covered
asset accounts) to a product that a majority of such consumers may not
be able to access (i.e., other asset accounts) because they do not have
such accounts or do not have sufficient funds in those accounts to
easily execute transfers. As a result, the CFPB preliminarily concludes
that a per transaction fee for transferring asset funds from other
asset accounts such as a savings account should not be compared with
(should not be allowed to be subtracted from) a service, transaction,
activity, or carrying charge assessed on a covered asset account. The
CFPB seeks comment on the proposed revisions to Sec. 1026.4(b)(2), the
proposal to add Sec. 1026.4(b)(12), and the CFPB's preliminary
conclusions regarding comparable cash transactions.
2. History of the Current Sec. 1026.4(c)(3) Exception
Historically, whenever a consumer bounced a check written against a
deposit account that lacked a credit feature, the consumer's financial
institution typically returned the check unpaid and assessed the
consumer an NSF fee. In addition, the payee on the check might have
taken various actions against the consumer, such as assessing the
consumer a late fee or returned item fee, reporting the consumer's
payment as late to a credit bureau, or bringing legal action against
the consumer for writing a bad check.\138\ However, instead of
returning the check unpaid, a financial institution, in its discretion,
might have paid the check into overdraft as a courtesy.\139\
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\138\ 74 FR 5212, 5214 (Jan. 29, 2009); 74 FR 59033, 59035 (Nov.
17, 2009); Steve Cocheo, Follow the Bouncing Check, 95 ABA Banking
J. 32, at 34 (Apr. 2003) (Cocheo 2003).
\139\ See Peter G. Weinstock & Stephanie E. Dreyer, Overdraft
Protection Programs: The Emerging Battleground for Bankers and
Consumer Advocates, 121 Banking L. J. 791, at 795 (2004) (``Banks
have been paying NSF items as a service to customers on a case-by-
case basis for decades.''); see also Cocheo 2003 at 34 (``Our
overdraft program formalizes the traditional courtesy of paying
insufficient checks. . . .'') (quoting Gaynell Lawson, Executive
Vice-President and Chief Financial Officer of Citizens Bank of
Blount County).
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Although Congress did not exempt any category of overdraft credit
from TILA,\140\ the Board used its exception (not its interpretive)
authority to create a limited exception for this longstanding practice
when it issued Regulation Z in
[[Page 13867]]
1969.\141\ Specifically, the Board added Sec. 226.4(d), which provided
that ``[a] charge imposed by a bank for paying checks which overdraw or
increase an overdraft in a checking account is not a finance charge
unless the payment of such checks and the imposition of such finance
charge were previously agreed upon in writing.'' \142\ A bank providing
discretionary, check-centric overdraft (a.k.a. ``bounce-check
protection'' or ``courtesy overdraft protection'' services, as noted in
later Federal Register publications \143\) was not a creditor subject
to Regulation Z because, pursuant to this exception, it did not impose
a finance charge (and otherwise did not structure the repayment of
credit by written agreement in more than four installments).\144\ As
Board commentary on Regulation Z noted, this exception enabled a bank
to ``occasionally, as an accommodation to its customer, honor a check
which inadvertently overdraws that account'' without having to comply
with the requirements of Regulation Z.\145\
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\140\ See Public Law 90-321, 82 Stat. 146 (May 29, 1968),
codified as amended at 15 U.S.C. 1601 et seq.
\141\ 34 FR 2002, 2004 (Feb. 11, 1969); 73 FR 28904, 28927 (May
19, 2008) (``Historically, if a consumer engaged in a transaction
that overdrew his or her account, depository institutions used their
discretion on an ad hoc basis to pay the overdraft, usually imposing
a fee. The Board recognized this longstanding practice when it
initially adopted Regulation Z in 1969 to implement TILA.'').
\142\ 34 FR 2002, 2004 (Feb. 11, 1969).
\143\ 70 FR 29582, 29582 n.1 (May 24, 2005).
\144\ See 12 CFR 1026.2(a)(17)(i).
\145\ 42 FR 22360, 22362 (May 3, 1977).
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In 1981, the Board amended Regulation Z to, among other things,
make ``a few minor editorial changes'' to the Sec. 226.4(d)
exception.\146\ Specifically, the Board changed the term ``bank'' to
``financial institution'' and the term ``checks'' to ``items.'' \147\
The Board made these changes ``to reflect the ability of financial
institutions other than banks, such as savings and loan associations,
to pay items that are similar to checks, such as negotiable orders of
withdrawal, into overdraft.'' \148\ Additionally, the Board renumbered
Sec. 226.4(d) to Sec. 226.4(c)(3).\149\ By making these ``minor
editorial changes,'' the Board stated that ``[n]o substantive change is
intended . . . .'' \150\ In other words, the Board did not change the
purpose of the Sec. 226.4(d) exception, which was to allow financial
institutions to provide consumers with courtesy check-centric overdraft
services without having to comply with the requirements of TILA and
Regulation Z.
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\146\ 46 FR 20848, 20855 (Apr. 7, 1981).
\147\ Id.
\148\ Id.
\149\ Id.
\150\ Id.
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The language from the Board's 1981 version of Sec. 226.4(c)(3)
remains in effect unchanged at Sec. 1026.4(c)(3) in the CFPB's current
version of Regulation Z.\151\
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\151\ In 2016, the CFPB added an additional sentence to the end
of Sec. 1026.4(c)(3) to clarify that the paragraph does not apply
to credit offered in connection with a prepaid account as defined in
Sec. 1026.61. See 81 FR 83934, 84179 (Nov. 22, 2016). However, this
amendment did not impact the text of the portion of Sec.
1026.4(c)(3) adopted in 1981.
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3. Proposed Changes to the Sec. 1026.4(c)(3) Exception
It is the CFPB's preliminary view that the Sec. 1026.4(c)(3)
exception is overbroad for purposes of the current non-covered
overdraft market. To address the issue, the CFPB proposes to add a new
sentence to the end of Sec. 1026.4(c)(3) that would provide that the
paragraph no longer applies to ``above breakeven overdraft credit'' as
that term is defined in proposed Sec. 1026.62. As discussed in part
V.A, the CFPB proposes to apply its proposed Sec. 1026.4(c)(3)
amendment only to very large financial institutions.
The CFPB proposes to define the term ``above breakeven overdraft
credit'' at Sec. 1026.62(b)(1) to mean overdraft credit extended by a
very large financial institution to pay a transaction on which, as an
incident to or a condition of the overdraft credit, the very large
financial institution imposes a charge or combination of charges
exceeding the average of its costs and charge-off losses for providing
non-covered overdraft credit as described in Sec. 1026.62(d). The CFPB
proposes to establish above breakeven overdraft credit by reference to
the average of a very large financial institution's cost and charge off
losses for providing non-covered overdraft credit rather than the cost
and estimated charge-off losses for providing non-covered overdraft
credit for each separate transaction because the CFPB has preliminarily
determined, based on its supervisory experience, that many financial
institutions currently do not track their costs and charge-off losses
at the transaction level, but generally can calculate their average
costs and charge-off losses at the product level. Further, the CFPB
expects that an institution-wide calculation would be easier for very
large financial institutions to administer.
The CFPB is proposing these changes for several independent
reasons.
First, the market for non-covered overdraft credit has changed in
important ways--many financial institutions have automated their non-
covered overdraft programs and expanded them to cover non-check
transactions, while also adjusting their account pricing structure to
more heavily emphasize overdraft fees.\152\ These changes have caused
the market for non-covered overdraft credit to move away from the
historical courtesy model to the point that, for a significant number
of consumers, non-covered overdraft credit is no longer an occasional
accommodation for inadvertent overdrafts.
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\152\ 74 FR 5212 (Jan. 29, 2009); 81 FR 83934, 83950-51 (Nov.
22, 2016).
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Unlike in 1969, when checks made up the lion's share of overdraft
transactions,\153\ recent CFPB analysis of account data from a number
of large banks showed that on average overall only 10.36 percent of
monthly debit transactions occurred by check, while 62.14 percent
occurred by debit card (both one-time and recurring), 12.14 percent
occurred by ACH, 6.43 percent occurred by ATM, 0.71 percent occurred by
bank teller, and the remainder occurred by other means.\154\
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\153\ Stephen Quinn & William Roberds, The Evolution of the
Check as a Means of Payment: A Historical Survey, 93 Fed. Rsrv. Bank
of Atlanta Econ. Rev. 1, at 21 (2008).
\154\ CFPB 2014 Data Point at 17.
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This shift away from check transactions is significant because, as
financial institutions have automated their non-covered overdraft
programs and expanded them to cover non-check transactions, the sheer
volume of overdraft transactions and associated fees has
increased.\155\ This trend especially is pronounced with respect to
debit cards, where CFPB research shows that incidence of overdraft
increases for consumers who use debit cards. For example, CFPB research
shows that 92.3 percent of accounts that do not use debit cards have no
overdrafts in a year of account use and only 0.6 percent of such
accounts incur more than 10 overdrafts per year.\156\ In contrast,
accounts that use their debit cards more than 30 times per month have
the lowest percentage of accounts with no overdraft (51.2 percent) and
the highest percentage of accounts that overdraft more than 10 times
per year (18.0 percent).\157\ In other words, for many consumers who
use debit cards frequently, non-covered overdraft credit services are
no longer provided as an occasional accommodation.\158\
[[Page 13868]]
Moreover, financial institutions today routinely extend overdraft
credit in circumstances where they stand to generate more direct
revenue from extending overdraft credit to cover a transaction than
they would from declining it (because, for example, consumers are
rarely charged NSF fees for declined debit card transactions,\159\ and
nearly two-thirds of banks with over $10 billion in assets have
eliminated NSF fees \160\).\161\ As a result of these changes, non-
covered overdraft programs now generate a substantial portion of the
direct fee revenue that many financial institutions make from checking
accounts (and much of the total revenue that financial institutions
make from low-balance accounts), which has encouraged some financial
institutions to promote consumers' use of non-covered overdraft credit
and/or to calibrate their systems to increase overdraft fee
revenue.\162\ This shift represents a significant departure from the
historical courtesy model, which provided an accommodation to consumers
for the occasional inadvertent overdraft.
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\155\ 81 FR 83934, 83950-51 (Nov. 22, 2016).
\156\ CFPB 2014 Data Point at 15 tbl.4c.
\157\ Id.
\158\ 42 FR 22360, 22362 (May 3, 1977) (``[Section 226.4(d) (now
section 1026.4(c)(3)] relates only to regular demand deposit
accounts which carry no credit features and in which a bank may
occasionally, as an accommodation to its customer, honor a check
which inadvertently overdraws that account.'').
\159\ 74 FR 5212, 5217 (Jan. 29, 2009).
\160\ See CFPB October 2023 Data Spotlight.
\161\ This was not always the case. Historically, financial
institutions charged no more for honoring an overdrawing check
through non-covered overdraft credit than they did for returning the
check unpaid. For example, a 1976 report on bank fees presented the
results of a survey of banks in New York and Washington, DC. Of the
41 banks surveyed, 39 charged overdraft fees that were equal to or
less than the amount of their NSF fees. See Senate Staff Report at
10-11.
\162\ See 81 FR 83934, 83950-51 (Nov. 22, 2016); 70 FR 29582,
29583 (May 24, 2005); CFPB 2013 White Paper at 16-17; CFPB Winter
2015 Highlight at 8-9; FDIC 2018 Highlight at 12; FDIC 2019
Highlight at 2-3.
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The proposed changes described in this section would return the
exception to its original conception--excepting overdraft services from
Regulation Z when offered as a courtesy or accommodation to customers--
while adapting it to fit within the modern payments system. The concept
of a courtesy or an accommodation is the provision of a service
primarily for the convenience of a customer. A credit product that
produces large amounts of revenue and profit, and is provided to many
people who may not want the service, is not consistent with the concept
of providing an additional service as a courtesy. The CFPB
preliminarily finds that, where a financial institution sets its
overdraft fees at or below its breakeven point, it provides a courtesy
service to consumers who overdraw their accounts. Conversely, where a
financial institution sets its overdraft fees above its breakeven
point, and profits from those fees, it cannot be said to be providing a
courtesy. The CFPB has preliminarily determined that the Sec.
1026.4(c)(3) exception should continue to apply to overdraft fees set
at or below the breakeven point, so that very large financial
institutions have the option to recover their costs and losses
associated with providing non-covered overdraft credit to consumers
(without having to comply with Regulation Z), and thus, are not
disincentivized from providing non-covered overdraft to consumers as a
convenience.
In addition to returning the Sec. 1026.4(c)(3) exception to its
original courtesy conception, an independent justification for the
proposed amendments to Sec. 1026.4(c)(3) is that they would further
TILA's purposes of promoting the informed use of credit and comparison
shopping across credit products. Currently, most non-covered overdraft
credit is subject to Regulations DD and E. Although Regulation DD and
Regulation E require certain disclosures for overdraft services,
neither regulation requires that such non-covered overdraft credit be
disclosed as a credit product. Instead, both regulations use terms like
overdraft fees, overdraft practices, or overdraft services that tend to
obscure the fact that financial institutions are providing consumers a
credit product. Applying the Regulation Z regulatory framework would
benefit consumers by ensuring that above breakeven overdraft credit is
disclosed as a credit product and treated like other credit products.
Treating above breakeven overdraft credit like other credit would
benefit consumers by helping them understand that they are entering
into a contract for a credit product provided by a creditor. Unlike the
disclosures required under Regulation DD and Regulation E, the
disclosures required by Regulation Z are designed to set forth
contractual terms for credit products clearly. Providing such
disclosures will help promote the informed use of credit. In addition,
treating above breakeven overdraft credit like other credit would
benefit consumers by aligning the disclosures for such credit with
other credit types and by applying Regulation Z's substantive credit
protections consistently across similar credit products.
Further, disclosing above breakeven overdraft credit under the
Regulation Z regulatory framework would make it easier for consumers to
compare the cost of such credit with the cost of other credit products,
such as linked credit cards, because financial institutions would
present the credit terms for above breakeven overdraft credit in the
same form that creditors present the credit terms of other credit
products. In its November 2009 rulemaking finalizing the current
Regulation E opt-in rule, the Board acknowledged that, based on its own
consumer testing, consumers are interested in receiving more
information about alternatives to non-covered overdraft credit services
on ATM and one-time debit card transactions prior to deciding whether
or not to opt in to such services.\163\ Even though consumers generally
are interested in alternatives to non-covered overdraft credit
services, some consumers, including consumers who may even have
alternative credit available to them,\164\ continue to be frequent
users of non-covered overdraft credit services despite its higher cost
relative to other forms of credit. For example, CFPB research found
that in 2012 the median overdraft fee was $34, the median size of a
debit card transaction incurring an overdraft fee was $24, and that the
majority of non-covered overdraft credit transactions were repaid
within three days.\165\ Putting these figures in lending terms, the
annual percentage rate (APR) for such a non-covered overdraft credit
transaction would be 17,000 percent (if transaction fees were included
in the APR calculation).\166\ By comparison, CFPB research found that
the APR for a typical payday loan was 391 percent and APRs on credit
cards can range between 12 and 30 percent.\167\ The fact that frequent
overdrafters continue to use non-covered overdraft credit services
despite its higher cost relative to other credit suggests that some
frequent overdrafters have difficulty comparing non-covered overdraft
credit services with available alternatives. Disclosing above breakeven
overdraft credit services under the Regulation Z regulatory framework
would promote
[[Page 13869]]
the informed use of credit by ensuring that credit terms were disclosed
consistently across competing credit products, thereby helping
consumers compare such credit with alternative credit options.
---------------------------------------------------------------------------
\163\ 74 FR 59033, 59048 (Nov. 17, 2009).
\164\ CFPB 2017 Data Point at 16 tbl. 2.
\165\ CFPB 2013 White Paper at 52; CFPB 2014 Data Point at 5.
\166\ Press Release, CFPB, CFPB Finds Small Debit Purchases Lead
to Expensive Overdraft Charges (July 31, 2014), https://www.consumerfinance.gov/about-us/newsroom/cfpb-finds-small-debit-purchases-lead-to-expensive-overdraft-charges/. Recent supervisory
data the CFPB has collected, reflecting transactions from 2022 and
2023, found that the median debit card overdraft resulted in an
overdraft credit extension of approximately $25.50. Assuming a
credit extension of $25.50, the $35 overdraft fee typical of very
large financial institutions, and a three-day repayment period
results in a similar APR of over 16,000 percent.
\167\ CFPB, Payday Loans and Deposit Advance Products, at 9
(Apr. 24, 2013), https://files.consumerfinance.gov/f/201304_cfpb_payday-dap-whitepaper.pdf; CFPB, Ask CFPB: What is a
payday loan?, https://www.consumerfinance.gov/ask-cfpb/what-is-a-payday-loan-en-1567/ (last reviewed Jan. 17, 2022).
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Moreover, the CFPB expects that applying the Regulation Z
regulatory framework to above breakeven overdraft credit services would
benefit consumers by applying the regulation's existing substantive
protections to such credit services. For example, the CFPB's proposal,
as discussed in additional detail in this notice, would apply the due
date requirement in 1026.7(b)(11)(i)(A), the offset prohibitions in
Sec. 1026.12(d)(1), and the ability to pay provisions in Sec. 1026.51
to covered overdraft credit accounts (including credit that currently
is non-covered above breakeven overdraft credit) that can be accessed
by a hybrid debit-credit card. Therefore, applying Regulation Z to
above breakeven overdraft credit would prohibit very large financial
institutions from immediately taking funds from any incoming deposit in
repayment of the consumer's overdraft balance, would require very large
financial institutions to establish due dates on the same day of each
billing cycle, and would require very large financial institutions to
assess the consumer's ability to pay for such credit--all protections
that the current Regulation DD and Regulation E regulatory frameworks
do not provide.
The CFPB acknowledges that the current Sec. 1026.4(c)(3) exclusion
has existed in its present form for decades and that very large
financial institutions have undertaken efforts to ensure that their
non-covered overdraft credit services comply with Regulations DD and E.
The CFPB also recognizes that some consumers have come to rely on the
availability of non-covered overdraft credit. The CFPB's proposal
reflects, in part, an effort to balance these reliance interests
against the other considerations discussed above in this section. The
proposed changes to Sec. 1026.4(c)(3) would require very large
financial institutions to comply with Regulation Z when providing above
breakeven overdraft credit services, but would allow them to continue
to comply with Regulations DD and E when providing non-covered
overdraft credit services at or below breakeven pricing. Thus, a very
large financial institution that has invested in compliance with
Regulations DD and E could maintain its current processes for providing
consumers with non-covered overdraft credit so long as it priced such
credit at or below breakeven pricing.
i. Alternatives to the Proposed Sec. 1026.4(c)(3) Amendment Considered
During the development of its proposal, the CFPB considered
alternatives to its proposed amendment to Sec. 1026.4(c)(3) including
(1) striking Sec. 1026.4(c)(3) from Regulation Z in its entirety and
(2) updating the opt-in disclosure requirements at Sec. 1005.17 of
Regulation E in a manner that would better disclose the costs
associated with authorizing non-covered overdraft protection for ATM
and debit card transactions.\168\
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\168\ Press Release, CFPB, CFPB Unveils Prototypes of ``Know
Before You Owe'' Overdraft Disclosure Designed to Make Costs and
Risks Easier to Understand (Aug. 4, 2017), https://www.consumerfinance.gov/about-us/newsroom/cfpb-unveils-prototypes-know-you-owe-overdraft-disclosure-designed-make-costs-and-risks-easier-understand/.
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With respect to the first alternative, the CFPB has preliminarily
determined that it should not eliminate all non-covered overdraft
credit. The CFPB believes that the proposed amendment to Sec.
1026.4(c)(3) is preferable because it would address the CFPB's concerns
relating to consumers' informed use of above breakeven overdraft
credit, including a consumer's ability to compare competing credit
offers, and apply other substantive protections, including ability to
pay requirements and offset restrictions, while allowing very large
financial institutions to still offer non-covered overdraft credit as a
courtesy if they chose to do so.
With respect to the second alternative, the CFPB preliminarily
determined that Regulation E opt-in disclosures would not communicate
the cost of above breakeven overdraft credit as effectively as
Regulation Z disclosures. As discussed above, applying Regulation Z
will ensure that above breakeven overdraft credit is disclosed as a
credit product and treated like other credit products. In addition,
Regulation E disclosures distinguish between overdraft transactions
completed via electronic fund transfers and overdraft transactions
completed via other funds transfer methods (such as checks), whereas
Regulation Z disclosures would apply identically to above breakeven
overdraft transactions regardless of fund transfer method. Modifying
the opt-in disclosure requirements at Sec. 1005.17 of Regulation E
also would not provide other substantive protections available through
Regulation Z, such as the ability to pay requirements and the offset
prohibition discussed above. These substantive protections are
important. For example, by requiring financial institutions to assess
consumers' ability to pay, the proposed rule would ensure that
financial institutions confirm that consumers could make the required
minimum periodic payments under the terms of their account based on
their income or assets and their current obligations. As another
example, by prohibiting offset and requiring the due date to be on the
same day each month for covered overdraft credit accessible by a hybrid
debit-credit card, the proposed rule would give consumers more time to
repay overdraft credit and greater control over how to structure those
repayments. Therefore, the CFPB preliminarily believes that its
proposal better protects consumers than an approach that merely updates
the opt-in disclosure requirements at Sec. 1005.17 of Regulation E.
ii. How To Calculate Whether Overdraft Credit Is Above Breakeven
Overdraft Credit
To clarify the circumstances under which overdraft credit offered
by a very large financial institution is ``above breakeven overdraft
credit'' for purposes of proposed Sec. 1026.62(b)(1), the CFPB also
proposes to add a paragraph at Sec. 1026.62(d).
Proposed Sec. 1026.62(d)(1) would clarify that overdraft credit
offered by a very large financial institution is ``above breakeven
overdraft credit'' for purposes of proposed Sec. 1026.62(b)(1) if the
charge or combination of charges for such credit exceeds the greater of
(1) the pro rata share of the very large financial institution's annual
total direct costs and charge-off losses for providing non-covered
overdraft credit calculated in accordance with Sec. 1026.62(d)(2); or
(2) an estimate published by the CFPB.
For purposes of proposed Sec. 1026.62(d)(1), a ``combination of
charges'' would include all revenue received in connection with an
overdraft transaction when determining whether the charges for that
transaction exceed its average costs and charge-off losses for
providing non-covered overdraft credit, including any extended or
sustained overdraft fees, any interest charges on outstanding overdraft
balances, and any other payments the very large financial institution
receives in connection with an overdraft transaction or transactions.
The approach outlined in proposed Sec. 1026.62(d)(1) would provide
a very large financial institution with two methods for determining
whether its current charge for an overdraft transaction exceeds the
average of its costs and charge-off losses for providing non-covered
overdraft credit--the breakeven standard described at proposed Sec.
1026.62(d)(1)(i) and the benchmark fee described at proposed
[[Page 13870]]
Sec. 1026.62(d)(1)(ii). To the extent that a very large financial
institution does not determine or prefers not to calculate its average
costs and charge-off losses for providing non-covered overdraft credit
using the breakeven standard described at proposed Sec.
1026.62(d)(1)(i), the proposal would permit the very large financial
institution to determine whether it is offering above breakeven
overdraft credit based solely on the benchmark fee at proposed Sec.
1026.62(d)(1)(ii). The CFPB has preliminarily determined that this
approach would decrease compliance costs for some very large financial
institutions by providing them with a simple bright-line method for
determining whether the overdraft credit they extend is above breakeven
overdraft credit. Other very large financial institutions would be
permitted the flexibility to calculate on their own whether the
overdraft credit they extend is above breakeven pricing.
To employ the breakeven standard described at proposed Sec.
1026.62(d)(1)(i), a very large financial institution would determine
its total direct costs and charge-off losses for providing non-covered
overdraft credit to all accounts open at any point during the previous
12 months and then divide that figure by the total number of non-
covered overdraft transactions attributable to those accounts occurring
the previous 12 months. The CFPB proposes to use figures from the prior
12 months because (1) reviewing annualized data would even out any
seasonal variations that could occur with a shorter review period; (2)
very large financial institutions likely already collect annualized
cost and loss data; and (3) reviewing annualized data would require
very large financial institutions to make average cost and loss
calculations only once per year. When determining the total number of
non-covered overdraft transactions occurring the previous 12 months,
the financial institution may account for non-covered overdraft
transactions that do not incur fees, including those that do not incur
fees consistent with fee waiver policies, by excluding from its
transaction total any non-covered overdraft transaction for which the
financial institution either refunded or did not assess any fee or
charge. The CFPB believes that allowing very large financial
institutions to adjust their transaction totals to account for
overdraft transactions that do not incur fees would give financial
institutions flexibility to maintain or to implement fee waiver
policies.
Under the proposal, when a very large financial institution applies
the breakeven standard either for the first time or after transitioning
from the benchmark fee described at proposed Sec. 1026.62(d)(1)(ii),
it may include direct costs and charge-off losses from any transaction
that was a non-covered overdraft transaction during the prior 12-months
even if, applying the breakeven standard, it would have been considered
above breakeven overdraft credit during that period. When determining
the total number of non-covered overdraft transactions occurring the
previous 12 months, a very large financial institution applying the
breakeven standard either for the first time or after transitioning
from the benchmark fee described at proposed Sec. 1026.62(d)(1)(ii)
also may exclude from its transaction total any non-covered overdraft
transaction for which the financial institution either refunded or did
not assess any fee or charge.
To provide additional guidance regarding the types of costs and
charge-off losses a very large financial institution could consider
when calculating the breakeven standard, the CFPB also proposes to add
a paragraph at Sec. 1026.62(d)(2). Proposed Sec. 1026.62(d)(2) would
provide that, when calculating the breakeven standard, a very large
financial institution could consider costs and charge-off losses that
are specifically traceable to its provision of non-covered overdraft
credit in the previous year. The CFPB proposes to allow very large
financial institutions to consider only costs and charge-off losses
that are specifically traceable to their provision of non-covered
overdraft credit to prevent very large financial institutions from
employing the breakeven standard in a manner that would circumvent
Sec. 1026.62(b)(1). For example, without the specifically traceable
restriction, very large financial institutions might include in their
average cost and loss calculations costs and charge-off losses that are
more appropriately attributable either to other segments of their
deposit business or to their deposit business overhead.
Based on its previous experience collecting overdraft cost data
from financial institutions, the CFPB has preliminarily determined that
specifically traceable costs and charge-off losses would include a very
large financial institution's cost of funds for providing non-covered
overdraft credit, its charge-off losses for non-covered overdraft
credit, and any operational costs that are directly attributable to its
non-covered overdraft program. For example, if a very large financial
institution uses issue tagging in its call center to reasonably and
accurately gauge the number of customer service calls it receives
relating to non-covered overdraft credit, direct costs relating to
those customer service calls would be specifically traceable and the
very large financial institution could include the direct costs
relating to those calls in its calculation of costs under the breakeven
standard. Conversely, the CFPB preliminarily believes that both general
overhead costs and charge-off losses resulting from unauthorized use,
EFT errors, billing errors, returned deposit items, or rescinded
provisional credit are not specifically traceable to a very large
financial institution's provision of non-covered overdraft credit and
must not be included in its calculation of costs under the breakeven
standard. For example, if a very large financial institution purchases
office equipment to support its depository business generally, such
costs would not be specifically traceable to its provision of overdraft
services and the very large financial institution could not include the
cost of such office equipment in its calculation of costs under the
breakeven standard.
Under the benchmark fee approach outlined at proposed Sec.
1026.62(d)(1)(ii), a very large financial institution may presume that
any charge or combination of charges it imposes for paying a
transaction that overdraws an account does not exceed its costs and
charge-off losses for providing non-covered overdraft credit if the
charge or combination of charges is less than or equal to any benchmark
fee established by the CFPB. The CFPB is considering four alternatives
for this benchmark fee--$3, $6, $7, and $14. The CFPB views each of
these options as potentially viable because, as discussed in additional
detail in the following paragraphs, they each apply the calculation
method proposed by the breakeven standard to alternative data sets and/
or alternative approaches for calculating the total number of non-
covered overdraft transactions. (As highlighted at the end of this
section, the CFPB seeks comment on each of these alternatives.)
The CFPB requested data, information, and documents from eight
financial institutions relating to, among other things, their costs and
charge-off losses for providing non-covered overdraft credit in the
2022 calendar year.\169\ Each of these eight financial institutions
would qualify as very large financial institutions for purposes of
[[Page 13871]]
proposed Sec. 1026.62(b)(8) and, collectively, these eight
institutions account for over 30 percent of the total assets of very
large financial institutions and represent a diverse set of geographic
footprints, asset sizes, and business models.\170\ The CFPB received
data from all eight institutions, but some institutions were unable to
provide all the requested data at the level of detail requested.\171\
As a result, the CFPB referenced data from five financial institutions
to calculate the four alternatives for the proposed benchmark fee.
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\169\ CFPB, Discretionary Overdraft and NSF Practices at Very
Large Financial Institutions (Jan. 2024), https://files.consumerfinance.gov/f/documents/cfpb_overdraft-nsf-practices-very-large-financial-institutions_2024-01.pdf (CFPB 2024 Overdraft
NSF Report).
\170\ Id. at 4.
\171\ Id.
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The CFPB used the same general formula to calculate all four of the
proposed alternative benchmark fees but relied on different datapoints
to derive each fee amount. To calculate each benchmark fee, the CFPB
first determined the total charge-off losses (excluding losses
attributable to unauthorized use, billing errors, rescinded provisional
credit, returned deposit items, and other sources not attributable to
overdraft transactions) for the financial institutions included in its
estimate calculation and then divided that figure by the total number
of non-covered overdraft transactions (i.e., overdraft transactions
currently excepted from Regulation Z) in the relevant dataset for each
estimate. Next, the CFPB adjusted this charge-off loss per transaction
figure by adding to it $1 per transaction to account for the CFPB's
estimate of a financial institution's cost of funds and operational
costs, which the CFPB estimates does not exceed $0.50 per transaction
each.\172\ To calculate the $0.50 cost of funds figure, the CFPB
estimated that financial institutions would pay interest of 5 percent
per year to obtain funds and would lend an average of $120 to consumers
per transaction for a period of one month. The CFPB preliminarily
believes that this cost of funds estimate would cover most
institutions' costs given that the median overdraft amount per
transaction is $50 and that consumers typically repay overdraft
transactions within three days.\173\ Based on its supervisory and
enforcement experience, the CFPB preliminarily believes that call
center expenses represent the bulk of the operational costs associated
with providing non-covered overdraft programs at very large financial
institutions. To calculate the figure for operational costs, the CFPB
estimated that 10 percent of non-covered overdraft transactions would
require 10 minutes of a customer service representative's time and that
20 percent of these customer service contacts also would require 10
minutes of a supervisor's time.\174\ Based on this estimate, the CFPB
determined that at an average hourly wage of $21.07 and $30.81 for
customer service representatives and supervisors in the financial
sector, respectively, financial institutions would incur roughly $0.45
per non-covered overdraft transaction on call center expenses.\175\ The
CFPB then rounded this figure up to $0.50 to account for other
potential operational costs.
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\172\ Id. at 8-9.
\173\ Id. at 8.
\174\ Id. at 9.
\175\ U.S. Bureau of Labor Stat., Occupational Employment and
Wage Statistics: May 2022 National Industry-Specific Occupational
Employment and Wage Estimates NAICS 5220A1--Credit Intermediation
and Related Activities (5221 and 5223 only), https://www.bls.gov/oes/current/naics4_5220A1.htm (last modified Apr. 25, 2023).
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To calculate the $3 benchmark fee figure, the CFPB first added
together the charge-off losses for the five financial institutions in
its sample that produced sufficient data to analyze. Next, the CFPB
calculated a charge-off loss per transaction figure by dividing the
total charge-off loss figure by the total number of non-covered
overdraft transactions paid by those five financial institutions. When
tallying the total number of non-covered overdraft transactions for the
charge-off loss per transaction figure, the CFPB counted both non-
covered overdraft transactions that resulted in an overdraft fee and
non-covered overdraft transactions that did not result in an overdraft
fee. This approach yielded a charge-off loss per transaction figure of
$2 per transaction after rounding to the nearest dollar. The CFPB then
added $1 per transaction to this figure to account for the CFPB's
estimate of a financial institution's cost of funds and operational
costs.
To calculate the $6 benchmark fee figure, the CFPB used the same
approach it used to calculate the $3 benchmark fee figure, but changed
how it tallied the total number of non-covered overdraft transactions
for the charge-off loss per transaction figure. Instead of counting
both non-covered overdraft transactions that resulted in an overdraft
fee and non-covered overdraft transactions that did not result in an
overdraft fee, the CFPB counted only non-covered overdraft transactions
that resulted in an overdraft fee. This change increased the charge-off
loss per transaction figure to $5 per transaction after rounding to the
nearest dollar. The CFPB then added $1 dollar per transaction to this
figure to account for the CFPB's estimate of a financial institution's
cost of funds and operational costs.
To calculate the $7 benchmark fee figure, the CFPB first identified
the financial institution in its sample with the highest charge-off
losses. Next, the CFPB calculated a charge-off loss per transaction
figure by dividing total charge-off losses by the total number of non-
covered overdraft transactions paid by the financial institution. When
tallying the total number of non-covered overdraft transactions for the
charge-off loss per transaction figure, the CFPB counted both non-
covered overdraft transactions that resulted in an overdraft fee and
non-covered overdraft transactions that did not result in an overdraft
fee. This approach yielded a charge-off loss per transaction figure of
$6 per transaction after rounding to the nearest dollar. The CFPB then
added $1 dollar per transaction to this figure to account for the
CFPB's estimate of a financial institution's cost of funds and
operational costs.
To calculate the $14 benchmark fee figure, the CFPB used the same
approach it used to calculate the $7 benchmark fee figure (i.e.,
identifying the financial institution in its sample with the highest
charge-off losses) but changed how it tallied the total number of non-
covered overdraft transactions for the charge-off loss per transaction
figure. Instead of counting both non-covered overdraft transactions
that resulted in an overdraft fee and non-covered overdraft
transactions that did not result in an overdraft fee, the CFPB only
counted non-covered overdraft transactions that resulted in an
overdraft fee. This change increased the charge-off loss per
transaction figure to approximately $13 per transaction after rounding
to the nearest dollar. The CFPB then added $1 dollar per transaction to
this figure to account for the CFPB's estimate of a financial
institution's cost of funds and operational costs.
In addition to amending Sec. 1026.4(c)(3), the proposed rule also
would revise the commentary to Sec. 1026.4(c)(3) by adding proposed
comment 4(c)(3)-3. Proposed comment 4(c)(3)-3 would direct readers to
see proposed Sec. 1026.4(b)(12) for guidance on when fees imposed on a
covered asset account as defined in Sec. 1026.62 are finance charges.
The CFPB seeks comment on all aspects of the proposed amendments to
Sec. 1026.4(c)(3) and its commentary and on its proposal to add Sec.
1026.62(b)(1) and (d). In particular, the CFPB seeks comment on the
following issues:
[[Page 13872]]
1. Should the CFPB eliminate the Sec. 1026.4(c)(3) exception for
very large financial institutions rather than amend its application to
above breakeven overdraft credit?
2. What alternative formulae, if any, should the CFPB consider for
calculating costs and charge-off losses for the breakeven standard and
the proposed alternative benchmark fee? For example, instead of
requiring a very large financial institution to calculate its average
costs and charge-off losses for non-covered overdraft across its entire
depository account portfolio, should the breakeven standard allow a
very large financial institution to make separate calculations of its
average costs and charge-off losses for non-covered overdraft within
subsets of its depository account portfolio, such as account
relationship tiers or average account balance ranges?
3. What are the pros and cons of permitting very large financial
institutions to adjust their non-covered overdraft transaction totals
to account for their fee waiver policies under the breakeven standard
described at proposed Sec. 1026.62(d)(1)(i)?
4. What alternative approaches, if any, should the CFPB consider
for calculating the breakeven standard described at proposed Sec.
1026.62(d)(1)(i)? For example, should the CFPB consider an approach
that allows very large financial institutions to estimate their costs
as a flat dollar amount per transaction, as a percentage of their total
asset account costs, or as a percentage of losses?
5. What alternative figures should the CFPB consider, if any, for
its cost of funds and operational cost estimates?
6. Which of its proposed benchmark fee figures--$3, $6, $7, and
$14--should the CFPB adopt? What alternative figures should the CFPB
consider, if any?
7. Should the breakeven standard require the same calculation used
to calculate the benchmark fee? For example, if the CFPB finalizes a
benchmark fee based on all non-covered overdraft transactions, whether
or not the very large financial institution collected a fee in
connection with the transaction, should the breakeven standard also
require the very large financial institution to calculate their costs
based on all non-covered overdraft transactions, whether or not the
very large financial institution collected a fee in connection with the
transaction?
D. Changes to Covered Overdraft Credit Offered by Very Large Financial
Institutions
As discussed below, the CFPB is proposing to change requirements
that apply to covered overdraft credit offered by a very large
financial institution by: (1) requiring covered overdraft credit to be
structured as a separate account; (2) applying additional credit card
provisions to covered overdraft credit that can be accessed by a hybrid
debit-credit card; and (3) applying Regulation E's compulsory-use
prohibition to covered overdraft credit. For existing open-end covered
overdraft credit products, the proposed new designation as covered
overdraft credit accounts would not impose duplicative or additional
account opening requirements.
1. Structure of Covered Overdraft Credit (Sec. 1026.62(c))
The CFPB proposes in Sec. 1026.62(c) to prohibit a very large
financial institution from structuring covered overdraft credit as a
negative balance on a checking or other transaction account.
Conversely, the CFPB proposes to require such institution to structure
covered overdraft credit as a separate credit account.
The CFPB has preliminarily determined that this structural
prohibition and requirement will make it easier for creditors and
consumers to implement and understand, respectively, covered overdraft
credit. Regulation Z's open-end credit rules generally address
independent credit products that do not have substantial positive
(asset) funds associated with them. For example, existing Sec.
1026.11(a) generally provides that creditors must refund any asset
balances on a credit account to the consumer within six months.
In contrast, overdraft credit, whether or not subject to Regulation
Z's requirements, by its nature involves both consumer assets and
consumer credit, the purpose of the latter being to cover shortfalls in
the former. In the context of overdraft credit, the CFPB has
preliminarily determined that requiring the separation of a consumer's
asset balance, such as a checking or other transaction account that is
a ``covered asset account'' as defined in proposed Sec. 1026.62(b)(2),
from the consumer's credit balance, such as a credit account that is a
``covered overdraft credit account'' as defined in proposed Sec.
1026.62(b)(4), is an appropriate addition to Regulation Z under its
TILA section 105(a) authority, as it is necessary or proper to
facilitate creditor compliance and to effectuate the purposes of TILA
by helping to avoid the uninformed use of credit and protecting
consumers against inaccurate and unfair credit billing and credit card
practices. Existing Sec. 1026.61(b), which was established by the
Bureau's 2016 Prepaid Final Rule, similarly prohibits credit accounts
tied to prepaid accounts from being structured as negative balances on
the prepaid accounts and requires that the prepaid account and the tied
credit account be separate.\176\ Further, commenters that addressed
this aspect of the Bureau's 2014 prepaid accounts proposed rule
universally supported the separate asset account and credit account
structure that the 2016 rule adopted.\177\
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\176\ See 12 CFR 1026.61(b).
\177\ See 81 FR 83934, 84264 (Nov. 22, 2016).
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In the context of overdraft credit that is not subject to
Regulation Z's requirements, financial institutions today typically
provide overdraft credit to consumers through negative balances on
consumers' asset accounts. That is, institutions typically provide one
account to a consumer, which is regulated as an asset account such as a
checking or other transaction account, with an asset balance being a
positive balance in the account and an overdraft credit balance being a
negative balance in the account. Further, institutions typically obtain
repayment of a consumer's negative overdraft credit balance by
immediately taking any incoming deposit to the asset account, such as
an electronic direct deposit, as repayment (or ``offset'') of the
account's negative balance. For example, if a consumer's asset account
balance is a negative $100 overdraft credit balance and an institution
receives a $150 electronic direct deposit which is to be credited to
the consumer's account, the institution immediately takes the first
$100 of the electronic deposit to repay the consumer's overdraft credit
balance, such that the consumer's account balance subsequent to the
institution's receipt of the electronic direct deposit is a positive
asset balance of $50.
This practice by institutions of immediately taking incoming
deposits as repayment of overdrafts is known as ``offset.'' Regulation
Z generally prohibits offset in connection with covered overdraft
credit, as defined in proposed 1026.62(b)(3), which can typically be
accessed by a ``credit card'' as defined in 1026.2(a)(15).\178\ That
is, the institution providing the covered overdraft credit is generally
prohibited from immediately taking funds from
[[Page 13873]]
incoming deposits in repayment of consumers' outstanding overdraft
credit balances. Thus, continuing the above example of an outstanding
overdraft credit balance of $100, when Regulation Z applies and the
institution receives a $150 deposit to be credited to the consumer's
account, the institution is prohibited from immediately taking the
funds of the incoming deposit, but must instead credit the funds to the
consumer's asset account and give the consumer the use of the funds. In
other words, when Regulation Z applies, the regulation's offset
prohibition requires that the institution make it such that the
consumer has both an overdraft credit balance of $100 (the money the
consumer continues to owe the institution) and an asset balance of $150
(the money from the incoming deposit) at the same time.\179\
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\178\ See TILA section 169(a) (15 U.S.C. 1666h(a)) and 12 CFR
1026.12(d)(1).
\179\ While TILA and Regulation Z prohibit offset, the statute
and regulation do permit periodic deductions pursuant to the
consumer's written agreement. See 12 CFR 1026.12(d)(3). These
periodic deductions must occur at regular intervals and therefore
cannot occur immediately whenever deposit funds are received to be
credited to the consumer's account. Thus, the permissibility of
periodic deductions does not change the requirement that the
institution make it such that the consumer has both an overdraft
credit balance of $100 and an asset balance of $150 at the same
time.
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Accordingly, the CFPB has preliminarily determined that the
proposed requirement in Sec. 1026.62(c) to structure covered overdraft
credit as a separate credit account that is separate from the checking
or other transaction account will enable institutions to comply with
the TILA and Regulation Z offset prohibition. Specifically, the CFPB
has preliminarily determined that that proposed requirement would
facilitate compliance with the TILA and Regulation Z offset prohibition
by requiring an institution to retain at the same time both an
outstanding overdraft credit balance and an outstanding asset balance
for a consumer. Conversely, the CFPB has preliminarily determined that
it is difficult or impossible for an institution to maintain both an
asset (positive) balance and a credit (negative) balance at the same
time for a consumer within a single asset account and that it is
therefore difficult or impossible for the institution to provide
overdraft credit to the consumer in a manner that complies with
Regulation Z without providing the consumer with an asset account and a
credit account that are separate from each other.
In addition, the CFPB has preliminarily determined that the
proposed requirement to structure covered overdraft credit as a
separate credit account would (1) protect consumers against inaccurate
and unfair credit billing and credit card practices by enabling them to
exercise control over their funds and (2) avoid the uninformed use of
credit by enabling consumers to better understand their asset and
credit balances. With respect to protecting consumers by enabling them
to control their funds, the requirement will facilitate consumers'
ability to control incoming deposits to their accounts and use them for
purposes other than immediately repaying an overdraft balance, as the
offset prohibition requires institutions to permit consumers to do. For
example, continuing the example above, rather than the institution
immediately using the incoming $150 electronic direct deposit to
eliminate the $100 negative overdraft balance in the single account,
under the proposed separate-account structure the consumer might use
the electronically deposited funds to pay a phone or electric bill and
to retain the unpaid $100 balance in the separate credit account (i.e.,
to repay the credit balance to the institution at a later time).
With respect to avoiding the uninformed use of credit by enabling
consumers to understand their asset and credit balances, the
requirement for separate accounts will enable consumers to better
monitor their account balances and trace how their funds are being used
through the better disclosures (e.g., entries on periodic statements)
that institutions will provide to consumers in compliance with
Regulations E and DD for asset accounts and in compliance with
Regulation Z, which effectuates the informed use of credit, for the
credit accounts. Continuing the above example of a $150 incoming
deposit and $100 overdraft balance, with a separate asset account and
credit account (as would be required by proposed Sec. 1026.62(c)), the
consumer whose asset account receives an electronic direct deposit
would see disclosed on the periodic statements a $150 credit entry to
the asset account and, at that time, a $150 balance in the asset
account and a $100 balance in the credit account.
Further, if the consumer were to subsequently choose to use the
$150 asset funds to repay the overdraft, the consumer would at that
later point in time see on the statements the following data points on
the asset account and credit account: (1) a debit entry of $100 to the
asset account for repayment of the overdraft credit balance, (2) a
resulting balance in the asset account of $50, (3) a credit entry of
$100 to the credit account, and (4) a resulting balance in the credit
account of $0. In contrast, without the separate credit account, where
overdrafts are represented as negative balances on the asset account,
the same consumer would see disclosed only the following: a $150 credit
to the asset account for the incoming electronic deposit and a
resulting balance of $50 in the asset account. The CFPB has
preliminarily determined that this latter approach may result in the
uninformed use of credit by the consumer, because the consumer may not
readily appreciate how the credit and asset aspects of their asset
account have interacted. The CFPB has therefore also preliminarily
determined that the former approach of requiring that the asset account
and the credit account be separate from each other--and the better
periodic-statement disclosures that necessarily accompany that
approach--will help avoid the uninformed use of credit by the consumer.
Credit account opening. Opening an open-end consumer credit plan,
such as a covered overdraft credit account, that is subject to
Regulation Z may trigger certain requirements and protections,
including account opening disclosures pursuant to Sec. Sec. 1026.5 and
1026.6 and, if a credit card is involved, ability to pay requirements
in Sec. 1026.51 and fee limitations in Sec. 1026.52(a). Consistent
with existing requirements, for purposes of determining compliance with
provisions of Regulation Z that are tied to credit account opening, an
account opening with respect to covered overdraft credit occurs on the
date a consumer may first engage in a transaction for which covered
overdraft credit can be extended under the account.
If the CFPB finalizes the rule as proposed, very large financial
institutions that offer overdraft services on existing accounts may
need to take steps to come into compliance with Regulation Z. For
example, assume that prior to the effective date of this proposed rule,
a very large financial institution through negative balances on a
deposit account provides above breakeven overdraft credit that is not
subject to Regulation Z to a consumer, and assume further that the
institution seeks to continue to provide above breakeven overdraft
credit to the consumer subsequent to the effective date of the proposed
rule. After the proposed rule's effective date, such above breakeven
overdraft credit would be covered overdraft credit, and proposed Sec.
1026.62(c) of the proposed rule (discussed in the preceding paragraphs)
would require the institution to provide the covered overdraft credit
to the consumer through a separate covered overdraft credit account.
Therefore, to provide above
[[Page 13874]]
breakeven, covered overdraft credit to the consumer subsequent to the
effective date of this proposed rule, the institution would need to
open a covered overdraft credit account for the consumer. Further, the
institution would be required by Sec. 1026.5(b)(1)(i) to provide to
credit account opening disclosures to the consumer for the covered
overdraft credit account before the consumer makes the first
transaction under the covered overdraft credit plan. This is so
regardless of whether there was any change in the terms or conditions
of the previously existing deposit account under which the above
breakeven non-covered overdraft credit was previously extended.\180\
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\180\ The only change in the terms of the previously existing
deposit account that would be required by the CFPB's proposed rule
would be a reduction in the dollar amount of the overdraft fee the
institution charges for negative-balance (non-covered) overdraft.
Because that changed term would be a change in the consumer's favor,
a change-in-terms notice would not be required in advance of the
change. See Regulation E Sec. 1005.8(a)(1) and Regulation DD Sec.
1030.5(a)(1).
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Disclosure requirements. Subsequent to the effective date of the
CFPB's proposed rule, when a very large financial institution seeks to
provide above breakeven overdraft credit to a consumer through a
covered overdraft credit account, the institution will need to comply
with the existing disclosure requirements in Regulation Z. The CFPB
seeks comment on whether any specific disclosure requirements should be
clarified and on whether any adjustments should be made to existing
disclosure requirements to help better promote the informed use of
covered overdraft credit.
Credit subaccounts. Like the CFPB's current proposal, section
1026.61(b), established by the CFPB's 2016 Prepaid Final Rule,
prohibits a covered separate credit feature from being structured as a
negative balance on a prepaid account. Section 1026.61(b) requires that
the covered credit feature be provided ``as a separate credit feature,
either as a separate credit account, or as a credit subaccount of a
prepaid account that is separate from the asset feature of the prepaid
account.'' Further, comment 61(b)-1 requires that ``the credit feature
[] be set up as a separate balance on the prepaid account such that
there are at least two balances on the prepaid account--the asset
account balance and the credit account balance.''
In light of these requirements that the prepaid accounts rule
attaches to covered credit subaccounts tied to prepaid asset accounts
(i.e., the same requirements that it attaches to covered credit
accounts tied to prepaid asset accounts) the CFPB has preliminarily
determined that there would be no meaningful distinction between a
covered overdraft credit account tied to a covered asset account and a
covered overdraft credit subaccount tied to a covered asset account.
For clarity in this regard, proposed Sec. 1026.62(b)(4) would
establish that a credit subaccount is a type of covered overdraft
credit account. Nonetheless, the CFPB seeks comment on whether any
distinctions should be made between covered overdraft credit
subaccounts and other types of covered overdraft credit accounts. The
CFPB also seeks comment on whether any additional requirements should
be adopted to specify how covered overdraft credit accounts should be
disclosed to consumers.
Existing overdraft lines of credit. Many very large financial
institutions currently provide overdraft lines of credit subject to
Regulation Z. Subsequent to the effective date of the CFPB's proposed
rule, these lines of credit would be covered overdraft credit accounts,
regardless of whether they are above or below breakeven pricing.
However, under the proposed rule the institution would not be opening a
new credit account (i.e., would not be newly opening an account that is
subject to Regulation Z) because a credit account--the overdraft line
of credit--already existed prior to the effective date of the proposed
rule. Thus, Regulation Z requirements triggered by credit-account
opening (such as Sec. Sec. 1026.5, 1026.6, 1026.51, and Sec.
1026.52(a) mentioned above) would not apply to these previously
existing overdraft lines of credit. However, other Regulation Z
requirements such as change-in-terms requirements would continue to
apply to them. Further, as discussed under proposed Sec. 1026.4(b)(2)
and (12), fees for transferring funds from the overdraft line of credit
to the tied deposit account, which are currently excepted from being
finance charges under Regulation Z, would be finance charges under the
CFPB's proposed changes to Sec. 1026.4(b)(2) and (12). Accordingly,
very large financial institutions may need to provide change-in-terms
notices in connection with many of the overdraft lines of credit that
they currently provide. The CFPB seeks comment on whether additional
guidance would be helpful for understanding the disclosure and other
requirements that under the proposed rule would be applicable to very
large financial institutions in these circumstances. If so, what
examples should be addressed and added?
2. Credit Card Changes
Credit cards and card issuers are generally subject to additional
requirements in Regulation Z. The requirements that apply generally
depend on whether the credit account can be accessed by a ``credit
card,'' ``credit card account under an open-end (not home-secured)
consumer credit plan,'' or ``charge card'' under Regulation Z.
Currently, a covered overdraft credit account that can be accessed by a
debit card or other device that qualifies as a credit card (including
certain account numbers) is subject to some Regulation Z requirements
that apply to ``credit cards.'' Such covered overdraft credit is not
subject to requirements that apply to a ``credit card account under an
open-end (not home-secured) consumer credit plan.'' It is also
specifically excepted from some of the requirements that apply to
``credit cards.'' As discussed in more detail below, the CFPB is
proposing to apply all credit card provisions generally to covered
overdraft credit accounts if the credit can be accessed by a hybrid
debit-credit card, as defined in this proposal, such as a debit card
offered by a very large financial institution.
i. Applying CARD Act Provisions of Regulation Z to Covered Overdraft
Credit
The CFPB is proposing to subject all covered overdraft credit to
the CARD Act provisions of Regulation Z in subparts G and B (the CARD
Act provisions) if that credit is (1) open-end credit; (2) accessible
by a credit card; and (3) offered by a very large financial
institution. Currently, covered overdraft credit accessible by a debit
card is considered a credit card under Regulation Z and generally is
subject to the Regulation Z provisions that apply to credit cards, but,
because of two non-statutory exceptions, such overdraft credit is not
subject to the CARD Act provisions.\181\ The proposal would
[[Page 13875]]
subject such credit to the CARD Act provisions when it is offered by
very large financial institutions. To implement these changes, the
proposal would add a new definition of ``hybrid debit-credit card,''
amend the definitions of ``credit card'' and ``credit card account
under an open-end (not home-secured) consumer credit plan,'' and make
other clarifying changes to the rule text and associated commentary.
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\181\ 12 CFR 1026.2(a)(15)(i), (iv) and comment 2(a)(15)-2.i.B.
Non-covered overdraft credit is not subject to Regulation Z, which
includes the provisions applicable generally to credit cards and the
provisions implementing the CARD Act, because (1) it is not subject
to a finance charge or repayable by a written agreement in more than
four installments and (2) a debit card that can access non-covered
overdraft credit is not considered a credit card because, as current
comment 2(a)(15)-2.ii.A explains, a debit card with no credit
feature or agreement is not a credit card even if the creditor
occasionally honors an inadvertent overdraft. As discussed in the
changes to the definition of finance charge section above, the CFPB
is proposing to amend the definition of ``finance charge'' to expand
the scope of covered overdraft credit, such that certain overdraft
credit that is currently non-covered overdraft credit would be
considered covered overdraft credit if this proposal is finalized as
proposed. This newly covered overdraft credit generally would be
subject to the Regulation Z provisions applicable to credit cards if
the covered overdraft credit can be accessed by a credit card.
However, without further changes, the non-statutory exceptions that
exclude covered overdraft from being subject to the CARD Act
provisions would prevent covered overdraft credit, including newly
covered overdraft credit, from being subject to the CARD Act
provisions. As discussed in this section, the CFPB is proposing to
update these non-statutory exceptions, which would subject certain
covered overdraft credit, including certain newly covered overdraft
credit, to the CARD Act provisions.
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The CARD Act and Overdraft
The CARD Act amended TILA to institute new substantive and
disclosure requirements to establish fair and transparent practices for
open-end consumer credit card plans. The CARD Act addressed multiple
aspects of the credit card market, regulating, among other things, rate
increases, the imposition of penalty fees, the timing of payments, the
issuance of subprime credit cards, ability to pay assessments, the
specifics of certain credit card disclosures, the marketing of credit
reports, and the marketing of credit cards to young consumers.\182\
These provisions indicate that Congress was particularly concerned with
protecting vulnerable populations of consumers--like students and
individuals with subprime credit--and with regulating high-cost
consumer credit card products subject to burdensome fees.\183\
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\182\ See CARD Act sections 101, 102, 105, 106, 109, 201, 301.
\183\ See CARD Act sections 102, 105, 109, 301.
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The statutory language of the CARD Act applies the protections
broadly to credit card products that can access open-end consumer
credit. The CARD Act generally applies to any ``credit card account
under an open-end consumer credit plan.'' Absent two non-statutory
exceptions, this broad language generally would apply to open-end
covered overdraft credit that is accessed by a credit card, including a
debit card.
The Board implemented this statutory language in Regulation Z in
2010 through the term ``credit card account under an open-end (not
home-secured) consumer credit plan.'' \184\ That term is defined in
current Sec. 1026.2(a)(15)(ii) to generally mean an open-end credit
account that is accessed by a credit card. The Board then used the term
``credit card account under an open-end (not home-secured) consumer
credit plan'' in provisions of Regulation Z in subpart G and subpart B
that were promulgated or amended to implement the CARD Act. Like the
statutory definition, absent non-statutory exceptions, this regulatory
definition would be broad enough so that the CARD Act provisions
generally would apply to covered overdraft credit that is accessed by a
credit card, including a debit card.
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\184\ See 75 FR 7658, 7663-65 (Feb. 22, 2010). The Board first
implemented the statutory term ``credit card account under an open-
end consumer credit plan'' in its July 2009 interim final rule,
which, in relevant part, exempted home equity lines of credit from
certain requirements of the CARD Act. 74 FR 36077, 36083 (July 22,
2009). The Board added the new term ``credit card account under an
open-end (not home-secured) consumer credit plan'' in its 2010 final
rule.
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However, overdraft lines of credit are not subject to the CARD Act
provisions in subpart G and subpart B that apply to a ``credit card
account under an open-end (not home-secured) consumer credit plan''
because the Board adopted two exceptions that exclude overdraft lines
of credit from that definition. Current Sec. 1026.2(a)(15)(ii)(B) and
(C), respectively, except from this definition (1) an overdraft line of
credit that is accessed by a debit card; and (2) an overdraft line of
credit that is accessed by an account number other than an account
number that is a hybrid prepaid-credit card and that can access a
covered separate credit feature as defined in Sec. 1026.61. Although
Regulation Z does not define ``overdraft line of credit,'' the term is
generally understood to refer to an open-end credit product tied to an
asset account. Funds are advanced from the credit product to pay for a
withdrawal when the consumer withdraws more money than they have in the
asset account.
Aside from the CARD Act provisions in subpart G and subpart B,
currently these overdraft line of credit products are generally subject
to Regulation Z's open-end credit rules when the fees and other charges
imposed on this product are finance charges.\185\ To the extent these
overdraft line of credit products can be accessed by a debit card or
other single credit device, they are thus also a ``credit card'' and
are generally subject to provisions in Regulation Z that apply to a
``credit card.'' \186\
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\185\ See 12 CFR 1026.4. The current overdraft-related exception
in 12 CFR 1026.4(c)(3), which the CFPB is proposing to narrow in
this rulemaking, does not apply to overdraft products where ``the
payment of [overdrawing] items and the imposition of the charge were
previously agreed upon in writing.''
\186\ See Regulation Z comment 2(a)(15)-2.i.B.
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The Board acknowledged in its February 2010 Rule that it believed
that, as a general matter, Congress intended the CARD Act to apply
broadly to products that meet the definition of a credit card.\187\ The
Board also acknowledged that a debit card that accesses an overdraft
line of credit is a ``credit card.'' \188\
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\187\ See 75 FR 7658, 7664 (Feb. 22, 2010).
\188\ Id.
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Nevertheless, the Board relied on its authority under TILA section
105(a) and section 2 of the CARD Act to create two exceptions for
overdraft lines of credit, including one for debit cards that can
access an overdraft line of credit. As a result of the exceptions, such
accounts are not subject to the various CARD Act provisions in subpart
G and subpart B, as discussed below, that apply to a ``credit card
account under an open-end (not home-secured) consumer credit plan.'' In
creating the exceptions, the Board stated that, at the time, Regulation
Z-covered overdraft lines of credit were not in wide use and that, as a
general matter, creditors who offered overdraft lines of credit did not
engage in some of the practices regulated by the CARD Act provisions
with respect to those products.\189\ The Board cited three examples of
practices regulated by the CARD Act that were not currently present in
the market: (1) increasing annual percentage rates, (2) applying
different rates to different balances, and (3) allowing grace periods
before charging interest. The Board did not specifically address other
provisions, such as limitations on penalty fees and the requirement to
assess ability to pay, which may have had an impact on practices
involving overdraft lines of credit. Because of its assessment that the
small market for overdraft lines of credit did not present substantial
consumer protection concerns similar to those addressed by the CARD
Act, the Board concluded that ``alternative forms of regulation'' such
as Regulation E were ``better suited'' to protect consumers from harm
with respect to those products.\190\
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\189\ Id. at 7665.
\190\ Id.
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The CFPB is proposing to amend the non-statutory overdraft-related
exceptions so that a very large financial institution that offers open-
end covered overdraft credit that can be accessed by a ``credit card''
must comply with provisions that apply to a ``credit card account under
an open-end (not home-secured) consumer credit plan.'' As a result,
open-end covered overdraft credit that can be accessed by a ``credit
card,'' including a debit card, would be
[[Page 13876]]
subject to the CARD Act provisions in subpart G and subpart B if it is
offered by a very large financial institution. This would include
existing covered overdraft credit (currently commonly referred to as
``overdraft lines of credit'') and overdraft credit that would become
covered overdraft credit, such as above breakeven overdraft credit, if
the rule is finalized.
The CFPB has preliminarily determined that the exceptions are no
longer appropriate. While the Board created those exceptions based on
the understanding that overdraft lines of credit were not in ``wide
use'' at the time and did not include features common to other credit
cards, the CFPB has preliminarily determined that the prevalence or
nature of a particular type of credit card should not render it beyond
the scope of the CARD Act. By its plain terms, the CARD Act applies to
all ``credit card account[s] under an open-end consumer credit plan,''
which, as noted above, would include open-end overdraft credit
accessible by a credit card. In any event, the CFPB anticipates that
the market for covered overdraft credit could react to the proposed
changes in this rulemaking, if finalized, in several ways, including by
offering covered overdraft credit to many consumers who currently
receive non-covered overdraft credit, including subprime consumers.
Very large financial institutions could also react to the proposed
changes by offering different terms on covered overdraft credit than
those that have historically been offered. For example, financial
institutions could start marketing covered overdraft credit as a long-
term credit solution and could begin imposing different rates on
different balances. In addition, consistent with the current non-
covered overdraft credit market, financial institutions could allow for
grace periods before imposing finance charges. Similarly, other
protections, such as the requirement to assess ability to pay, the fee
limitations provision, and the limits on penalty fees, may become even
more important if covered overdraft credit is offered to more subprime
consumers.
The CFPB also has preliminarily determined that the CARD Act
provisions would provide important consumer protections to those
consumers most likely to use covered overdraft credit accounts. Today,
a small subset of consumers (approximately 10 percent of consumers),
whom the CFPB has in the past referred to as ``frequent overdrafters,''
incur most overdraft fees. In light of the CFPB's proposed treatment of
the overdraft fee that a very large financial institution may charge
for non-covered overdraft, the CFPB expects that some very large
financial institutions will have reduced incentives to provide non-
covered overdraft credit to the subprime consumers who are frequent
overdrafters and today incur the preponderance of overdraft fees.
Instead of providing these consumers with non-covered overdraft credit,
some very large financial institutions may provide these consumers with
covered overdraft credit accounts--the accounts to which the CFPB is
proposing to apply the CARD Act provisions--which would allow them the
flexibility to charge more than the threshold that cannot be exceeded
to remain non-covered overdraft credit.
The CFPB also has preliminarily determined that applying the CARD
Act provisions as proposed could provide important benefits to subprime
consumers. Many of the provisions of the CARD Act target credit card
practices affecting subprime consumers. To the extent that some
financial institutions would offer covered overdraft credit to more
subprime consumers if the proposed rule were adopted, these CARD Act
provisions would offer additional protections to consumers with a debit
card that accesses overdraft credit. This will result in a consumer who
uses a debit card to access overdraft credit--who often is a subprime
consumer--receiving the same protections that a subprime credit card
consumer receives today, consistent with the broad statutory language
in the CARD Act.
To prevent the market for Regulation Z-covered overdraft from
posing consumer risks after the rule goes into effect, and to carry out
the purposes of TILA by promoting the informed use of credit and
protecting consumers against unfair credit card practices pursuant to
TILA section 105(a), and to carry out the CARD Act pursuant to section
2 of the CARD Act, the CFPB is proposing to subject covered overdraft
credit to the CARD Act provisions in subpart G and subpart B when such
credit can be accessed by a credit card and is offered by a very large
financial institution. This would revise non-statutory exceptions so
that Regulation Z's coverage more closely aligns with the plain
language of the CARD Act.
The CFPB invites comment on the proposal to subject covered
overdraft credit to the CARD Act provisions in subpart G and subpart B.
In particular, the CFPB seeks comment on potential impacts of a
finalized rule, if any, on the market for covered overdraft credit and
the resulting effects of market changes on consumers. The CFPB also
seeks comment on the costs and benefits to these consumers of the CARD
Act protections in subpart G and subpart B. The CFPB also requests
comment on whether clarification is needed or whether there are
operational challenges regarding the application of specific CARD Act
provisions to covered overdraft credit. The CFPB also seeks comment on
what, if any, operational costs might arise as a result.
The proposed rule would subject all covered overdraft credit to the
CARD Act provisions in subparts G and B if that credit is (1) open-end
credit; (2) accessible by a credit card; and (3) offered by a very
large financial institution. The proposed rule would also add a new
definition of ``hybrid debit-credit card,'' and amend the definitions
of ``credit card,'' and ``credit card account under an open-end (not
home-secured) consumer credit plan.'' The proposal would also make
other clarifying changes to the rule text and associated commentary.
These technical and clarifying changes are discussed in more detail
below.
Hybrid Debit-Credit Card (Sec. 1026.62(b)(5))
In proposed Sec. 1026.62(b)(5), the CFPB is proposing to define
the new term ``hybrid debit-credit card'' for clarity and ease of
reference. The CFPB proposes to define ``hybrid debit-credit card'' to
mean any card, plate, or other single credit device that a consumer may
use to obtain covered overdraft credit from a very large financial
institution. This proposed definition describes a type of credit card
that has two defining characteristics: (1) the credit card must be able
to access covered overdraft credit; and (2) the covered overdraft
credit must be offered by a very large financial institution. This
definition would include, for example, a debit card that a consumer can
use to complete transactions using funds drawn from an asset account
held at a very large financial institution when that device can also be
used to access covered overdraft credit.
Credit Card (Sec. 1026.2(a)(15)(i))
TILA defines ``credit card'' as ``any card, plate, coupon book or
other credit device existing for the purpose of obtaining money,
property, labor, or services on credit.'' \191\ Section
1026.2(a)(15)(i) defines credit card as ``any card, plate, or other
single credit device that may be used from time to time to obtain
credit,'' which includes
[[Page 13877]]
``a hybrid prepaid-credit card as defined in Sec. 1026.61.'' The CFPB
is proposing to amend the definition of ``credit card'' to clarify what
is and is not a credit card when certain credit devices can access
covered overdraft credit. These amendments would clarify that when a
debit card can access covered overdraft credit, the debit card would be
a credit card subject to the CARD Act provisions.
---------------------------------------------------------------------------
\191\ 15 U.S.C. 1602(l).
---------------------------------------------------------------------------
First, the CFPB is proposing various non-substantive wording
revisions in Sec. 1026.2(a)(15)(i) to clarify that a debit card that
can access a covered overdraft credit account is a credit card. These
changes are non-substantive because, under Regulation Z today, a debit
card that can access an overdraft line of credit is a credit card.\192\
Nonetheless, to make this fact--that a debit card that can access
covered overdraft credit is a credit card--as clear as possible, the
CFPB is proposing two textual changes for clarity. First, in Sec.
1026.62, the CFPB proposes to define a ``hybrid debit-credit card'' as
any card (including a debit card) that can access covered overdraft
credit offered by a very large financial institution. Second, the CFPB
proposes to amend Sec. 1026.2(a)(15)(i) to explain that the definition
of ``credit card'' includes a hybrid debit-credit card. Thus, under the
proposal, a debit card that can access a covered overdraft credit
account is a hybrid debit-credit card, a hybrid debit-credit card is a
credit card, and a debit card that can access a covered overdraft
credit account is a credit card. This is not a substantive change from
the extant regulation because, as noted, under the extant regulation a
debit card that can access an overdraft line of credit is a credit
card.
---------------------------------------------------------------------------
\192\ See current Regulation Z comment 1026.2(a)(15)-2.i.B
(stating that examples of credit cards include a debit card that
also accesses a credit account).
---------------------------------------------------------------------------
Similarly, the CFPB is proposing to revise comment 2(a)(15)-2.i.B
to clarify that a hybrid debit-credit card is a type of debit card that
also accesses a credit account, such as a covered overdraft credit
account.
To further clarify what is and is not a ``credit card'' in light of
proposed definitions and proposed changes to the definition of
``finance charge,'' the CFPB is also proposing to amend several
examples in the commentary to Sec. 1026.2(a)(15)(i) and (ii). In
comment 2(a)(15)-2.i.A, the CFPB is proposing to replace the undefined
term ``overdraft line of credit'' with a new proposed term ``covered
overdraft credit.'' In comment 2(a)(15)-2.ii.C, the CFPB is proposing
amendments to clarify that an account number is a credit card when it
can access covered overdraft credit if the account number can use the
credit accessed to purchase goods and services.
The CFPB is also proposing to amend comment 2(a)(15)-2.ii.A and add
comment 2(a)(15)-2.ii.E to ensure that the examples of what is not a
credit card clarify that allowing a card, plate, or other single credit
device to access non-covered overdraft credit does not trigger
Regulation Z's credit card requirements. As explained in current Sec.
1026.1(c)(2), where a credit card is involved, certain provisions of
Regulation Z apply even if the credit is not subject to a finance
charge or is not payable by a written agreement in more than four
installments. However, comment 2(a)(15)-2.ii.A clarifies that a check-
guarantee or debit card with no credit feature or agreement is not a
credit card ``even if the creditor occasionally honors an inadvertent
overdraft.'' In other words, a financial institution that allows a
debit card or check-guarantee card to access non-covered overdraft--
including overdraft where the financial institution does not impose a
``finance charge,'' either because it does not impose a fee or because
any fee charged is not considered a finance charge under Sec.
1026.4(c)(3)--does not have to comply with Regulation Z's credit card
provisions, even though such cards would otherwise meet the definition
of ``credit card.'' As discussed above, currently, Sec. 1026.4(c)(3)
provides that overdraft charges are not finance charges if the payment
of such items and the imposition of the charge were not previously
agreed upon in writing. Thus, financial institutions may pay an
inadvertent overdraft and charge for it without complying with
Regulation Z as long as the payment of the overdraft and associated
charges are consistent with the provision. The CFPB is proposing to
modify the exception from the definition of finance charge in Sec.
1026.4(c)(3) so that certain overdraft-related charges are finance
charges even if the financial institution does not agree in advance to
pay the items. If finalized, some charges for paying overdrafts that
may otherwise be characterized as occasional or inadvertent would be
considered finance charges. To ensure the commentary aligns with the
exception in Sec. 1026.4(c)(3) and clarify that allowing a consumer to
access non-covered overdraft credit using a debit card does not trigger
credit card requirements in Regulation Z, the CFPB is proposing to: (1)
amend comment 2(a)(15)-2.ii.A by deleting the phrase ``even if the
creditor occasionally honors an inadvertent overdraft;'' and (2) add
comment 2(a)(15)-2.ii.E to clarify that a check-guarantee or debit card
that can only access non-covered overdraft credit is not a ``credit
card''.
Credit Card Account Under an Open-End (Not Home-Secured) Consumer
Credit Plan (Sec. 1026.2(a)(15)(ii))
The CFPB is proposing to amend the definition of ``credit card
account under an open-end (not home-secured) consumer credit plan'' in
Sec. 1026.2(a)(15)(ii) by narrowing the two overdraft-related
exceptions so that open-end covered overdraft credit offered by a very
large financial institution would no longer be excepted from the
definition of a ``credit card account under an open-end (not home-
secured) consumer credit plan.'' Such credit offered by a very large
financial institution would be subject to the CARD Act provisions in
subpart G and subpart B.
Discussion of the Effect of Applying Regulation Z's CARD Act Provisions
to Covered Overdraft Credit Accounts Accessed by a Hybrid Debit-Credit
Card
These changes would subject all covered overdraft credit to the
CARD Act provisions in subparts G and B if that credit is accessible by
a credit card and offered by a very large financial institution.
The CARD Act provisions that the CFPB is proposing to apply to
hybrid debit-credit cards include the following:
The requirement in Sec. 1026.51 to assess the consumer's
ability to pay the credit extended, such as covered overdraft credit,
including special rules regarding the extension of credit to persons
under the age of 21. This may provide an incentive for institutions to
structure and price covered overdraft credit such that consumers are
better able to repay it, relative to current non-covered overdraft
credit.
The restriction in Sec. 1026.52(a) on the amount of
certain fees, such as overdraft fees, that an issuer can charge during
the first year after opening of a credit account, such as a covered
overdraft credit account, to 25 percent of the credit limit. This
restriction does not apply to charges assessed as periodic rates. This
may provide an incentive for institutions to reduce or eliminate flat
fees for overdraft and to instead apply periodic rates that must be
disclosed as APRs. The CFPB has preliminarily determined that this
change in the manner and disclosure of overdraft credit pricing would
improve consumers' ability to understand the price of the credit, and
to compare it to
[[Page 13878]]
the pricing of other forms of credit that consumers might wish to
consider.
The limit in Sec. 1026.52(b)(1) on the amount card
issuers can charge for ``back-end'' penalty fees, such as when a
consumer makes a late payment or exceeds their credit limit. This may
provide an incentive for institutions to rely more on non-penalty
charges that are disclosed as part of the upfront price of the covered
overdraft credit.
The prohibition in Sec. 1026.52(b)(2) on ``declined
transaction fees'' and other penalty fees where there is no cost to the
card issuer associated with the violation of the account agreement. As
discussed below, applying this provision to a covered overdraft credit
account accessed by a hybrid debit-credit card would prohibit declined
debit card transaction fees on accounts with a covered overdraft credit
account accessed by a hybrid debit-credit card. This provision would
also prohibit declined ACH transaction fees where the card issuer
declines an attempted ACH payment and would otherwise impose a fee on
the cardholder for doing so. Consistent with comment 52(b)(2)(i)-4,
this provision would permit a card issuer to impose a fee for declining
a check that attempts to access a covered overdraft credit account
because such a check is ``a check that accesses a credit card
account.'' Such a fee would still be limited by Sec. 1026.52(b)(1).
The CFPB has preliminarily determined that this prohibition on declined
transaction fees limit could lead institutions to shift away from back-
end fees and toward upfront pricing in the form of periodic rates
disclosed as APRs.
The provisions in Sec. 1026.53 regarding how a card
issuer must allocate payments in excess of the minimum periodic
payment.
The limitation in Sec. 1026.54 on card issuers imposing a
finance charge as a result of the loss of a grace period.
The prohibition in Sec. 1026.55 on increases in any APR,
fee, or finance charge applicable to any outstanding balance on a
credit card account, with exceptions where advance notice is provided,
with a requirement that the promotional rate generally cannot expire
earlier than six months, and the requirement in Sec. 1026.59 that card
issuers reevaluate rate increases.
The restriction in Sec. 1026.56 on fees for over-the-
limit transactions to one per billing cycle and the requirement that
the consumer opt-in to payment of such transactions in order for the
fee to be charged.
The requirement in Sec. 1026.57 that institutions of
higher education publicly disclose agreements with card issuers and
limit the marketing of credit cards on or near college campuses.
The requirement in Sec. 1026.58 that card issuers submit
credit card agreements to the CFPB on a quarterly basis.
This proposal would also require very large financial institutions
to comply with the following CARD Act-derived disclosure-related
requirements in subpart B with respect to covered overdraft credit
accounts accessed by a hybrid debit-credit card:
The timing requirements in Sec. 1026.5(b)(2)(ii)(A) for
disclosures sent with respect to a credit card account under an open-
end (not home-secured) consumer credit plan.
The rate-disclosure requirements in Sec.
1026.6(b)(2)(i)(F) for account-opening statements specific to a credit
card account under an open-end (not home-secured) consumer credit plan.
The due date disclosure, repayment disclosure, and format
requirements for periodic statements specific to a credit card account
under an open-end (not home-secured) consumer credit plan in Sec.
1026.7(b)(11)(i), (b)(12)(i), (b)(13).
The subsequent disclosure requirements specific to a
credit card account under an open-end (not home-secured) consumer
credit plan in Sec. 1026.9(c)(2)(iv)(A)(8), (c)(2)(iv)(B)-(C),
(g)(3)(i)(A)(6), (g)(3)(i)(B), (h).
The payments-related requirements specific to a credit
card account under an open-end (not home secured) consumer credit plan
in Sec. 1026.10(b)(3), (e).
The requirements in Sec. 1026.11(c)(1)(i) related to the
timely settlement of estate debts for a credit card account under an
open-end (not home-secured) consumer credit plan.
In addition to the proposed amendments to the definition of
``credit card'' and ``credit card account under an open-end (not home-
secured) consumer credit plan,'' the CFPB is also proposing conforming
and clarifying changes to the commentary for Sec. Sec. 1026.55 and
1026.57 to reflect the changes discussed in this section. In
particular, the CFPB is proposing to add comment 55(a)-5 to clarify
that the limitations on increasing annual percentage rates, fees, and
charges apply to fees imposed in connection with covered overdraft
credit whether those fees are imposed on the covered overdraft credit
account or the associated covered asset account. Finally, the CFPB is
proposing to amend comment 57(a)(1)-1 so that it would continue to
accurately reflect the exceptions from the definition of credit card
issued under a credit card account under an open-end (not home-secured)
consumer credit plan if changes to that definition are finalized as
proposed.
Limitations on Penalty Fees
Among the CARD Act provisions discussed above, one of them, Sec.
1026.52(b), raises complex policy considerations that the CFPB believes
are important to address in more detail. Section 1026.52(b) regulates
the imposition of penalty fees on a credit card account under an open-
end (not home secured) consumer credit plan. TILA refers to a ``penalty
fee'' as a fee imposed ``in connection with any omission with respect
to, or violation of, the cardholder agreement,'' and it permits only a
penalty fee that is ``reasonable and proportional to the amount of such
omission or violation.'' \193\ Consistent with this statutory language,
Regulation Z defines a ``penalty fee'' as ``any charge imposed by a
card issuer based on an act or omission that violates the terms of the
account or any other requirements imposed by the card issuer with
respect to the account, other than charges attributable to periodic
interest rates.'' \194\ Section 1026.52(b)(1) permits a card issuer to
impose a penalty fee as long as that fee represents a ``reasonable
proportion of the total costs incurred by the card issuer as a result
of that type of violation'' or complies with dollar amounts specified
in a safe harbor provision.\195\ Section 1026.52(b)(2), meanwhile,
prohibits a penalty fee that exceeds the dollar amount associated with
the violation or where there is no dollar amount associated with the
violation.\196\ In particular, Sec. 1026.52(b)(2)(i)(B)(1) prohibits
any fee charged in connection with a ``transaction that a card issuer
declines to authorize.''
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\193\ CARD Act section 102, TILA section 149, 15 U.S.C.
1665d(a).
\194\ Regulation Z comment 52(b)-1.
\195\ 12 CFR 1026.52(b)(1)(i)-(ii).
\196\ Section 1026.52(b)(2) also bans the imposition of multiple
fees for the same violation. 12 CFR 1026.52(b)(2)(ii).
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When applied to a covered overdraft credit account accessed by a
hybrid debit-credit card, Sec. 1026.52(b)(2)(B)(1) would prohibit most
declined transaction fees imposed with respect to a declined
transaction that, if paid, would have overdrawn a particular consumer's
asset account. When covered overdraft credit is accessible by a hybrid
debit-credit card, the CFPB has preliminarily determined that a fee
imposed when a potentially overdrawing transaction is declined, such as
an nonsufficient funds (NSF) fee, is a penalty fee. A potentially
overdrawing transaction initiated on a
[[Page 13879]]
consumer's asset account, would, if authorized, result in the extension
of overdraft credit. Declining such a transaction, and then imposing a
fee for such an attempt, is a penalty fee because, under the statutory
language, it is a fee that ``a card issuer may impose with respect to a
credit card account . . . in connection with any omission with respect
to, or in violation of, the cardholder agreement.'' \197\ Likewise,
under Regulation Z, it is a fee ``imposed by a card issuer based on an
act . . . that violates the terms'' of the covered overdraft credit
account ``or any other requirements imposed by the card issuer with
respect to'' that overdraft credit account, including any requirements
relating to when overdraft credit can and cannot be accessed from an
asset account.\198\ Because such a transaction has been declined, no
credit has been extended and there is therefore no dollar amount
associated with the violation.\199\ Finally, because the card issuer is
the entity declining this transaction, any fee imposed with respect to
this declined transaction is a fee for a ``transaction that the card
issuer declines to authorize.'' \200\ This is true whether the penalty
is charged to the covered overdraft credit account or the covered asset
account.
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\197\ 15 U.S.C. 1665d(a).
\198\ See Regulation Z comment 52(b)-1.
\199\ See 12 CFR 1026.52(b)(2)(i)(B).
\200\ See 12 CFR 1026.52(b)(2)(i)(B)(1).
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Thus, for a covered overdraft account accessed by a hybrid debit-
credit card, 15 U.S.C. 1665d(a) and Sec. 1026.52(b) would prohibit any
fee for a potentially overdrawing transaction that the card issuer
declines to authorize. This would include declined debit card
transactions as well as declined ACH transactions. However, as
explained in comment 52(b)(2)(i)-4, the prohibition on fees for
transactions that a card issuer declines to authorize does not extend
to fees imposed for declining a ``check that can access a credit card
account.'' \201\ The CFPB has preliminarily determined that applying
Sec. 1026.52(b) to a covered overdraft credit account accessed by a
hybrid debit-credit card similarly would permit fees imposed when a
card issuer declines a check on an asset account with an attached
covered overdraft credit account as long as those fees satisfy the
restrictions in Sec. 1026.52(b)(1).
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\201\ Regulation Z comment 52(b)(2)(i)-4.
---------------------------------------------------------------------------
With respect to declined transactions other than declined check
transactions, the CFPB has preliminarily determined that the Board's
rationale in adopting Sec. 1026.52(b)(2) continues to apply. That is,
it appears that there is no dollar amount associated with a declined
transaction and the imposition of the fee does not appear to be related
to costs incurred by the card issuer. The CFPB recognizes that it may
be possible that such fees could have a deterrent effect or could
affect the consumer's conduct in certain limited situations. However,
there does not appear to be any need for the financial institution to
attempt to deter or influence the consumer's conduct in this situation,
particularly in light of minimal costs and risks to the card issuer.
With respect to costs, because the mechanism for authorizing or
declining a transaction is generally automated, the CFPB understands
that declining transactions imposes very minimal or no costs, which
would not support imposing a penalty fee. The CFPB understands this to
be the case across several payment channels, including for payments
initiated via debit card, payments occurring on an ACH network, and
other online payments. To the extent there are certain minimal costs
associated with the automated authorization and declination of
transactions generally, card issuers can consider whether other sources
of revenue might allow them to recoup those costs.
The CFPB notes that these considerations may apply equally to
declined checks. However, the CFPB is not proposing at this time to
reconsider the Board's prior decision to permit some amount of a fee in
connection with declining to pay a check that accesses a credit card
account and would apply the same approach to checks issued in
connection with a checking or other transaction account with a
connected covered overdraft credit account accessible by a hybrid
debit-credit card.
Accordingly, after considering the factors in 15 U.S.C. 1665d, the
CFPB is not proposing any amendments to Sec. 1026.52(b).
ii. Special Credit Card Provisions (Sec. 1026.12)
Existing Sec. 1026.12 contains special rules applicable to credit
cards and credit card accounts, including rules regarding the
conditions under which a credit card may be issued, liability of
cardholders for unauthorized use, cardholder rights to assert merchant
claims and defenses against the card issuer, and the prohibition on
offsets by issuers.
The proposal would revise the commentary to Sec. 1026.12 to
clarify how the special card provisions of Sec. 1026.12 apply to
hybrid debit-credit cards. Specifically, the proposal would add a
sentence to comment 12-1 clarifying that paragraphs (a) through (f) of
Sec. 1026.12 apply to hybrid debit-credit cards notwithstanding
paragraph (g). Paragraph (g) addresses whether Regulation Z or
Regulation E controls in instances where a transaction involves both
credit and electronic fund transfer aspects. The proposed revision to
comment 12-1 is intended to clarify that the provisions of Sec.
1026.12 relating to card issuance and liability apply to hybrid debit-
credit cards.
As discussed in greater detail below, the proposal would provide
additional guidance on unsolicited issuance in Sec. 1026.12(a) and the
right of a cardholder to assert claims or defenses against a card
issuer in Sec. 1026.12(c).
iii. Clarification to Issuance of Credit Cards (Sec. 1026.12(a))
TILA section 132 generally prohibits creditors from issuing credit
cards except in response to a request or an application. TILA section
132 explicitly exempts credit cards issued as renewals of or
substitutes for previously accepted credit cards from this
prohibition.\202\
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\202\ 15 U.S.C. 1642.
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Section 1026.12(a) of Regulation Z implements TILA section 132 and
provides that ``[r]egardless of the purpose for which a credit card is
to be used, including business, commercial, or agricultural use, no
credit card shall be issued to any person except: (1) In response to an
oral or written request or application for the card; or (2) As a
renewal of, or substitute for, an accepted credit card.'' The proposal
would provide guidance on how the prohibition on issuing unsolicited
credit cards applies to hybrid debit-credit cards.
Clarification to Explicit Request Requirement (Sec. 1026.12(a)(1))
Comment 12(a)(1)-1 states that ``[a] request or application for a
card must be explicit'' and that ``a request for an overdraft plan tied
to a checking account does not constitute an application for a credit
card with overdraft checking features.'' However, as discussed in
greater detail in part [IV.E.2.i], under the proposal, a hybrid debit-
credit card would be a credit card that a consumer may use from time to
time to obtain covered overdraft credit from a very large financial
institution. Therefore, the prohibition on issuing unsolicited credit
cards set forth in Sec. 1026.12(a)(1) would apply to hybrid debit-
credit cards. As a result, a request for covered overdraft credit from
a very large financial institution would constitute an application for
a credit card with overdraft features to the extent such credit would
be accessible
[[Page 13880]]
through a hybrid debit-credit card. The proposal would revise comment
12(a)(1)-1 to clarify that a very large financial institution cannot
issue a hybrid debit-credit card to a person without first receiving an
oral or written request or application from that person for the hybrid
debit-credit card.
The proposed rule also would amend comment 12(a)(1)-2. Comment
12(a)(1)-2 explains that the addition of a credit feature or plan to a
non-credit card that would turn that card into a credit card
constitutes issuance of a credit card. The comment then provides two
examples of scenarios that would constitute issuance of a credit card.
The proposed rule would amend comment 12(a)(1)-2 by adding a third
example relating to hybrid debit-credit cards as comment 12(a)(1)-
2.iii. Proposed comment 12(a)(1)-2.iii would state that extending
covered overdraft credit through a hybrid debit-credit card as defined
in Sec. 1026.62 would constitute issuance of a credit card. For
example, if a very large financial institution initially allowed a
consumer to use a debit card to access overdraft credit that is not
``covered overdraft credit'' as defined in Sec. 1026.62, the very
large financial institution would be issuing a credit card if it then
allowed the consumer to use the same card to access covered overdraft
credit. Under that scenario, the debit card would convert into a hybrid
debit-credit card subject to the requirements of Sec. 1026.12(a).
Clarifications to Replacement Card Requirements (Sec. 1026.12(a)(2))
Comment 12(a)(2)-5 (the so-called ``one for one'' rule) explains
that an accepted card generally may be replaced by no more than one
renewal or substitute card. For example, the card issuer may not
replace a credit card permitting purchases and cash advances with two
cards, one for the purchases and another for the cash advances.
However, comment 12(a)(2)-6 provides three exceptions to this general
``one for one'' rule. First, comment 12(a)(2)-6.i explains that the
unsolicited issuance rule in Sec. 1026.12(a) does not prohibit the
card issuer from replacing a debit/credit card with a credit card and
another card with only debit functions (or debit functions plus an
associated overdraft capability), since the latter card could be issued
on an unsolicited basis under Regulation E. Second, comment 12(a)(2)-
6.ii explains that Sec. 1026.12(a) does not prohibit a card issuer
from replacing a single card that is both a prepaid card and a credit
card with a credit card and a separate prepaid card where the latter
card is not a hybrid prepaid-credit card as defined in Sec. 1026.61.
Finally, comment 12(a)(2)-6.iii explains that Sec. 1026.12(a) does not
prohibit a card issuer from replacing an accepted card with more than
one renewal or substitute card, provided that: ``(A) No replacement
card accesses any account not accessed by the accepted card; (B) For
terms and conditions required to be disclosed under Sec. 1026.6, all
replacement cards are issued subject to the same terms and conditions,
except that a creditor may vary terms for which no change in terms
notice is required under Sec. 1026.9(c); and (3) Under the account's
terms the consumer's total liability for unauthorized use with respect
to the account does not increase.''
The proposal would amend comment 12(a)(2)-6 by revising comment
12(a)(2)-6.i in two respects. First, it would explain that a hybrid
debit-credit card is an example of a single card that is both a debit
card and a credit card. Second, it would remove the phrase ``an
associated overdraft capability'' in the parenthetical and replace it
with the phrase ``an associated capability to extend overdraft credit
that is not covered overdraft credit as defined in Sec. 1026.62.'' The
purpose of these proposed changes is to clarify that a very large
financial institution may replace a hybrid debit-credit card with a
credit card and a separate debit card so long as the separate debit
card does not provide the capability to extend covered overdraft credit
(i.e., overdraft that is subject to a finance charge or payable by
written agreement in more than four installments). Replacing the phrase
``an associated overdraft capability'' with the phrase ``an associated
capability to extend overdraft credit that is not covered overdraft
credit as defined in Sec. 1026.62'' in the parenthetical would not
change how the provision applies to card issuers, but rather would
align terminology relating to overdraft credit across Regulation Z.
iv. Right of Cardholder To Assert Claims or Defenses Against Card
Issuer (Sec. 1026.12(c))
When a cardholder has a dispute with a person honoring the credit
card, TILA section 170 generally provides that the cardholder may
assert against the card issuer all claims (other than tort claims) and
defenses arising out of the transaction.\203\ The claim or defense
applies only as to unpaid balances for the goods or services and any
finance or other charges imposed on that amount if the merchant
honoring the card fails to resolve the dispute. The right is further
limited generally to disputes exceeding $50 for purchases made in the
consumer's home State or within 100 miles of the cardholder's address.
Regulation Z Sec. 1026.12(c), implements this section of TILA.
---------------------------------------------------------------------------
\203\ 15 U.S.C. 1666i.
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TILA does not except overdraft credit from the scope of
cardholders' right to assert claims or defenses against card issuers.
However, in 1981 the Board created a non-statutory exception for the
use of a debit card in connection with an overdraft credit plan.\204\
In doing so, the Board noted ``serious operational problems cited by
commenters as arising from applying the claims and defenses provisions
to check guarantee and debit card transactions.'' \205\ This exception
is in current comment 12(c)-3.
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\204\ 46 FR 20848, 20865 (Apr. 7, 1981).
\205\ Id.
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As discussed above, the CFPB has preliminarily determined that it
would be appropriate to update exceptions in Regulation Z and thus
increase consumer protections that apply to covered overdraft credit
offered by very large financial institutions. The proposed rule would
not change the current overdraft exceptions for financial institutions
with total assets of $10 billion or less.
Accordingly, the CFPB proposes to narrow the overdraft exception in
comment 12(c)-3 by adding the phrase ``other than a hybrid debit-credit
card.'' As discussed above, under proposed Sec. 1026.62(b)(5) a
``hybrid debit-credit card'' would include a debit card that a consumer
may use from time to time to obtain covered overdraft credit from a
very large financial institution. Such cards would be covered by the
consumer protections in Sec. 1026.12(c). The CFPB has preliminarily
determined that operational concerns alluded to by the Board in 1981
may no longer justify the overdraft exception in comment 12(c)-3,
particularly for very large financial institutions, given advances in
information technology systems over the last 40 years. The current
exception would not change for financial institutions with total assets
of $10 billion or less.
The CFPB further proposes conforming revisions to the commentary
for Sec. 1026.12(c)(1). First, the CFPB would revise comment 12(c)(1)-
1. The current comment explains that the scope of cardholders' right to
assert claims or defenses against card issuers only includes situations
where the goods or services are ``purchased with the credit card.'' The
comment provides examples of situations that are included and excluded.
To facilitate compliance with the proposed rule, the CFPB would
[[Page 13881]]
revise comment 12(c)(1)-1 to provide an example illustrating that the
phrase ``purchased with the credit card'' includes a purchase using a
hybrid debit-credit card to access a covered overdraft credit account
as defined in Sec. 1026.62.
Second, the CFPB would revise comment 12(c)(1)-1.ii. The current
comment explains that credit card protections in Sec. 1026.12(c) do
not apply to the purchase of goods or services by use of a check
accessing an overdraft account and a credit card used solely for
identification of the consumer. The current comment further illustrates
that, if the credit card is used to make partial payment for the
purchase and not merely for identification, the right to assert claims
or defenses would apply to credit extended via the credit card
(although not to credit extended by the overdraft line). The current
comment also provides that the right would apply to credit extended
through a covered separate credit feature accessible by a hybrid
prepaid-credit card. To facilitate compliance with the proposed rule,
the CFPB would revise comment 12(c)(1)-1.ii to provide an example
illustrating that if partial payment for the purchase is made with a
hybrid prepaid-credit card or a hybrid debit-credit card, the right to
assert claims or defenses would apply to credit accessed from a covered
separate credit feature or covered overdraft credit account,
respectively.
Third, the CFPB would revise comment 12(c)(1)-1.iv. Current comment
12(c)(1)-1.iv cross-references comment 12(c)-3 and explains that credit
card protections in Sec. 1026.12(c) do not apply to purchases effected
by use of either a check guarantee card or a debit card when used to
draw on overdraft credit plans. The current comment further illustrates
that, if a card serves both as an ordinary credit card and also as a
check guarantee or debit card, a transaction will be subject to the
provisions on asserting claims and defenses when used as an ordinary
credit card, but not when used as a check guarantee or debit card. As
discussed above, the CFPB proposes to narrow the overdraft exception in
comment 12(c)-3. To reflect that proposed change, CFPB also proposes
conforming revisions to comment 12(c)(1)-1.iv, which would provide that
the right to assert claims or defenses would apply to purchases
effected by use of a hybrid debit-credit card to access a covered
overdraft credit account. The CFPB would also revise comment 12(c)(1)-
1.iv to provide an example illustrating that for purchases effected by
use of a hybrid debit-credit card where the transaction is partially
paid with funds from the asset account, and partially paid with covered
overdraft credit, the provisions of Sec. 1026.12(c) apply only to the
credit portion of the purchase transaction. The CFPB would also correct
a typographical error in comment 12(c)(1)-1.iv by inserting the article
``a'' that is currently missing before ``check guarantee or debit
card.''
The CFPB seeks comment on the proposed narrowing of the overdraft
exception in comment 12(c)-3, including what, if any, operational
issues might arise as a result. The CFPB also seeks comment on the
proposed conforming revisions to the commentary for Sec.
1026.12(c)(1).
v. Credit Card Applications and Solicitations (Sec. 1026.60)
Existing Sec. 1026.60 includes certain requirements related to
applications and solicitations for credit cards. Among other things, it
requires certain disclosures in connection with credit card
applications and solicitations and prescribes content and format of the
application or solicitation. Existing Sec. 1026.60(a)(5) excepts
certain types of credit from the requirements of Sec. 1026.60,
including Sec. 1026.60(a)(5)(ii), which excepts overdraft lines of
credit tied to asset accounts accessed by check-guarantee cards or by
debit cards; Sec. 1026.60(a)(5)(iii), which excepts lines of credit
accessed by check-guarantee cards or by debit cards that can be used
only at automated teller machines; and Sec. 1026.60(a)(5)(iv), which
excepts lines of credit accessed solely by account numbers except for a
covered separate credit feature solely accessible by an account number
that is a hybrid prepaid-debit card as defined in Sec. 1026.61.
The requirements in Sec. 1026.60 implement provisions of the Fair
Credit and Charge Card Disclosure Act of 1988.\206\ The purpose of the
law was to provide for more detailed and uniform disclosures of rates
and other cost information in applications and in solicitations to open
credit and charge card accounts. The statute applies the disclosure
requirements broadly to any application to open a credit card account
for any person under an open-end consumer credit plan or to a
solicitation to open such an account without requiring an application.
In implementing the statutory requirements, the Board narrowed the
scope of coverage by adopting the exceptions in what is now Sec.
1026.60(a)(5), determining that the requirements should apply only to
``traditional'' credit or charge accounts that are used primarily to
purchase goods and services.\207\
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\206\ Public Law 100-583, 102 Stat. 2960 (Nov. 3, 1988).
\207\ 54 FR 13855, 13856-57 (Apr. 6, 1989).
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The CFPB has preliminarily determined that, as with the CARD Act
provisions, covered overdraft offered by a very large financial
institution that is accessible by a card, including a debit card,
should be subject to the requirements of Sec. 1026.60. In excepting
certain types of credit from those requirements, the Board noted only
that the requirements should apply only to ``traditional'' credit cards
that are used to purchase goods and services. However, given the
expanded use of debit cards to purchase goods and services, many of
which are linked to accounts that offer overdraft credit, the
distinction between ``traditional'' credit cards and debit cards that
can access overdraft credit appears far less clear. The CFPB has
preliminarily determined that the requirements of Sec. 1026.60 should
be applied consistent with the broad statutory language to cards that
can access covered overdraft credit, and that doing so will carry out
the purposes of TILA by assuring a meaningful disclosure of credit
terms and avoiding the uninformed use of credit.
Accordingly, the CFPB is proposing to amend Sec. 1026.60 to narrow
the exception for overdraft lines of credit. Specifically, the proposal
would amend Sec. 1026.60(a)(5)(ii), (iii), and (iv) so that those
exceptions would not apply to covered overdraft credit accessed by a
hybrid debit-credit card. As explained above, the CFPB is proposing to
define a ``hybrid debit-credit card'' as any card (including a debit
card) that can access covered overdraft credit offered by a very large
financial institution. Accordingly, the proposed amendments to Sec.
1026.60(a)(5)(ii), (iii), and (iv) would narrow the exception so that
the requirements of Sec. 1026.60 would apply to covered overdraft
credit offered by a very large financial institution when that credit
can be accessed by any card, including a debit card.
vi. Charge Card (Sec. 1026.2(a)(15)(iii))
The CFPB proposes to amend the definition of ``charge card'' in
Sec. 1026.2(a)(15)(iii) to exclude a hybrid debit-credit card from the
definition. Under the proposed amendment, a hybrid debit-credit card
would be subject to the same disclosure and other rules as other credit
cards, rather than certain special rules for charge cards. The CFPB has
preliminarily determined that consumers using hybrid debit-credit cards
would benefit from the
[[Page 13882]]
TILA and Regulation Z provisions that apply to credit cards generally.
TILA defines ``charge card'' as ``a card, plate, or other single
credit device that may be used from time to time to obtain credit which
is not subject to a finance charge.'' \208\ Because hybrid debit-credit
cards would generally access credit that is subject to a finance
charge, they do not fit within the statutory definition of charge card.
The term ``charge card'' was introduced into TILA with the Fair Credit
and Charge Card Disclosure Act of 1988, which amended TILA to define
``charge card'' as ``a card, plate, or other single credit device that
may be used from time to time to obtain credit which is not subject to
a finance charge'' (emphasis added).\209\ In its rule implementing the
1988 act, the Board expanded the definition of ``charge card'' such
that, in Regulation Z, the definition includes any card on which there
is no periodic rate.\210\ In other words, a card with a finance charge
that is not a periodic rate is excluded from the statutory charge card
definition but is included within the Regulation Z definition of that
term. The Board sought to address a perceived inconsistency between
that statutory definition and the fact that some disclosure provisions
that apply to charge cards reference finance charges.
---------------------------------------------------------------------------
\208\ 15 U.S.C. 1637(c)(4)(E).
\209\ See Public Law 100-583, section 2, 102 Stat. 2960 (Nov. 3,
1988).
\210\ 54 FR 13855, 13856 (Apr. 4, 1989).
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Under both the statutory and regulatory definitions, a charge card
is a type of credit card. Thus, where Regulation Z provisions apply to
credit cards, the provisions also apply to charge cards. However, in
specific provisions, which are listed in comment 2(a)(15)-3.i, the term
charge card is distinguished from credit card such that different
requirements apply. One example of such a provision is Sec.
1026.7(b)(11), which, in accordance with TILA, requires on credit card
periodic statements the disclosure of a payment due date and requires
that that date be the same day of the month for each billing cycle. The
Board in Regulation Z excluded charge cards from these
requirements.\211\ The CFPB has preliminarily determined, however, that
these requirements should apply to a debit card that can access a
covered overdraft credit account (i.e., a hybrid debit-credit card).
The CFPB accordingly is proposing to exclude hybrid debit-credit cards
from the Regulation Z definition of charge card. This approach is
consistent with TILA; in proposing to apply the TILA and Regulation Z
credit card provisions to debit cards that can access covered
overdraft, the CFPB is merely declining to exercise its regulatory
authority to implement TILA with respect to hybrid debit-credit cards
in the ways that the Board previously did with respect to charge cards.
---------------------------------------------------------------------------
\211\ See Sec. 1026.7(b)(11)(ii)(A); 75 FR 7658, 7672-73 (Feb.
22, 2010).
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The proposed definition of hybrid debit-credit card would encompass
devices that can access overdraft credit and are subject to finance
charges, including devices that are subject to fees but not a periodic
interest rate. Hybrid debit-credit cards would therefore not fit the
statutory definition of a ``charge card,'' because they are subject to
finance charges. Further, the CFPB preliminarily determines that
consumers using hybrid debit-credit cards would benefit from the TILA
and Regulation Z provisions that apply to credit cards generally, such
as Sec. 1026.7(b)(11).
The CFPB understands that charge cards are typically offered to
higher income individuals with prime or super-prime credit, and they
often have no set credit limit.\212\ In contrast, current users of non-
covered overdraft credit often are lower-income consumers with lower
credit scores.\213\ Subsequent to the CFPB's proposal, many of these
consumers may be offered hybrid debit-credit cards. Accordingly,
consistent with TILA, and to ensure that consumers who use covered
overdraft credit may benefit from the full protection of the Regulation
Z credit card rules, the CFPB is proposing to amend the regulatory
definition of ``charge card'' such that a `hybrid debit-credit card'
would not be within the credit card subset ``charge card'' but would
nonetheless remain in the larger set ``credit card.'' This would ensure
that a hybrid debit-credit card that accesses covered overdraft credit
offered by a very large financial institution would be subject to the
same disclosure and other rules as other credit cards.
---------------------------------------------------------------------------
\212\ See Fed. Trade Comm'n, Comparing Credit, Charge, Secured
Credit, Debit, or Prepaid Cards (Dec. 2021), https://consumer.ftc.gov/articles/comparing-credit-charge-secured-credit-debit-or-prepaid-cards.
\213\ See CFPB 2017 Data Point at 6.
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3. Compulsory Use of Preauthorized Transfers (Sec. 1005.10(e)(1))
The CFPB proposes to apply the Regulation E compulsory-use
prohibition to covered overdraft credit extended by very large
financial institutions--i.e., when a very large financial institution
provides overdraft credit that is subject to Regulation Z. Under this
proposal, a very large financial institution that provides covered
overdraft credit to a consumer could not condition the extension of
such covered overdraft credit on the consumer's agreement to repay it
solely by preauthorized electronic fund transfer (EFT). In other words,
the proposal would require a very large financial institution that
provides covered overdraft credit to a consumer to offer the consumer
at least one alternative repayment option in addition to a
preauthorized EFT.
EFTA section 903(10) defines the term ``preauthorized electronic
fund transfer'' as ``an [EFT] authorized in advance to recur at
substantially regular intervals.'' \214\ Regulation E Sec. 1005.2(k)
restates the statutory definition. EFTA's compulsory-use prohibition,
EFTA section 913(1), prohibits any person from conditioning the
extension of credit to a consumer on the consumer's repayment by means
of preauthorized EFTs.\215\ However, Regulation E Sec. 1005.10(e)(1)
currently includes a non-statutory exception. Specifically, that
section states that ``[n]o financial institution or other person may
condition an extension of credit to a consumer on the consumer's
repayment by preauthorized electronic fund transfers, except for credit
extended under an overdraft credit plan or extended to maintain a
specified minimum balance in the consumer's account'' (emphasis
added).\216\ The commentary explains that, as a result of the
exception, a financial institution may require the automatic repayment
of an overdraft credit plan.\217\
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\214\ 15 U.S.C. 1693a(10).
\215\ 15 U.S.C. 1693k(1).
\216\ 12 CFR 1005.10(e)(1).
\217\ Regulation E comment 10(e)(1)-2.
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Regulation Z section 1026.12(d)(3) permits a card issuer, who
obtains written authorization from the cardholder, to deduct
periodically a cardholder's credit card debt from a deposit account
held with the card issuer. Therefore, under the current rules, if a
financial instution were to provide a consumer with overdraft credit
accessible by a credit card, the financial institution could, with the
consumer's written authorization, make automatic periodic deductions
from the consumer's deposit account. Because periodic deductions by a
creditor to obtain repayment of an overdraft credit balance occur at
regular intervals, they are a form of preauthorized EFT and would be
subject to the Regulation E compulsory-use prohibition, absent the
extant exception for an overdraft credit plan provided by current
[[Page 13883]]
Sec. 1005.10(e)(1).\218\ It is this exception that the CFPB is
proposing to eliminate for covered overdraft credit provided by a very
large financial institution.
---------------------------------------------------------------------------
\218\ See Sec. 1005.3(c)(5)(iii), which excludes from the
Regulation E EFT definition a transfer of funds between a consumer's
account and an account of the consumer's financial institution, but
which also states that these transfers remain subject to the Sec.
1005.10(e) compulsory-use prohibition.
---------------------------------------------------------------------------
In adopting the exception from the compulsory-use prohibition in
1981, the Board used its EFTA exception authority to exclude
``overdraft credit plans'' (i.e., covered overdraft credit) from the
general EFTA compulsory-use prohibition.\219\ The CFPB's proposal would
revise Sec. 1005.10(e)(1) and associated commentary to update that
non-statutory exception. Under the CFPB's proposal, the exception in
Sec. 1005.10(e)(1) for overdraft credit plans would no longer apply to
covered overdraft credit provided by a very large financial
institution, as those terms would be defined in proposed Sec. 1026.62.
---------------------------------------------------------------------------
\219\ See 46 FR 2972, 2973 (Jan. 13, 1981).
---------------------------------------------------------------------------
Because under the proposal the exception would no longer apply to
covered overdraft credit provided by a very large financial
institution, the institution would be required to offer a consumer at
least one method of repaying an overdraft credit balance other than
automatic repayment by preauthorized EFT. For example, in addition to
the automatic repayment option, the institution could offer consumers
an option to repay their outstanding overdraft credit balances by
expressly authorizing (e.g., on the institution's website or smartphone
application) a one-time transfer of funds from the consumer's asset
account.
Under the CFPB's proposal, this requirement to offer additional
repayment methods would apply to any existing covered overdraft credit
offered by a very large financial institution, including products that
often are referred to as Regulation Z overdraft lines of credit. In
other words, where such an institution today provides a consumer with
an overdraft line of credit subject to Regulation Z, the institution,
upon the compliance date of the CFPB's proposal (if finalized), would
need to begin to offer the consumer a way for the consumer to repay the
consumer's overdraft credit balances other than by preauthorized EFT.
While the institution would be required to offer a repayment option
other than automatic repayment, the institution (as today) may offer a
reduced APR or other cost-related incentive for the consumer to choose
the option of automatic repayment.\220\
---------------------------------------------------------------------------
\220\ See Regulation E comment 10(e)(1)-4.
---------------------------------------------------------------------------
Congress enacted the compulsory-use prohibition to prevent
financial institutions and other persons that are creditors from
mandating repayment of credit by preauthorized EFTs, such as automatic
periodic deductions from consumers' accounts. In turn, in adopting an
exception to that prohibition for overdraft in the early 1980s, the
Board stated its belief that overdraft credit plans were popular with
those consumers who had them and that those plans almost universally
involved an automatic payment feature.\221\ The Board also stated that
it believed that the cost to institutions of providing and maintaining
a nonautomatic payment option was substantial and that requiring
institutions to incur that cost could have an adverse impact on
consumers, such as through reduced service levels or the termination of
the overdraft service altogether.\222\
---------------------------------------------------------------------------
\221\ 46 FR 2972, 2973 (Jan. 13, 1981).
\222\ Id.
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Covered overdraft credit plans are currently relatively rare.\223\
The CFPB has no reason to believe that these plans were available to a
wider set of consumers in 1981 than they are now. Accordingly, the CFPB
generally understands the Board's 1981 preamble to indicate that
covered overdraft credit plans were well liked at that time by those
consumers who had access to them. In addition, the CFPB has
preliminarily determined that advances in information technology since
the early 1980s (when the Board adopted the compulsory-use exception
for overdraft) have reduced institutions' costs of obtaining repayment
by means other than automatic repayment by preauthorized EFT. For
example, an institution can establish at reasonable cost an internet
computer or smartphone interface through which consumers may easily
initiate--such as by tapping a ``button'' on a smartphone screen--
monthly repayment of credit balances. Further, because applying the
compulsory-use prohibition should not substantially increase
institutions' costs, applying the prohibition would not necessarily
reduce consumers' access to covered overdraft credit plans. At the same
time, applying the compulsory-use prohibition to covered overdraft
credit may allow consumers at very large financial institutions to
retain better control over the funds in their asset accounts at those
institutions. Specifically, applying the prohibition would better
enable consumers to prioritize which of their obligations to pay. For
example, when funds are deposited into the consumer's asset account
(such as electronic direct deposit of the consumer's paycheck), the
consumer would be able to choose to use those funds to pay their rent
before subsequently repaying the consumer's overdraft balance at the
institution (using additional funds from the electronic direct deposit
or subsequently deposited funds). Giving the consumer this choice could
also help to reduce the consumer's costs if the consumer is charged for
each overdraft transaction and delaying repayment of the overdrawn
amounts would allow the consumer to avoid a subsequent overdraft
transaction and its associated charge.
---------------------------------------------------------------------------
\223\ 75 FR 7657, 7664 (Feb. 22, 2010). See also 79 FR 77102,
77208 (Dec. 23, 2014).
---------------------------------------------------------------------------
For these reasons, the CFPB has preliminarily determined that
applying the compulsory-use prohibition to covered overdraft credit
provided by a very large financial institution will carry out the
purposes of EFTA by safeguarding consumers' rights in electronic fund
transfer systems. This preliminary determination to apply the
compulsory-use prohibition is consistent with Congress's original
intent. Congress passed a broad compulsory-use prohibition, which the
Board then narrowed due to concerns about costs, and which the CFPB is
now proposing to restore in light of changed market circumstances
(i.e., substantially reduced costs of alternative means of repayment).
Non-Covered Overdraft Credit
As noted, the Regulation E compulsory-use prohibition prohibits
conditioning credit extensions on consumers' repayment by preauthorized
EFT. As discussed in this proposal, all overdraft is credit,
irrespective of whether the overdraft is or is not subject to
Regulation Z. Nonetheless, the compulsory-use prohibition has
historically been interpreted as not applying to overdraft credit that
is not subject to the requirements of Regulation Z (notwithstanding
that non-covered overdraft credit is credit). Specifically, in 1980 the
Board stated its belief that the compulsory-use prohibition does not
apply to overdraft credit that is not covered by Regulation Z because,
with respect to that overdraft, banks take consumers' repayments
through immediate offset (which does not occur at regular intervals),
rather than through preauthorized EFTs that consumers authorize in
advance to recur at
[[Page 13884]]
substantially regular intervals.\224\ Under the Board's historical
reasoning, a financial institution providing non-covered overdraft
credit does not need access to the above-described exception for
overdraft credit plans from the compulsory-use prohibition, because the
institution's non-covered overdraft credit is not subject to the
compulsory-use prohibition in the first place (because the institution
takes repayment at irregular intervals, whenever the next deposit is
received, rather than at regular intervals).
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\224\ See 45 FR 66348, 66348 (Oct. 6, 1980) (``Other [i.e., non-
covered] plans have automatic debiting whenever funds are deposited
into the consumer's account, and do not have a fixed periodic or
recurring payment schedule. It is the Board's opinion that these
[non-covered] plans are already in compliance with section 913,
because they do not require the consumer to agree to repayment by
preauthorized transfers, which are defined in the act and regulation
as transfers `authorized in advance to recur at substantially
regular intervals.''').
---------------------------------------------------------------------------
The CFPB is not proposing to revisit this longstanding
interpretation. That is, under the CFPB's proposal, it will remain the
case that non-covered overdraft credit that obtains repayment through
offset, such as the typical overdraft service as defined in Sec.
1005.17(a), is not subject to the compulsory-use prohibition.
Therefore, a very large institution providing non-covered overdraft at
or below breakeven pricing may continue to take repayment of a
consumer's overdraft balance immediately upon the institution's receipt
of the next deposit to the consumer's account, just as institutions
typically do today, if done in compliance with applicable law.
Under the CFPB's proposal, however, overdraft credit, including an
overdraft service as that term is defined in Regulation E, that is
provided by a very large financial institution, would only remain not
covered by Regulation Z's requirements--and thus outside the Regulation
E compulsory-use prohibition--if the institution provides its overdraft
credit to consumers for a price that is at or below the institution's
breakeven price for providing the credit. In other words, if the price
of such institution's overdraft credit is above its costs and losses,
then, under the CFPB's proposal, the credit is covered overdraft credit
that is not excepted from Regulation Z and is therefore subject to the
Regulation Z offset prohibition. Accordingly, under the CFPB's
proposal, the institution would be required to obtain repayment only
periodically (pursuant to the offset prohibition) and to comply with
the Regulation E compulsory-use prohibition (in addition to complying
with Regulation Z). As previously noted, the CFPB's proposal does not
apply to non-covered or covered overdraft credit provided by an
institution other than a very large financial institution. As now,
where such an institution provides non-covered overdraft credit,
including an overdraft service, the overdraft credit is not subject to
the Regulation E compulsory-use prohibition. Further, as now, where
such an institution provides an overdraft credit plan that is subject
to Regulation Z, the institution's overdraft credit plan retains access
to the current Sec. 1005.10(e)(1) exception from the compulsory-use
prohibition for overdraft credit plans.
i. The Offset Prohibition in 12 CFR 1026.12(d)(1)
While the CFPB is not proposing to amend the Regulation Z
prohibition against offset, it is closely related to the Regulation E
compulsory-use prohibition discussed above; thus, the CFPB briefly
discusses it here for clarity.
``Offset'' is a term used to describe a practice whereby a
depository institution uses funds from an incoming deposit to a
consumer's asset account at the institution to immediately obtain
repayment of the consumer's debt to the institution, such as an
overdraft.\225\ ``Offset'' is a permitted practice in the context of
non-covered overdraft that is not subject to Regulation Z. In that
context, as described above, an institution may use deposited funds
immediately upon receipt to obtain repayment of, or ``offset'' against,
the consumer's overdraft balance owed to the institution.
---------------------------------------------------------------------------
\225\ See Regulation Z comment 12(d)(1)-2 (describing offset as
when ``the consumer tenders funds as a deposit . . . [and] the card
issuer . . . appl[ies] the funds to repay indebtedness on the
consumer's credit card account'').
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Offset is prohibited by TILA section 169(a) (15 U.S.C. 1666h(a))
and 12 CFR 1026.12(d)(1). The statutory and regulatory offset
prohibition applies to a ``card issuer,'' \226\ which is a person that
issues a ``credit card.'' \227\ When an institution offers an overdraft
credit plan subject to Regulation Z, that plan is covered overdraft
credit. If the covered overdraft credit is accessible by a debit card,
the debit card is a credit card, the institution that provides the card
is a card issuer, and the covered overdraft credit is subject to the
Regulation Z prohibition against offset.
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\226\ The term ``card issuer'' is defined in 12 CFR 1026.2(a)(7)
as ``a person that issues a credit card or that person's agent with
respect to the card.''
\227\ The term ``credit card'' is defined in 12 CFR
1026.2(a)(15)(i) as ``any card, plate, or other single credit device
that may be used from time to time to obtain credit.''
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The CFPB is not proposing to amend the offset prohibition in
Regulation Z. Thus, when a very large financial institution provides a
covered overdraft credit account that is accessible by a card (i.e., a
hybrid debit-credit card), the institution must comply with the offset
prohibition. In particular, 12 CFR 1026.12(d)(1) prohibits the
institution (as a card issuer) from taking any action, either before or
after termination of credit card privileges, to offset a consumer's
indebtedness (such as an overdraft balance) that arises from a credit
card plan (such as a covered overdraft credit account) against the
consumer's funds (such as funds in a covered asset account) held on
deposit with the institution.
Further, per comment 12(d)(1)-3, the offset prohibition applies to
any indebtedness arising from transactions under a credit card plan
(such as a covered overdraft credit account accessible by a hybrid
debit-credit card), including accrued finance charges and other charges
on the account. The prohibition also applies to balances arising from
transactions not using the card itself but taking place under plans
that involve a credit card. For example, if the consumer writes a check
that accesses an overdraft line of credit (which is a type of covered
overdraft credit account), the resulting indebtedness is subject to the
offset prohibition since it is incurred through a credit card
plan.\228\
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\228\ See Regulation Z comment 12(d)(1)-3.
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ii. Periodic Deductions Permitted by 12 CFR 1026.12(d)(3)
Periodic deductions are a different practice than offset. TILA
section 169(a)(1) (15 U.S.C. 1666h(a)(1)) permits a card issuer to
periodically deduct all or part of a consumer's credit card debt from
the consumer's asset account if the periodic deductions are in
accordance with the consumer's preauthorized written agreement. This
TILA provision is implemented in 12 CFR 1026.12(d)(3).
The CFPB is not proposing to amend 12 CFR 1026.12(d)(3). Thus, when
a very large financial institution provides covered overdraft credit
that is accessible by a card, the institution (as a card issuer) must
comply with the offset prohibition (Sec. 1026.12(d)(1), discussed
above), but may obtain a consumer's preauthorized written agreement to
periodic deductions of the consumer's overdraft balances from the
consumer's asset balances held at the institution. These deductions
must be ``periodic'' to be permitted under
[[Page 13885]]
Sec. 1026.12(d)(3); that is, the deductions must occur at regular
intervals. Because the deductions must occur at regular intervals, they
are, as discussed above, a form of preauthorized EFT and are subject to
the Regulation E compulsory-use prohibition. Further, because the
deductions are subject to that prohibition, under the CFPB's proposal,
as discussed, a very large financial institution providing covered
overdraft credit must offer consumers a means of repayment other than
periodic deduction. In other words, even when a very large institution
(as a card issuer) obtains a consumer's written agreement to periodic
deductions as permitted by Sec. 1026.12(d)(3), the institution may not
adopt a practice of immediately taking funds from any incoming deposit
in repayment of the consumer's overdraft balance, because doing so
would run afoul of the offset prohibition in Sec. 1026.12(d)(1).
Moreover, when obtaining written agreement for periodic deductions, the
very large financial institution must offer the consumer another
repayment option, consistent with the prohibition against compulsory
use discussed earlier in this section.
iii. Summary of Compliance With the Compulsory-Use Prohibition, Offset
Prohibition, and Permitted Periodic Deduction Under the CFPB's Proposal
As discussed above, the CFPB is proposing to apply the Regulation E
compulsory-use prohibition to covered overdraft credit provided by a
very large financial institution. Further, the CFPB is not proposing to
amend the Regulation Z prohibition against offset, nor is the CFPB
proposing to amend the Regulation Z provision permitting periodic
deductions. Therefore, when such an institution provides covered
overdraft credit that is accessible by a card, the institution must
comply with the Regulation E compulsory-use prohibition and the
Regulation Z offset prohibition, and may obtain the consumer's
voluntary agreement to repayment by periodic deduction from the
consumer's asset account at the institution.
Pursuant to the Regulation Z offset prohibition, the institution
may not adopt a practice of immediately taking funds from any incoming
deposit in repayment of the consumer's overdraft balance. Pursuant to
the Regulation Z provision permitting periodic deductions, the
institution may obtain the consumer's written agreement to the
institution's obtaining repayment of the consumer's overdraft balance
through automatic periodic deductions from the consumer's covered asset
account. However, pursuant to the Regulation E compulsory-use
prohibition, the institution must provide the consumer with a repayment
option other than automatic periodic deduction. For example, the
institution could provide the repayment option of permitting the
consumer to authorize one-time EFTs to make payments against their
overdraft balance. Also pursuant to the compulsory-use prohibition, the
institution may provide a reduced APR or other cost-related incentive
for the consumer to choose the option of repayment by periodic
deduction.
Request for Comment--Defining ``Periodic''
In its 2016 Prepaid Final Rule, the CFPB defined ``periodically''
in Sec. 1026.12(d)(3) for purposes of a credit feature accessible by a
hybrid prepaid-credit card to mean no more frequently than once per
calendar month. The CFPB stated that it was concerned that some issuers
of hybrid prepaid-credit cards would attempt to circumvent the offset
prohibition in Sec. 1026.12(d)(1) by obtaining a consumer's written
authorization to deduct all or part of the cardholder's credit card
debt on a daily or weekly basis from the prepaid account to help ensure
that the debt is repaid.\229\ The CFPB stated that issuers of hybrid
prepaid-credit cards might obtain a consumer's written authorization to
daily or weekly debits given the overall creditworthiness of prepaid
accountholders who rely on covered separate credit features. In
addition, the CFPB believed that prepaid consumers might grant the
authorization more readily than other credit cardholders because these
consumers may believe that providing such authorization is required.
While the CFPB acknowledged that an appropriate interval for periodic
deductions may depend on the facts and circumstances, the CFPB
determined that Sec. 1026.12(d)(3)--defining periodically as no more
frequently than once per calendar month--would fully effectuate the
intent of the compulsory-use and offset prohibitions and would allow
consumers to retain control over the funds in their prepaid accounts
even when a covered separate credit feature accessible by a hybrid
prepaid-credit card becomes associated with that account.
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\229\ 81 FR 83934, 84213 (Nov. 22, 2016).
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The CFPB believes that similar issues are also present in the
context of covered overdraft credit accounts tied to covered asset
accounts. In particular, the CFPB believes that institutions providing
such accounts might attempt to circumvent the offset prohibition by
obtaining a consumer's written authorization to deduct all or part of
the consumer's debt on a daily or weekly basis to help ensure that the
debt is repaid. Further, the CFPB believes that consumers using these
accounts, such as frequent overdrafters, would generally be more
vulnerable than other consumers and that, in light of their
vulnerability, these consumers might grant such authorization more
readily than other consumers, because they believe that the
authorization is required to obtain the accounts. At the same time, the
CFPB acknowledges that it is possible that a periodic deduction period
shorter than one month might be appropriate in some circumstances.
Specifically, it is possible that some consumers might have difficulty
managing repayment of credit balances and that these consumers might
benefit from periodic deductions that occur more frequently than once
per month.
The CFPB requests comment on whether in its final rule it should
define ``periodically'' to mean no more frequently than once per
calendar month or some other interval for covered overdraft credit
accounts tied to covered asset accounts.
4. Definition of Overdraft Services in Regulation E (Sec. 1005.17(a))
Section 1005.17(a) currently defines ``overdraft service'' to mean
a service under which a financial institution assesses a fee or charge
on a consumer's account held by the institution for paying a
transaction (including a check or other item) when the consumer has
insufficient or unavailable funds in the account. Section 1005.17(a)(1)
also provides that the term ``overdraft service'' does not include any
payment of overdrafts pursuant to a line of credit subject to
Regulation Z, including transfers from a credit card account, home
equity line of credit, or overdraft line of credit. The CFPB is
proposing to add comment 17(a)-2 to clarify that the newly defined
terms under this proposal do not change the scope of the definition of
overdraft services under Sec. 1005.17(a). Specifically, the proposed
comment would clarify that covered overdraft credit, which includes
above breakeven overdraft credit, is not an overdraft service under
Sec. 1005.17(a) because it is a line of credit subject to Regulation
Z. When consumers at very large financial institutions are offered
covered overdraft credit, that covered overdraft credit would not be
subject to the Regulation E opt-in requirement for non-covered debit
card overdraft.
[[Page 13886]]
VI. Proposed Effective Date
Consistent with TILA section 105(d), the CFPB proposes that a final
rule relating to this proposal would have an effective date of the
October 1 which follows by at least six months the date it is published
in the Federal Register.\230\ The Bureau seeks comment on the proposed
effective date including whether it should be at a different time, and
if so, when and why.
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\230\ 15 U.S.C. 1604(d).
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As discussed above, the CFPB's proposed rule would, if finalized,
apply only to very large financial institutions. Accordingly, financial
institutions that are not very large institutions would not need to
make any changes in response to the proposed rule were it to be
finalized.
With respect to very large financial institutions, the changes that
the proposed rule would require, if finalized, would vary depending on
the very large financial institution's activities. If a very large
financial institution currently offered non-covered overdraft services
in compliance with existing regulations and, in response to the rule,
it chose to provide those services at or below its breakeven price, it
could continue to provide such services without making any operational
changes in response to the rule apart from developing a process to
confirm that its pricing for such services complied with either the
rule's benchmark fee or breakeven standard provisions.
If a very large financial institution currently offered non-covered
overdraft services in compliance with existing regulations and, in
response to the rule, chose to provide above-breakeven overdraft
credit, it would need to ensure that such credit complied with
Regulation Z. However, if the very large financial institution were
unable to bring a Regulation Z compliant above-breakeven overdraft
credit program to market before the effective date of a final rule, the
institution still could comply with the rule by delaying, for as long
as it wishes, the point in time at which it began to offer above-
breakeven overdraft credit to consumers. Finally, if a very large
financial institution currently offered covered overdraft credit in
compliance with Regulation Z and, in response to the rule, chose to
continue offering such credit, the very large financial institution
would need to comply with the rule by: (1) treating transfer fees as
finance charges, or eliminating those fees, (2) offering consumers a
means of repaying their overdrafts other than by preauthorized EFTs,
and (3) beginning to comply with the regulatory provisions in
Regulation Z that apply to credit cards that would newly apply to
certain types of covered overdraft credit.
The CFPB believes that the proposed effective date should be
sufficient for a very large financial institution to make these
changes.
VII. Severability
The CFPB preliminarily intends that, if any provision of the
proposed rule, if adopted as final, or any application of a provision,
is stayed or determined to be invalid, the remaining provisions or
applications are severable and shall continue in effect.
VIII. CFPA Section 1022(b) Analysis
A. Overview
In developing this proposed rule, the CFPB has considered the
proposed rule's potential benefits, costs, and impacts per section
1022(b)(2)(A) of the Consumer Financial Protection Act of 2010 (CFPA).
The CFPB requests comment on the preliminary analysis presented below
and submissions of more data that could inform the CFPB's analysis of
the potential benefits, costs, and impacts. In developing the proposed
rule, the CFPB has consulted or offered to consult with the appropriate
prudential regulators and other Federal agencies, including about the
consistency of this 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 also consulted with
agencies described in TILA section 149.
The goal of this proposed rule is to allow more consumers to better
compare certain overdraft credit to other types of credit and to
provide consumers with several substantive protections that already
apply to other consumer credit, while still encouraging the
availability of overdraft coverage. The section proceeds as follows.
First, it describes data limitations and the quantification of
benefits, costs, and impacts. Second, it presents the baseline for its
analysis. Third, it goes through the potential benefits and costs,
first to consumers and then to covered persons, of the proposed changes
that affect charges for non-covered and covered overdraft. Fourth, the
section turns to the benefits, costs, and impacts of further provisions
of the proposed rule. Fifth and sixth, it summarizes specific impacts
on financial institutions with $10 billion in assets or less and on
consumers in rural areas, respectively.
B. Data Limitations and Quantification of Benefits, Costs, and Impacts
The discussion below relies on information that the CFPB has
obtained from industry, other regulatory agencies, 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.
Specifically, this discussion is based on the CFPB's analysis of
public Call Reports and other publicly available data sources, internal
data from multiple supervisory information requests, as described in
part II above, as well as research reports published by the CFPB. The
CFPB also consulted the academic literature and policy analyses of
United Kingdom and State regulators.
The CFPB acknowledges several important limitations that prevent a
full determination of benefits, costs, and impacts. Quantifying the
benefits, costs, and impacts requires quantifying consumer and
depository institution responses to the proposed changes, and the CFPB
finds the body of knowledge on relevant behavioral responses and
elasticities incomplete. In particular, the CFPB is not aware of
evidence that could be used to predict how changes to overdraft pricing
would affect negative balance periods or the expected substitution
effects across asset accounts and between deposit accounts with
overdraft coverage and other forms of credit, including the consumer
harm from delaying or forgoing some transactions. Similarly, the CFPB
believes there is little reliable quantitative evidence available on
the cost and effectiveness of steps financial institutions might take
to facilitate clients' money management or timely repayment on
overdrawn accounts; reprice any of their services; remunerate their
staff, suppliers, or sources of capital differently; or enter or exit
any or all segments of the checking account market. Thus, while the
data and research available to the CFPB provide an important basis for
understanding the likely effects of the proposal, the data and research
are insufficient to fully quantify the potential effects of the
proposal for consumers and very large financial institutions. This
reflects, in part, the fact that the effects of the proposal would
depend on choices made by independent actors in response to the
proposal, and the data and research available to the CFPB do not
[[Page 13887]]
allow reliable predictions of those choices.
In light of these data limitations, the analysis below provides
quantitative estimates where possible and a qualitative discussion of
the proposed rule's benefits, costs, and impacts. General economic
principles and the CFPB's expertise, together with the available data,
provide insight into these benefits, costs, and impacts. The CFPB
requests additional data or studies that could help quantify the
benefits and costs to consumers and covered persons of the proposed
rule.
C. Baseline for Analysis
To evaluate the proposal's benefits, costs, and impacts, the CFPB
measures the proposal's benefits, costs, and impacts against a baseline
in which the CFPB would take no action. This baseline assumes existing
regulations remain in place and that market conditions in the overdraft
market do not change from their current state.
The discussion below assumes that, without action, both the
overdraft credit market and the broader consumer checking market would
function in the manner understood through past CFPB research, external
academic literature, and supervisory activity. The CFPB bases its
prediction for the baseline on market conditions and market data from
the 2022 calendar year. As a result, its baseline reflects changes to
the overdraft market through 2022, including changes to checking
account pricing (both fee and net interest revenue) and changes to the
speed, cost, availability, and prevalence of payment systems. The CFPB
sees that the market is changing rapidly and might continue to do so
absent the rule, but for purposes of the baseline the CFPB generally
uses data from the most recent full calendar year to characterize the
status quo.
D. Potential Benefits and Costs to Consumers and Covered Persons of the
Proposed Changes That Affect Charges for Non-Covered and Covered
Overdraft Credit
1. Potential Benefits and Costs to Consumers
In addition to other changes discussed later in this section and to
the further changes discussed in the following section, the proposal
would apply Regulation Z to above breakeven overdraft credit that is
currently excepted from the regulation (i.e., it is currently non-
covered overdraft credit). Overdraft credit is above breakeven
overdraft credit when a very large financial institution imposes a
charge or combination of charges for such credit that exceeds the
greater of either the average of the institution's costs and losses for
providing non-covered overdraft credit (as defined in the proposal) or
the benchmark fee published by the CFPB. The CFPB anticipates that its
proposal generally would benefit consumers in two ways. First, some
very large financial institutions may reduce their fees so that they
can continue offering non-covered overdraft credit. In general, lower
overdraft fees for non-covered overdraft credit would benefit consumers
by reducing the amount they pay through these fees. Second, some
financial institutions may continue offering above breakeven overdraft
credit and apply the Regulation Z regulatory framework. In general,
applying the Regulation Z regulatory framework to above breakeven
overdraft credit would benefit consumers by promoting their informed
use of such credit and by applying TILA's substantive protections. The
CFPB's analysis may underestimate or overestimate the proposal's
benefits to consumers depending on how various market participants,
such as financial institutions covered by the proposal, entities not
covered by the proposal, and consumers, respond to the proposal. The
discussion below begins with an analysis of the proposal's direct
benefits to consumers assuming that very large financial institutions
comply with the proposal by lowering their fees for non-covered
overdraft credit. The discussion then considers how other potential
responses by very large financial institutions could impact the
proposal's direct benefits to consumers. Next, the discussion considers
how the proposal might impact consumer behavior, including demand for
both covered and non-covered overdraft credit, demand for alternative
credit products, and deposit behavior. Finally, the discussion briefly
considers how institutions not covered by the proposal may respond to
the proposal.
i. Estimated Savings to Consumers if Very Large Financial Institutions
All Use the CFPB's Proposed Benchmark Fee or Breakeven Standard
Under the proposal, overdraft credit offered by very large
financial institutions that currently is non-covered overdraft credit
could remain non-covered overdraft credit if the per-transaction price
for such credit were less than or equal to the benchmark fee
established by the CFPB. Consequently, if all very large financial
institutions were to use the benchmark fee to comply with the rule, the
proposal's direct benefits to consumers, assuming no change in
overdraft frequency, could be as high as the difference between the
total fees currently paid by consumers for non-covered overdraft credit
and the total fees they would pay if non-covered overdraft credit were
priced at the benchmark fee.
Today, fees for non-covered overdraft credit are generally greater
than $30 per transaction.\231\ Under the proposal, fees for any non-
covered overdraft product provided by a very large financial
institution would be substantially lower. From Call Report data, the
CFPB estimates that consumers paid $5.98 billion in overdraft fees to
very large banks and thrifts in 2022. For this estimate, the CFPB
started with CFPB-supervised banks' total reported consumer overdraft-
related service charges levied on those transaction account and non-
transaction savings account deposit products intended primarily for
individuals for personal, household, or family use.\232\ This amount
was $6.42 billion in 2022, including fee revenue from both overdraft
and NSF transactions. In prior work, the CFPB has estimated that,
between January 2011 through June 2012, 18.9 percent of such revenue at
several very large financial institutions was NSF fee revenue.\233\
However, most of the largest banks eliminated NSF fees during 2022; the
CFPB estimates that nearly two-thirds of supervised banks had
eliminated NSF fees by mid-2023, representing an estimated 97 percent
of annual NSF fee revenue earned by those institutions.\234\ For
purposes of this analysis, the CFPB estimates that the NSF fee share in
2022 was half as large as the earlier 18.9 percent share, so supervised
banks' overdraft fees would be 90.55 percent of the 2022 fee total, or
$5.81 billion. This total does not include fee revenue from credit
unions that are very large financial institutions, since credit union
call reports do not include data on overdraft fee
[[Page 13888]]
revenue.\235\ To estimate overdraft revenue earned by CFPB-supervised
(very large) credit unions, the CFPB estimates the overdraft revenue
earned by all credit unions and distributes that estimated revenue to
credit unions above and below $10 billion in assets based on those
groups' relative share of member shares and deposits. The CFPB has
estimated that overdraft revenue reported by banks with over $1 billion
in assets comprises approximately 77 percent of the total overdraft/NSF
revenue earned by banks and credit unions combined, while credit union
overdraft/NSF revenue comprises approximately 15 percent of such
revenue (overdraft/NSF revenue of banks under $1 billion in assets
comprises approximately 7 percent of such revenue).\236\ Banks with
more than $1 billion in assets reported $7.72 billion in overdraft/NSF
revenue in 2022, 90.55 percent or $7.00 billion of which the CFPB
estimates is overdraft revenue for reasons explained above. Assuming
this $7.00 billion represents 77 percent of the market total overdraft
revenue, the CFPB estimates that credit unions earned 15 percent of the
total, or $1.43 billion in overdraft revenue in 2022. At the end of
2022, very large credit unions held 24.1 percent of all member shares
and deposits held by federally insured credit unions. Applying this
24.1 percent to $1.43 billion, the CFPB estimates that very large
credit unions earned $0.34 billion in overdraft fees in 2022, and that
very large financial institutions collectively earned $6.16 billion.
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\231\ In narrative responses to supervisory information
requests, financial institutions generally stated that discretionary
overdraft fees are set using factors such as: (1) the direct and
indirect cost of offering OD services, (2) deterrence effects, (3)
positioning with respect to other competitors, (4) customer
feedback, experiences, and utility, (5) regulatory requirements and
(6) safety and soundness concerns. CFPB 2024 Overdraft NSF Report at
11.
\232\ This information is reported in Schedule RI, Memorandum
item 15.a on the FFIEC 031 and 041 forms, as of September 2023. For
most institutions, this definition also includes fees associated
with sustained negative balances. Few charges related to overdraft
transactions are reported as net interest revenue, if any.
\233\ CFPB 2014 Data Point at 10 tbl.2.
\234\ CFPB October 2023 Data Spotlight.
\235\ Some state-charted credit unions reported substantial
overdraft revenue under California's Financial Code Section 521. See
Dep't of Fin. Prot. & Innovation, Annual Report of Income from Fees
on Nonsufficient Funds and Overdraft Charges (Mar. 2023), https://dfpi.ca.gov/wp-content/uploads/sites/337/2023/04/Annual-Report-of-Income-from-Fees-on-Nonsufficient-Funds-and-Overdraft-Charges_2023.pdf (DFPI 2023 Report).
\236\ See CFPB 2021 Data Point at 7 (estimating combined
overdraft/NSF revenue for credit unions and for banks with less than
$1 billion in assets using 2014 data collected from core processors
for the number of accounts by asset size and the overdraft/NSF
revenue per account, and from 2014 call report data for distribution
of institutions by asset size, and then assuming that overdraft/NSF
revenue at small institutions saw the same growth from 2014 to 2019
as at large banks to arrive at the 2019 estimates). For purposes of
this analysis, we assume that banks with assets over $1 billion,
banks with assets below $1 billion, and all credit unions represent
the same relative portions of total marketwide overdraft/NSF revenue
in 2022 as they did in 2019.
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From information requests by the CFPB, it estimates the average
overdraft fee amount to be $32.50.\237\ The CFPB initially assumes that
a reduction in the fee for non-covered overdraft credit would affect
neither the quantity of credit demanded nor the quantity supplied,
meaning that the application of the benchmark fee across the entire
market would imply mechanical savings for consumers, unaffected by
behavioral responses.\238\ As discussed in part V(D)(2)(v), the CFPB
has proposed four alternative values for the benchmark fee--$3, $6, $7,
and $14. Assuming each proposed value would effectively be the new
average fee across the market, the decline of the market total revenue
would be proportional to the decline in the average fee amount. Thus,
using a 2022 baseline, a $3 fee would have saved consumers $5.6 billion
(90.8 percent of the 2022 total) annually, a $6 fee $5.0 billion (81.5
percent of the total), a $7 fee $4.8 billion (78.5 percent of the
total), and a $14 fee $3.5 billion (56.9 percent of the total) in a
calendar year.
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\237\ The CFPB requested information about some very large
financial institutions' 2022 overdraft practices. For those
institutions with available data on the number of instances of non-
covered overdraft when the institution charged a fee, the reported
weighted average fee amount was $32.50. CFPB 2024 Overdraft NSF
Report. Based on the CFPB's review of publicly available information
between December 2022 and July 2023, the unweighted median non-
covered overdraft fee amount across all very large financial
institutions was $35. Past CFPB research publications have reported
the median non-covered overdraft fee as $35; this median was also
based on data from very large financial institutions. A $35 fee is
higher than the $25.77 fee recently reported by the New York State
Department of Financial Services for 2022 based on a surveyed
entities, most of which would not be subject to this proposal. See
N.Y. State Dep't of Fin. Servs., Consumer Fee Practices in New York
(July 14, 2023), https://www.dfs.ny.gov/system/files/documents/2023/07/rpt_20230714_consumer_fee_practices_nys.pdf. The Department of
Financial Protection and Innovation of the State of California
annually tabulates State-chartered banks' and credit unions' revenue
from overdraft charges but not the fee amounts. See DFPI 2023 Report
Note that to the extent market revenue or fees for very large
financial institutions were lower by the effective date of the
proposed rule, the proportional drop from a smaller market total
would amount to less than these extrapolations from 2022 market
revenue totals and fees. Bankrate's 2023 checking account and ATM
fee survey reports that the average overdraft fee was 11 percent
lower than a year before, https://www.bankrate.com/banking/checking/checking-account-survey/ (last visited Jan. 7, 2024).
\238\ This assumption approximates the situation where overdraft
transactions are inadvertent (a fixed quantity demanded) and always
met at the prevailing price, even after the supply curve shifts
downward with the benchmark fee. As discussed elsewhere, this
outcome is unlikely to hold exactly. Consumers might be less
attentive to avoid overdraft when it is cheaper, though many might
have larger buffers if earlier fees have depleted their account
balances less than they would under the baseline. Financial
institutions might also meet demand only at higher prices, applying
the breakeven standard approach or offering covered overdraft credit
instead.
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Savings from lower fees would be particularly valuable in cases
when they protect liquidity at times when the consumer needs it most.
Consumers with low balances may deplete their asset account less
frequently if they have paid less in overdraft fees in the past, and
thus their asset account recovered to a higher balance after a
sufficiently large deposit. Moreover, if fees, in particular multiple
or cascading fees, deplete less of the buffer the depository
institution is willing to lend to the consumer (i.e., the shadow line
of their non-covered overdraft credit), the consumer might be able to
cover more or larger transactions with it when they have depleted their
asset account. The same shadow line would permit more consumption.
Current users of non-covered overdraft credit would enjoy similar
benefits even if they end up with substitute products like covered
overdraft credit, or linked asset or credit accounts, as long as the
new source of liquidity is cheaper than non-covered overdraft is
currently.
A large reduction in fees for non-covered overdraft could reduce
some operating costs associated with complaints, collections, and
account closures. Such benefits to covered persons do not need to
reflect an equal but opposite pecuniary cost to consumers. Fewer
complaints, collections, or account closures can save money for both
the accountholder and the depository institution, who somehow split the
value that would have been spent otherwise. These gains would mitigate
some losses covered persons suffer from lower fee revenue, so they lose
less on net, in total. The CFPB understands from its general monitoring
activities that complaints fell by 70 percent or more at depository
institutions that radically decreased overdraft fees recently. With
lower fees and charges, the CFPB expects more non-covered or covered
overdraft credit accounts to recover from negative balance episodes.
Very large financial institutions with per-incident costs and
losses traceable to overdrawing transactions above the benchmark fee
would have an incentive to set fees for non-covered overdraft using the
breakeven standard described at proposed Sec. 1026.62(d)(1)(i).
Consumer gains when very large financial institutions with per-incident
costs and losses above the benchmark fee use the breakeven standard
would be less as their fee would not drop all the way to the benchmark
fee. The gains for consumers would be even smaller if the application
of the breakeven standard imposes additional administrative costs on
the institutions who use it, and, in turn, those institutions shift
some of these costs to their customers. However, the CFPB expects these
administrative costs to be small compared to revenue.
[[Page 13889]]
Data produced in response to the CFPB's supervisory information
requests on 2022 overdraft practices suggest that, for benchmark fee
levels less than $14, at least some very large financial institutions
would have traceable costs and losses per overdraft fee charged greater
than the benchmark fee level, such that they could find it more
advantageous to use the breakeven standard. The CFPB has less data on
the costs and losses of other very large financial institutions, whose
costs and losses (mostly their charge-off losses) may be higher than
for some institutions in its supervisory information request
collection. However, because the costs and losses of providing non-
covered overdraft are driven largely by credit losses, and because
these losses depend on underwriting policies, which, as discussed
below, very large financial institutions likely would change in
response to the proposed rule, current cost and loss levels may not be
a reliable indicator of future cost and loss levels assuming the
proposed rule were finalized.
Overdraft fees are incurred by consumers in an estimated 17 percent
of households annually.\239\ Among these, the consumers who would
benefit most from the proposal are those that incur the largest number
of overdraft fees. Thus, a change in fee amounts would have an outsized
impact on specific groups of consumers. The CFPB collected 2022
calendar year information from entities it supervises (the group that
would be affected by the proposed rule), which reinforced patterns of
disparity that prior research of the CFPB and others established: \240\
Overdraft and NSF fees comprised 53 percent of all fees that the
institutions charged to consumer checking accounts, nearly three
quarters of all fees charged to accounts with an average balance below
$500 (lower balance accounts), and nearly three quarters of all fees
charged to accounts where accountholders opted to authorize overdraft
fees on debit card and ATM overdraft transactions (opted-in accounts).
While overdraft-related fees averaged approximately $65 per year over
all accounts, accountholders of opted-in accounts and accountholders of
lower-balance accounts paid over $165 and $220, respectively, in total
of overdraft fees per year on average. Therefore, the benefits of any
fee changes driven by the proposal would be predominantly experienced
by the small fraction of accountholders who had either opted-in
accounts or lower-balance accounts because those accountholders paid
the majority of overdraft fees. Indeed, in aggregate, across all
institutions represented in the CFPB's Supervisory Information
collection, one-fifth of accounts were lower-balance accounts, but
these accounts paid 68 percent of per-item overdraft fees assessed. In
fact, at least one institution charged over half of per-item overdraft
fees to accounts that were both lower-balance accounts and opted-in
accounts, even though only five percent of accounts fell into this
category. Furthermore, accounts that paid for overdraft most often
(twelve or more overdraft fees per year) were nearly five times as
prevalent among opted-in accounts than not-opted-in accounts.
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\239\ FinHealth Spend Research Reports from 2021, 2022 and 2023
have estimated that 17 percent of responding households have paid an
overdraft fee in the prior twelve months between November 2021 and
January 2023. See generally, FHN, Market Analysis: FinHealth Spend
Research--Latest Research, https://finhealthnetwork.org/finhealth-spend-research/ (last visited Jan. 7, 2024).
\240\ See CFPB Fall 2023 Highlight; see also CFPB 2014 Data;
CFPB 2017 Data Point.
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Overdraft use, and therefore the potential benefit from reduced
fees, is also correlated with other consumer characteristics. As lower-
income accountholders pay more fees, and minorities pay more fees even
after controlling for income, these groups are more likely to benefit
from the proposed changes.\241\
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\241\ Oz Shy & Joanna Stavins, Who Is Paying All These Fees? An
Empirical Analysis of Bank Account and Credit Card Fees (Fed. Rsrv.
Bank of Bos., Working Paper No. 22-18, 2022), https://www.bostonfed.org/-/media/Documents/Workingpapers/PDF/2022/wp2218.pdf.
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ii. Responses by the Depository Institutions Covered by the Proposal
Consumer gains would likely differ from the mechanical effect of
lower fees on non-covered overdraft as described in the section above
if some depository institutions would tailor their offering to the new
environment as the proposed rule allows. The discussion in this
subsection starts with the possibility that institutions might adjust
underwriting standards or overdraft coverage limits for non-covered
overdraft credit when the marginal profit on each non-covered overdraft
transaction falls. Then the text turns to the decision of whether to
waive the fees on some overdraft transactions. Next is the analysis of
decisions about whether to instead extend products that substitute for
non-covered overdraft, primarily covered overdraft credit but also
transfers from linked asset accounts. Finally, the subsection discusses
repricing of financial products, like maintenance fees on the
underlying checking account.
The Availability of Non-Covered Overdraft Credit
Assuming that very large financial institutions comply with the
proposal by lowering their fees for non-covered overdraft credit, these
lower fees may change very large financial institutions' decisions
about whether to extend non-covered overdraft credit for a given
transaction on a given account. Financial institutions generally have
discretion in setting overdraft policies.\242\ When a financial
institution decides whether to cover an overdraft transaction, it
generally trades off the revenue from charging a fee against expected
marginal costs and charge-off losses, although decisions about
extending credit and charging or waiving a fee may also take into
account their impact on the lifetime value of the customer as well as
its reputation.\243\ Lower potential fee revenue could impact the
decision to extend non-covered overdraft credit. In addition, very
large financial institutions often offer services that are substitutes
for non-covered overdraft credit, including covered overdraft credit
and the option of linking other asset accounts to a checking account
such that those other accounts can, sometimes for a fee, be accessed in
the event of a shortfall. If fees for non-covered overdraft credit were
limited for very large financial institutions, they could have
incentives to limit access to non-covered overdraft credit but
encourage consumers to take advantage of these substitute services.
Having said that, firms that use the breakeven standard and not the
benchmark fee could be disincentivized from reducing overdraft
transactions because to do so would necessarily reduce the firms' cost
and loss basis for the next year's fee calculation for remaining
overdraft customers but not yield profits over the long run.
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\242\ Institutions authorize and pay transactions that they are
contractually obligated to, such as ``authorize positive, settle
negative'' (APSN) transactions, since under applicable payment
system rules, once a transaction is authorized, the financial
institution must pay the transaction. Pursuant to the CFPA, charging
an overdraft fee on such transactions can be unfair.
\243\ In response to supervisory information requests, financial
institutions said that when setting limits for discretionary
overdraft they consider factors that could be relevant both to the
risk of charge off and to the lifetime value of the customer,
including (1) age of the account, (2) available balance, (3) account
transaction activity and history, (4) standing of the account, and
(5) existence of direct deposits. CFPB 2024 Overdraft NSF Report at
8.
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In principle, very large financial institutions could respond to
the
[[Page 13890]]
proposed rule's changes by underwriting non-covered overdraft credit
more conservatively, by reducing credit limits (whether or not
disclosed to the accountholder) for accountholders with higher expected
credit losses, or even by eliminating access to non-covered overdraft
credit for some consumers who currently qualify for such credit, though
as discussed later, the firms may offer other products instead. Limited
access to non-covered overdraft could be beneficial to consumers with
access to cheaper credit options they mistakenly forgo or to consumers
who would have preferred that a transaction was declined rather than
incurring an overdraft fee. Consumers often overdraw their account when
they have liquid funds or available cheaper credit. In these cases,
consumers might benefit from using those options instead of overdraft
credit. However, there are scenarios, even when there are other credit
options available and overdraft is more expensive, that the prompt
completion of the transaction would be more valuable to consumers than
the fee charged.
The CFPB is aware of an empirical study finding that relaxing
restrictions to overdraft fees may result in increased access to
deposit accounts with overdraft coverage.\244\ The work, not yet peer-
reviewed, analyzed an episode in 2001 in which national banks' sudden
exemption from State fee caps permitted some banks to increase their
fees for non-covered overdraft. The study attempts to identify the
effect of the regulatory change by comparing national banks (which
became exempt from State fee restrictions) to State banks (which did
not), and also comparing banks in States that had such restrictions to
States that did not.
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\244\ Jennifer L. Dlugosz et al.,Who Pays the Price? Overdraft
Fee Ceilings and the Unbanked (Fed. Rsrv. Bank of N.Y., Staff Rep.
No. 9073, June 2021), https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr973.pdf (revised July 2023).
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The authors find that the analyzed change to fee caps seems to have
led to higher overdraft fees at national banks in these States,
expanded overdraft coverage at these banks, and more low-income
households opening deposit accounts. In the setting studied, about 56
percent of consumers in the lowest income quartile did not have
checking accounts before the regulatory change, and the authors
estimate that this share fell by about five percentage points after the
change. The findings are consistent with the regulatory change making
it more profitable, in those States affected, for national banks to
provide accounts to consumers who maintain low balances. The authors do
not find evidence that the newly banked consumers regretted (or at
least reverted) their choice or that they suffered worse financial
health.
As with most modern empirical research in economics, the study
focuses attention on the internal validity of the findings, i.e., the
measurement of the causal effect of the policy change at the time and
place that it took effect. The study design relies on relatively strong
assumptions to establish causation. The study's methodology requires
establishing that differential trends at national and State
institutions in affected States would have continued to diverge (or
converge) at the same linear rate in the absence of the rule, and
establishing this is made more difficult by the relatively short five-
year window that the study uses from its data source.
Even assuming the internal validity of the findings, several
differences in both the economic context and the nature of the
regulatory change make it unlikely that the study's findings would
apply directly if the proposed rule were finalized. The authors report
that for the households in their data from 2001, 34 percent of
households did not have a checking account,\245\ whereas the FDIC
reports that the share of households without a checking or savings
account has fallen steadily over the last decade and that in 2021 only
4.5 percent of households are unbanked.\246\ Even if new opportunities
to earn overdraft revenue gave banks meaningful incentives to expand
the types of checking accounts they offered in 2001, that does not
necessarily mean that reductions in overdraft revenue in the current
market would lead to similar reductions in overall bank account access.
The study authors concluded that while their research suggested
relaxing caps was beneficial to consumers without bank accounts in
2001, they did not reach the conclusion that relaxing the caps was
beneficial to consumers who already had bank accounts, which, as noted
above, since the time studied, has since become an even greater
proportion of the population. Moreover, the proposal would not impose
limits on all overdraft fees but rather would require very large
financial institutions to comply with Regulation Z when offering
covered overdraft credit.
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\245\ Id. at 40 tbl.7.
\246\ FDIC Tables at 3 tbl.A.2.
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A prominent precedent for a U.S. policy change affecting overdraft
fee revenue was the implementation of the opt-in rule of Regulation E
in August 2010. The CFPB is not aware of a careful empirical study that
isolates the effect of this change in the market. That said, there was
a substantial decrease in marketwide overdraft revenue following the
introduction of the opt-in rule and a smaller decrease in total service
charges, which suggests less than fully offsetting price
responses.\247\ However, isolating the effect of the opt-in rule is
made more difficult by the fact that the implementation of the cap on
very large financial institutions' interchange fees on debit cards came
a mere three months later, and the Great Recession might also confound
the effects of the opt-in rule alone. The CFPB's market monitoring
activities also indicate that some institutions ceased to offer ``free
checking'' after the 2010 changes.\248\ The downward trend in the share
of American adults without a bank account does not seem to have broken
around the time of these changes in the long-running series of the
Survey of Consumer Finances, and the FDIC's Survey of Household Use of
Banking and Financial Services, which started in 2009, shows a small
increase in the unbanked share in 2011 before steady declines
thereafter.\249\
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\247\ As discussed in part II above, marketwide overdraft
revenue (for both banks and credit unions) is estimated at
approximately $25 billion in 2009, and fell to an estimated $12
billion in 2011. According to bank call report data, total bank
deposit service charges fell from $41.7 billion in 2009 to $33.1
billion in 2011 and remained at a similar level in following years.
While other factors may explain part of the reduction in deposit
service charges, the large and persistent decrease suggests that
banks did not make up all of the lost overdraft revenue from the
2009 opt-in rule by increasing other prices.
\248\ See, e.g., E. Scott Reckord, At many big banks, no more
free checking, L.A. Times (Feb. 4, 2011), https://www.latimes.com/archives/la-xpm-2011-feb-04-la-fi-free-checking-20110204-story.html.
\249\ Paola Boel & and Peter Zimmerman. Unbanked in America: A
Review of the Literature. Econ. Comment. 2022-07 (Fed. Rsrv. Bank of
Clev.), May 26, 2002, https://www.clevelandfed.org/publications/economic-commentary/2022/ec-202207-unbanked-in-america-a-review-of-the-literature. Note that the increase in the FDIC measure may have
been impacted by the Financial Crisis.
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According to the CFPB's market monitoring, recent voluntary
decreases in overdraft revenue at many large American depository
institutions have not coincided with conspicuous restrictions of
checking offerings or increases in other fees, though this period
corresponded to increases in net interest revenue on deposits resulting
from a changing interest rate environment.\250\
---------------------------------------------------------------------------
\250\ See CFPB May 2023 Data Spotlight.
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In some cases, in response to the proposed rule, the above
referenced more conservative underwriting may lead lenders to reject
transactions they
[[Page 13891]]
would not have rejected under the baseline where consumers do not have
other viable options. In such cases, some consumers would no longer
have the option to use non-covered overdraft as credit, which means
transactions would be declined, but also, the consumers would not incur
its high cost and potential risks of account closure.
Overdraft use can also decrease due to financial institution
responses that cause no consumer harm. With smaller profits on each
transaction, very large financial institutions could have more of an
incentive to educate their depositors and help them avoid negative
balance episodes.\251\ Financial institutions would also have less of
an incentive to inflate the number of overdraft transactions with
transaction posting orders designed to increase the number of overdraft
fees.
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\251\ Various pieces of evidence have bolstered the view that
overdraft is a mistake for many. Stango and Zinman document that
surveying consumers about overdraft makes them use it less, strongly
suggesting that they overuse the service when they are paying less
attention. See Victor Stango & Jonathan Zinman, Limited and Varying
Consumer Attention: Evidence from Shocks to the Salience of Bank
Overdraft Fees, 27 Rev. Fin. Stud. 990-1030 (2014), https://academic.oup.com/rfs/article/27/4/990/1603971). Alan et al. ran an
experiment in Turkey, where overdraft fee discounts lowered use
while messages about availability raised it, suggesting that
consumers are overdrawing their account without regard to the actual
fees and even a discounted price is too high for them when it draws
their attention. Sule Alan et al., Unshrouding: Evidence from Bank
Overdrafts in Turkey, 73 J. Fin. 481-522 (2018), https://onlinelibrary.wiley.com/doi/full/10.1111/jofi.12593). Grubb modeled
the direct and indirect consequences of just-in time ``bill-shock
alerts'' (e.g., for debit card transactions) on consumers and finds
that the overdraft market is ripe for such reminders, as people
differ in how much attention they pay to their available balance.
Michael D. Grubb, Consumer Inattention and Bill-Shock Regulation, 82
Rev. Econ. Stud. 219-57 (2015), https://academic.oup.com/restud/article/82/1/219/1543467). Grubb et al. indeed report on field
experiments in the UK where timely text message alerts saved
consumers 11 to 27 percent of overdraft fees, which also shows that
many had available funds elsewhere. Michael D. Grubb et al., Sending
Out an SOS: Automatic Enrollment Experiments for Overdraft Alerts
(forthcoming in the Journal of Finance), https://sites.google.com/bc.edu/michael-grubb/research. Heidhues and Koszegi use overdraft as
their prime example of markets where providers exploit the mistakes
of some consumers. Paul Heidhues & Botond Koszegi,
Na[iuml]vet[eacute]-Based Discrimination, 132 The Q. J. of Econ.
1019, 1019-1054 (May 2017), https://academic.oup.com/qje/article/132/2/1019/2724551?searchresult=1. Gathergood and Olafsson find in
granular administrative data some overdraft behaviors impossible to
rationalize. John Gathergood & Arna Olafsson, The Co-holding Puzzle:
New Evidence from Transaction-Level Data (Oct 10, 2023), https://ssrn.com/abstract=3607560.
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Waiver Policies
Currently, a substantial fraction of overdraft fees is waived by
financial institutions, either because regulation does not allow fees
on transactions that are payed per contractual obligations (such as
debit APSN transactions without opt-in), pursuant to an automatic
policy like a daily maximum, or at the discretion of a customer service
representative or manager, often called a discretionary waiver or a
reversal after the fact. Lower fee amounts would change institutions'
incentives related to whether to waive the fee by policy or discretion,
which is a subset of overall waivers. For this decision, the depository
institution trades off the net revenue from charging the fee against
the expected value of a marginally better relationship with the
customer. Lower fee amounts would affect both parts of this tradeoff.
Lower potential fee revenue would mean that depository institutions
would have less to lose by waiving a fee, while they also imply that
there is less at stake for the consumer, likely making fee waivers less
important to maintaining good customer relationships.
As discussed in part V(D)(2)(v), the $3 benchmark fee, in
particular, would not have covered charge-off losses for the
institution with the lowest credit losses in the CFPB's data for 2022
had they applied their current waiver policy so that they charged $3
only in instances where they actually charged their current higher fee
in 2022. This suggests that institutions that currently waive or
reverse fees might reconsider their policies if a benchmark fee did not
allow them to recoup their costs and losses on their non-covered
overdraft credit product, if product-specific profit targets were more
important in practice than the marginal incentives for individual
waivers. Were an institution to adopt the breakeven standard, it would
charge higher fees but could waive the fee on fewer or more instances
than in the baseline without any impact on its profit. Institutions
adopting the breakeven standard would have an incentive to tailor their
waiver policies to foster customer goodwill and retention according to
the accountholder's lifetime value to the institution.
A decrease in the chance of a waiver would shift the consumer
experience from higher overdraft fees (as much as $35) that might be
waived discretionarily, to lower overdraft fees (as low as $3) that are
more predictable. On net, the CFPB expects that shift to lower costs
and create more predictability for consumers. In addition, the
discretionary nature of some fee waivers can lead to the potential for
disparate treatment of customers, as some customers may be more likely
to get an overdraft fee waived than others. This disparate treatment
would amount to what has been called ``contractual inequality.'' \252\
A substantial decrease in discretionary waivers is likely to move
towards more equality of waiver rates across underprivileged and more
privileged groups.
---------------------------------------------------------------------------
\252\ Manisha Padi, Contractual Inequality, 120 Mich. L. Rev.
825, at 834-40 (2021).
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Expanding Covered Overdraft Credit or Other Substitutes for Non-Covered
Overdraft
Financial institutions may choose to offer covered overdraft credit
in addition to or instead of non-covered overdraft credit. Whether
consumers would choose to apply for and use covered overdraft products,
and whether very large financial institutions would find it profitable
to offer them, depends on a number of factors, and available evidence
does not permit the CFPB to confidently predict whether or how such
products would develop. In particular, it would depend on the price
that the market will bear for these products in new segments, as well
as the cost and time required to develop reliable underwriting and
consumer acquisition systems to support such products.
Lines of credit on any such new covered overdraft product might be
smaller than on existing covered overdraft lines of credit, which
generally focus on premium market segments.
If underwriting these covered overdraft credit lines on the new
accounts would require extensions of existing systems or new
installations at many institutions, transitioning a new customer base
to covered overdraft credit would take time and experimentation, even
at institutions with experience underwriting credit cards or extant
overdraft lines of credit. The frequent overdrafter population might be
profitable to underwrite with small lines, but few financial
institutions would have experience underwriting such small lines of
credit for this population (either for a credit card or extant
overdraft lines of credit). The effective date proposed would leave
time for very large financial institutions to experiment before
implementation, which could facilitate development of new covered
overdraft credit offerings.
If frictions slowed the transition of consumers from non-covered to
covered overdraft credit, fewer consumers would receive the new
coverage at institutions that try to move some of their overdraft
customers into a covered product.
Past experience offers little guidance on the extent to which very
large
[[Page 13892]]
financial institutions would attempt to transition current non-covered
overdraft transactions into a covered product. As depository
institutions generally target existing covered overdraft credit as a
premium product at customers with low charge-off risks and high
expected lifetime value to the institution, inertia might imply that
customers who are more likely to struggle to recover from a negative
balance episode continue to access a non-covered overdraft product
subject to the new breakeven or benchmark limits, keeping non-covered
overdraft fees higher under the breakeven standard than otherwise.\253\
When overdraft credit is covered overdraft credit, institutions may
find it harder to quickly adjust credit limits, an advantage to
institutions of non-covered overdraft credit that is more important for
institutions when extending overdraft credit that is less likely to be
repaid.
---------------------------------------------------------------------------
\253\ Interest rates are similar on arranged and unarranged
overdrafts in the United Kingdom, following recent regulation
setting a comparable pricing structure on both. See Danail Vasilev
et al., Fin. Conduct Auth., Evaluation Paper 23/1: An evaluation of
our 2019 overdrafts intervention (Apr. 2023), https://www.fca.org.uk/publications/corporate-documents/evaluation-paper-23-1-evaluation-our-2019-overdrafts-intervention (FCA 2023)). This
could suggest similar pricing for covered overdraft credit as for
current non-covered overdraft credit, even if it becomes better
disclosed and the credit limits are clearer than current shadow
lines. However, the same British reform also resulted in expanding
arranged overdraft lines and smaller unarranged lines in addition,
which suggests that covered overdraft credit could also become
competitive or even prevalent in the United States.
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The disclosure provisions of Regulation Z might result in more
competitive pressure on the pricing of covered overdraft credit
products than currently exists for non-covered overdraft credit. An
increase in competitive pressure could mean that new covered overdraft
products would be less expensive than existing non-covered overdraft
products for the same consumers and coverage.\254\
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\254\ Regulatory constraints may also affect the fees charged
for covered overdraft credit. For example, for open-end covered
overdraft credit accounts accessible with a hybrid debit credit
card, the fee-harvesting provisions in Sec. 1026.52(a) would limit
some fees that very large financial institutions can charge in the
first year of a new account to 25 percent of the approved credit
line. Section 1026.52(a) does not, however, limit charges that are
assessed as periodic rates.
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Consumers would also stand to gain from the availability of covered
overdraft credit because meeting periodic minimum payments, which are
generally lower than the full balance, would allow them to revolve
their overdraft debt and cover more extended needs for liquidity. They
could also pay less in per-transaction fees if their asset account, not
depleted by full repayment of prior overdrafts, would cover more
transactions while the credit account carries a balance. Periodic
repayment saves consumers some per-transaction finance charges at the
cost of somewhat higher periodic charges resulting from a credit
balance remaining outstanding for longer. Furthermore, consumers who
cannot repay the overdrawn amount within 60 days, when non-covered
overdraft credit balances are typically charged off, might benefit from
revolving their covered overdraft credit balance for a longer period of
time.
Consumers who go delinquent on new covered overdraft credit
accounts would have their credit negatively impacted if the delinquency
is reported to consumer reporting agencies, though not necessarily with
more dire consequences than with a negative report to checking account
reporting companies after involuntary account closure due to a negative
balance on the original asset account that would have resulted from
similar behavior with non-covered overdraft credit in the absence of
the proposed rule.
When consumers at very large financial institutions are offered
covered overdraft credit, that covered overdraft credit would not be
subject to the Regulation E opt-in requirement for non-covered debit
card overdraft. However, it would be subject to Regulation Z's
application and solicitation requirements and limitations on the
issuance of credit cards if it can be accessed by a hybrid debit-credit
card. Consumers would not separately consent, the same way as
Regulation E currently requires, to overdraft charges on one-time debit
card and ATM transactions. A very large financial institution would be
permitted, instead, to simply give the consumer the choice to apply for
covered overdraft credit that would be extended to cover any
overdrawing transaction (whether it be check, ACH, debit card, ATM, or
any other form). Once the account is established, the CFPB expects
those covered overdraft accounts to be presented to consumers as a
credit account on phone applications, accounts on websites, and
periodic statements, which would call attention to the fact that
covered overdraft credit is a credit product.
Consumers who choose to have covered overdraft credit that is
accessible by a hybrid debit-credit card might be better off than those
who are opted into non-covered overdraft credit on one-time debit card
and ATM transactions today if the same amount of credit for the same
transactions costs less, as discussed above, or because of the other
protections included in this proposed rule. Where a financial
institution only offers covered overdraft credit bundled for all
transaction types, consumers who are not opted in today would gain the
right to, effectively, refrain from opting into overdraft on
transactions other than one-time debit and ATMs. They would lose,
however, the ability to refrain from opting into overdraft for one-time
debit and ATMs while intentionally keeping overdraft for other
transactions. It is unclear how many consumers would prefer the default
of Regulation E, particularly given evidence that consumer
understanding of the Reg E opt-in right is low.\255\ Loss of this
choice would be an issue where the financial institution is offering
covered overdraft credit and does not give consumers a choice on which
transactions can access the covered overdraft.
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\255\ Pew Charitable Tr., Overdraft Does Not Meet the Needs of
Most Consumers (Dec. 2017), https://www.pewtrusts.org/-/media/assets/2017/12/cb_overdraft_does_not_meet_the_needs_of_most_consumers.pdf (3 of 4
consumers do not understand they have a right to not opt in to
overdraft on debit card transactions).
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If very large financial institutions chose to offer closed-end
covered overdraft credit, such closed-end covered overdraft credit
would not be subject to the substantive protections discussed above.
Instead, it would be subject to the disclosure requirements that apply
to closed-end credit. The CFPB believes it is unlikely that this
product would be provided.
With non-covered overdraft credit less profitable for financial
institutions and available to fewer consumers, both institutions and
consumers would have greater incentive to take advantage of linked
accounts. Institutions might offer and promote more of these
opportunities. Transfer fees on linked asset accounts to cover
overdrawing checking account debits can result in costs for consumers
but protect them from unnecessary borrowing if they indeed have liquid
assets elsewhere. Links to existing credit lines like credit cards
would not have this benefit but give more control to consumers to shop
for rates and decide on repayment, with potentially still lower
transfer fees than fees on non-covered overdraft credit under the
proposal. Transfer fees for transfers from both savings accounts and
credit accounts have been less common among the largest banks in recent
years than they were prior.\256\
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\256\ Based on the CFPB's review of publicly available
information in June 2023, of the 20 banks reporting the most in
overdraft/NSF revenue in 2021, 18 were not charging a transfer fee
to transfer funds from a savings account to cover an overdraft, and
16 were not charging a fee to transfer funds from a credit account.
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[[Page 13893]]
Offsetting Changes to Other Deposit Account Prices
As discussed above, the proposed rule would lead to reductions in
non-covered overdraft revenue at many financial institutions, and it is
uncertain whether that revenue would be replaced, potentially by
revenue from covered overdraft or other substitute products. Overdraft
provider responses to this lost revenue would affect both the sum of
consumer gains and their distribution across market segments and
populations. Total consumer gains will be lower if very large financial
institutions make up for lost overdraft fee revenue and any potential
increase in costs by raising revenue by increasing other checking
account prices or decreasing rates paid on deposit accounts. Whether
financial institutions would offset lost overdraft fee revenue in this
way for some or all deposit accounts would depend on a number of
factors, including overall profitability of deposit accounts and the
nature of competition among financial institutions.
To give an upper bound on how much lost revenue might be offset on
a per-account basis, the CFPB estimates the mechanically lost revenue
per account from non-covered overdraft fees without any behavioral
responses. While full offset of the revenue loss is not a likely
scenario, calculating this upper bound provides some quantitative
context for understanding the limits of potential lost revenue and
corresponding changes that might result. The CFPB does not have current
information on the number of active checking accounts at all very large
financial institutions but requested such information for 2022 from
eight very large financial institutions in a supervisory capacity. For
these institutions, the overall average overdraft fee revenue from any
active account-month was $3.77. Of course, the proposed rule would not
eliminate all overdraft fee revenue. Were the CFPB to finalize with a
$3 benchmark (and again, assuming for analytical purposes full adoption
of the benchmark), financial institutions would lose approximately 90.8
percent in weighted average fee revenue (from $32.50 average fees to
the $3 benchmark proposal), totalling a revenue loss of $3.42 per
account per month. An 81.5 percent drop in average fee revenue
(assuming a $6 benchmark) would be result in $3 of lost revenue per
account per month. For a $7 benchmark, that figure is $2.96. For the
$14 benchmark, that figure is $2.15.
The magnitude of these extreme upper bounds on lost revenue per
account reassures the CFPB that any potential losses to banking access
can remain limited. In fact, there are large financial institutions for
which this proposed rule is unlikely to result in substantial
reductions in revenue.\257\ Furthermore, this decrease in overdraft
revenue is likely to be on-par with, if not lower than, the voluntary
decrease in revenue many large financial institutions already absorbed
between 2019 and 2022, without apparent disruptions to checking and
overdraft access.\258\ The proposed fee reductions are in some ways
similar to new regulations of the overdraft market in the United
Kingdom in 2019, whose impacts the Financial Conduct Authority
evaluated ex-post with a careful causal analysis. Their findings are
generally consistent with the CFPB's expectations about limited
disruption to checking and credit access and no complete offset of lost
overdraft revenue.\259\
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\257\ See CFPB, Chart of Overdraft/NSF metrics for Top 20 banks
based on overdraft/NSF revenue reported (Feb. 2022), https://files.consumerfinance.gov/f/documents/cfpb_overdraft-chart_2022-02.pdf. At least one of these banks charges overdraft fees that are
already less than fee benchmarks under consideration in this
proposed rule.
\258\ CFPB May 2023 Data Spotlight.
\259\ See FCA 2023.
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Offsetting changes in prices, if any, would limit the benefits
consumers gain from the proposal (as well as the corresponding costs to
covered persons), but also redistribute the burden of paying for
consumer checking services in the United States. Those consumers who
are currently frequent users of high-cost non-covered overdraft credit
would benefit substantially from lower fees even if checking account
APY or maintenance fees adjust, as those adjustments are unlikely to be
similarly concentrated. Consumers who currently receive cross-subsidies
from frequent (or just occasional) overdrafters, but might now receive
lower net interest or pay higher maintenance fees to their checking
provider, would incur only modest losses under the proposal relative to
the baseline.
Under the baseline scenario for this analysis, very large financial
institutions generally do not charge nonsufficient fund fees for
transactions that consumers attempt to authorize in close to real time,
which could include non-recurring debit card transactions or certain
person-to-person transactions. Consumers with less access to overdraft
credit due to this proposal would not pay fees on these types of
transactions that they attempted but that were not authorized. However,
the CFPB recognizes that financial institutions under the baseline
could start to charge such fees in the future if they are not subject
to the penalty fees limitation in Sec. 1026.52(b). Other types of
transactions can and might continue to trigger NSF fees when declined,
although, as noted earlier, the significant majority of supervised
entities subject to the proposal eliminated such fees during 2022 and
early 2023.
iii. Responses by Consumers
A lower price for non-covered overdraft credit would lead some
consumers to use the product more on the margin, assuming it remains
available to them. For those who are attentive to the price of the
product, who are also likely to use the product deliberately and
experience liquidity and convenience benefits outweighing the cost, any
additional utilization would likely provide net benefits. Inattentive
consumers, for whom overdraft has already often been a mistake, would
continue to be unlikely to pay attention to and rationally consider the
lower cost of overdrawing their balance, and would thus be unlikely to
use overdraft more even at a lower price.
Some consumers might keep a lower deposit balance as long as their
overdraft protection seems sufficient but is now cheaper. As consumers
with checking account balances forgo a net interest margin of 250 basis
points \260\ relative to short-term Treasury bill yields, on average,
every $500 in deposits shifted from a checking account to an account
with short-term Treasury bill yields would earn each consumer an
additional average $12.50 over a year. Others might keep higher
balances in their checking accounts if the proposed rule were to reduce
their access to overdraft credit or if more salient use of overdraft
credit made them try harder to avoid it. The cost-of-credit disclosures
required for covered overdraft credit make its use more salient for the
switchers than non-covered overdraft used to be. Consumers
[[Page 13894]]
who keep more in their checking account may forgo more interest on
their savings if they would have otherwise kept it in higher-yielding
accounts.
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\260\ The FDIC has been reporting national average interest
rates on checking accounts since 2009, separately for non-jumbo and
jumbo accounts until 2021. For much of this history, nominal
interest rates hit the zero lower bound. For months with four-week
Treasury yields below one hundred basis points, the national average
(non-jumbo) checking account paid 8.3 basis points less. In other
times, partly because checking account APYs have not risen as fast
as short-term nominal interest rates, checking accounts paid 251.7
basis points below the four-week Treasury bill yield, on average.
---------------------------------------------------------------------------
Some consumers may also choose different depository institutions,
as account terms change as a result of the proposed rule. The ability
to do so will generally increase consumer benefits and reduce consumer
costs. For example, consumers who frequently overdraft at banks that
are not very large financial institutions could switch to an account at
a very large financial institution if non-covered overdraft credit is
available there at lower cost. Conversely, a consumer at a very large
financial institution that loses access to non-covered overdraft credit
as a result of the rule could switch their account to another
institution that is not covered by the proposed rule.
To the extent that marginal consumers could expect to pay a
predictable and lower amount for checking overall, the proposal would
encourage unbanked or underbanked customers to return to the banking
system and gain access to FDIC insurance and the low cost payments
system banks provide.
Overdraft use might also change because very large financial
institutions would need to better disclose newly covered overdraft
credit to consumers, which can only help them. For consumers who would
use overdraft more because of this, their increased use may suggest
that they would be deliberately taking advantage of a product worth its
price for them. For consumers who would use overdraft less after these
changes, better information might correct prior misunderstandings and
prevent further mistakes.
Better disclosure would also help consumers compare the costs of
different forms of credit (or other options to delay or forgo
transactions), which provides direct benefits to those who are able to
make more informed choices, and also provides indirect benefits to
other potential users as more intensive comparison shopping would bring
down prices among competitors.
Consumers currently not opting into one-time debit card transaction
coverage by their non-covered overdraft service under Regulation E may
be more likely to opt into such coverage under lower prices. To the
extent these consumers pay particular attention to the fee and how it
might affect them, they are less likely to regret when they use non-
covered overdraft credit than others and are thus more likely to
benefit from the proposed rule.
iv. Responses by Financial Institutions Not Covered by the Proposal
The proposal would only apply to very large financial institutions,
and if finalized, would not lead to any new compliance costs for
financial institutions not covered by the proposal.
The CFPB recognizes that a bank or credit union's demand for
deposits (including demand and time deposits) derives from a multitude
of factors, including, but not limited to, meeting expected loan demand
and liquidity needs. In addition, when consumers select a deposit
product, they rely on many factors unrelated to the overdraft pricing,
including ATM and branch availability, interest rate, and expected
customer service.
As the proposal outlines, many large financial institutions have
already substantially reduced overdraft fees. During this time, there
was no major shift in the total share of deposits from small financial
institutions to very large financial institutions.
The CFPB acknowledges that is difficult to predict with certainty
as to how very large financial institutions would evolve their business
models over time. Of course, as with any change in business strategies
by market participants with substantial market shares, this may
ultimately lead to evolving industry dynamics with uncertain benefits
and costs.
2. Potential Benefits and Costs to Covered Persons
This proposed rulemaking would affect the consumer business of
certain depository institutions with more than $10 billion in assets.
At the end of calendar year 2022, used for some tabulations here, this
list included 176 depository institutions.
For covered persons, costs and benefits mostly mirror the existence
and extent of each respective pecuniary benefit or cost to their
customers, as detailed above, net of offsetting changes. By the very
nature of this relationship, the CFPB has considered the various
causes, mediating channels and modulating responses affecting costs and
benefits to covered persons as carefully as for consumers, and much of
the discussion of the factors and mechanisms affecting potential
consumer pecuniary benefits and costs in the previous section also
applies to the potential costs and benefits, respectively, of the
proposed rule for covered persons.
In particular, the proposed rule would reduce the revenue of very
large financial institutions from non-covered overdraft credit, and
these institutions may be able to offset this lost revenue in various
ways, including expanding their offerings of covered overdraft or other
services that substitute for non-covered overdraft credit. The extent
to which depository institutions will be able to pass the price changes
of checking accounts under the proposed rule onto input prices depends
on the pricing pressures on capital, labor, and intermediary goods, and
services that very large financial institutions pay for. Due to their
complexity, the CFPB has not modeled them in detail.
The operating cost of offering covered overdraft may be higher than
the cost of providing similar non-covered overdraft credit. This arises
from the costs of complying with Regulations Z and E, and potentially
other laws. The covered persons might bear these costs if market forces
do not let them pass some of them on to the consumer.
Very large financial institutions already have to provide
disclosures per Regulations DD and E for non-covered overdraft credit.
If they chose to continue offering non-covered overdraft credit, they
would need to update these systems to make sure they accurately
disclose and charge the new lower fees. If they decided to offer
covered overdraft credit instead to any customer, then the disclosures
would follow Regulation Z. The one-time cost of setting up a new
covered overdraft program or transitioning consumers to existing
covered overdraft programs could be substantial. The compulsory use
prohibition would impose an administrative burden on the institution to
offer another form of payment to the covered overdraft credit customer,
as well as the operating cost of collecting the payment.
As discussed in the previous section, mechanical application of the
benchmark fee amount to existing non-covered overdraft could reduce
revenue of very large financial institutions by $3.5 billion to $5.6
billion, depending on the benchmark fee amount. This revenue impact on
covered persons is limited by the proposal's design, which allows
depository institutions to collect their costs and losses in overdraft
fees. Part V.C.3.ii details why the CFPB believes that the benchmark
fee number would allow some very large financial institutions to cover
their costs and losses. Where the benchmark fee number would not allow
this, fees set based on the breakeven standard would allow institutions
to recover their costs and losses over time. This mechanism ensures
that even entities that would see less revenue due to this proposal
need not take losses on overdraft credit, unless they charge lower fees
than the
[[Page 13895]]
proposal would allow. And financial institutions whose per-transaction
traceable costs and losses are lower than the benchmark fee could
charge that fee and thereby make a profit on overdraft.
The CFPB finds it plausible that a different revenue model for
checking in the U.S. that may result from the proposed rule will have
broader implications on counterparties, competitors, or new entrants,
or elsewhere in the economy. Such considerations would be too
speculative for this impact analysis.
E. Potential Benefits and Costs to Consumers and Covered Persons of
Further Provisions of the Proposed Rule
The CFPB is also proposing to apply the Regulation E compulsory-use
prohibition to covered overdraft credit provided by a very large
financial institution. The CFPB is not proposing to amend the
Regulation Z prohibition against offset, nor is the CFPB proposing to
amend the Regulation Z provision permitting periodic deductions. The
proposal's approach to these provisions would affect the costs and
benefits for consumers and covered persons of consumers potentially
switching from non-covered overdraft to covered overdraft. Consumers
who have access to covered overdraft credit but consciously avoid pre-
authorized EFTs to repay covered overdraft credit are likely to benefit
from the compulsory use prohibition, which would give them additional
control over their finances, though they might be overoptimistic about
their future repayment discipline, and mistakenly turn down automatic
payments, to their detriment. Consumers who forget to repay can incur
additional costs, including late fees, default interest rates or
negative credit reporting after a period of delinquency. Some consumers
might not be able to switch to covered overdraft credit if their
depository institution was on the margin of offering it and they deem
the consumer too prone to delinquency without a pre-authorized EFT for
repayment. It is less likely that existing users of covered overdraft
credit would be impacted for the same reason, as they are typically
premium customers not on the margin of profitability.
Covered persons should not incur substantial cost from establishing
repayment options in addition to a preauthorized EFTs. They can
feasibly establish processes for consumers to have the repayment option
of authorizing individual EFTs. Covered overdraft credit accounts that
are not accessible via a hybrid debit-credit card would not be subject
to the no-offset provision of Regulation Z.
Consumers with covered overdraft who do not repay their balance
with frequent preauthorized EFTs pay either more interest from debt
held longer or the hassle cost of making unscheduled repayments more
often.
On covered overdraft credit accounts accessible via a debit card (a
hybrid debit-credit card), financial institutions cannot automatically
offset the credit balance against a positive balance on the associated
asset account after a deposit. Therefore, consumers would be able to
pay new debit transactions from the asset account before they repay the
credit account. As discussed above, this flexibility in when to repay
debt will generally give consumers better opportunities to manage their
finances, although in practice the extent of any benefit to consumers
from being able to delay repayment depends on finance charges for the
credit and whether delaying repayment out of the asset account allows
them to avoid higher additional credit charges for new transactions.
Consumers making purchases by using hybrid debit-credit cards that
access covered overdraft credit would also benefit from the proposed
rule's effect on dispute resolution for such purchases. The CFPB
expects the burden on covered persons from this occasional service to
be minimal.
The CFPB is also proposing to require very large financial
institutions that provide covered overdraft credit to do so through a
credit account that is separate from the associated asset account.
These provisions would clarify that a very large financial institution
must treat existing deposit accounts with overdraft credit that is
currently non-covered overdraft credit, but that the institution
chooses to provide as above breakeven covered overdraft credit
subsequent to the rule, as a new credit account for purposes of
Regulation Z. Consumers with hybrid debit-credit cards able to access a
covered overdraft credit account, and the very large financial
institutions that provide these accounts, would then be subject to the
CARD Act protections in subpart G of Regulation Z.
Section 1026.51 would require card issuers to consider consumers'
ability to make the required minimum periodic payments under the terms
of the account. This could generally reduce the amount of credit
available to some consumers, and some consumers may benefit from this
requirement if it makes it less likely that they are burdened with
covered overdraft debt for which they are unlikely to be able to make
required minimum periodic payments. Because the safe harbor requires
lenders to estimate whether consumers can repay the minimum payment and
all fees assuming full use of the credit line, this could result in
firms setting more concrete and less fluid credit limits, could result
in lower credit limits, and firms might institute minimum payment
formulas that do not require full payment of overdrafted amounts every
month.
Section 1026.52(a) would limit fees charged in the first year a
covered overdraft credit account is open to 25 percent of the account's
credit limit. (Section 1026.52(a) does not restrict charges
attributable to periodic interest rates; see comment 1026.52(a)(2)-1.)
This could benefit consumers with hybrid debit-credit cards able to
access a covered overdraft credit account in the first year the account
is open. Any reduction in fees paid by consumers as a result of
1026.52(a) would result in a corresponding cost to covered persons from
decreased fee revenue. Developing and implementing pricing strategies
for covered overdraft products that comply with these requirements
could impose costs on the covered persons providing these products,
though the CFPB does not expect these costs to impose a substantial
direct burden.
Penalty fees, like declined transaction fees, for violating the
terms of the covered overdraft credit account would be subject to
limitations under Sec. 1026.52(b), providing further benefits to
consumers who would have paid such fees. For example, Sec. 1026.52(b)
would restrict NSF fees from being charged on ACH transactions on
accounts that have covered overdraft credit that is accessible by a
hybrid debit-credit card. Consumers that would have been charged
penalty fees, including NSF fees on debit card or ACH transactions,
would benefit by not being charged these fees. Similarly, financial
institutions that would have received NSF fee revenue from these
transactions would see a decrease in revenue. Yet, the CFPB understands
that NSF fees are currently rarely charged on debit card transactions
and, as discussed above, most of the largest banks have already
eliminated all NSF fees. This suggests that the benefits to consumers
and costs to covered persons from this restriction are likely to be
limited.
Very large financial institutions would be required to provide
credit account opening disclosures and comply with other requirements
of credit account opening in connection with tying covered overdraft
credit to deposit accounts that already exist.
[[Page 13896]]
Applying new credit account opening requirements in connection with
deposit accounts of consumers who already have existing non-covered
overdraft credit that the institution chooses to replace with covered
overdraft credit under the proposal will impose some costs on the
depository institution.
Under the proposed rule, above breakeven overdraft credit would no
longer qualify as ``incidental credit'' under Sec. 1002.3 and thus
would be newly subject to certain requirements under Regulation B,
including with respect to providing notice and record-keeping. These
obligations would have costs to covered persons.
The proposed changes, including proposed changes to the definition
of finance charge, may affect other legal requirements under various
Federal and State laws, including the Military Lending Act, usury
limits, capital requirements, and interchange fees. The CFPB
acknowledges that some or all of these legal requirements might also
affect charges for non-covered and covered overdraft credit indirectly.
However, the CFPB has not attempted to quantify the effects of such
changes because it is not responsible for interpreting those laws and
regulations and therefore cannot provide the detailed predictions about
their effects that would be required for quantification; moreover, the
CFPB does not predict the extent to which very large financial
institutions will choose to offer covered overdraft credit that is
subject to those rules. The CFPB seeks comment on the extent to which
these considerations should affect its analysis.
F. Potential Specific Impacts of the Proposed Rule on Depository
Institutions and Credit Unions With $10 Billion or Less in Total
Assets, as Described in CFPA Section 1026
As this proposed rule applies only to financial institutions with
more than $10 billion in total assets, the CFPB expects no specific
impact on small entities directly. Subsection VIII.D.1.iv above
discusses how the CFPB understands the proposed rule's indirect impact
on these entities.
G. Potential Specific Impacts of the Proposed Rule on Consumer Access
to Credit and on Consumers in Rural Areas
As discussed above, the proposed rule would likely lead to an
increase in overdraft credit regulated by TILA and Regulation Z, and
for remaining non-covered overdraft credit, a decrease in the fee.
To the extent that consumers in rural areas bank with institutions
other than very large financial institutions, the impact of the
proposed rule on these areas will be limited.
The CFPB has limited insight into overdraft practices in rural
areas specifically. It is not aware of reasons to suggest more adverse
or particular impacts in rural areas.
The CFPB has tabulated the share of the unbanked in lowest fifth of
the income distribution in ZIP codes that the Census classified as
urban, rural, or with a fraction rural.\261\ With this precise
measurement, both fully urban or fully rural areas see 74 percent of
those with lowest incomes with a bank account, with slight variations
in the ratio for the mixed ZIP codes in between. This makes the CFPB
expect that urban and rural areas have similar exposure to overdraft
fees, and would likely experience similar impacts from the proposed
rule.
---------------------------------------------------------------------------
\261\ Cox et al. (2022) identified the unbanked in the universe
of tax records as those not listing an account for rebates or
payment over a ten-year period, focusing on the 50-59 age group in
2019 (Cox et al., Financial Inclusion Across the United States,
available for download at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3934498 (last revised Apr. 24, 2023)). The
Census links ZCTAs to an urban area (or none).
---------------------------------------------------------------------------
The CFPB has also tabulated the average credit score in each ZIP
code, in the latest year available in a public dataset released by
researchers at the Federal Reserve Board.\262\ Fully rural ZIP codes
have higher credit scores (719.6 on average) than fully urban ZIP codes
(713.7), though with even higher averages scores in mostly urban areas
and the lowest averages for fairly rural areas. This again suggests
that on average, rural areas would have as much access to newly
underwritten covered overdraft credit as the rest of the United States.
---------------------------------------------------------------------------
\262\ See Jesse Bricker & Geng Li, FRS, Finance and Economics
Discussion Series, 2023-048, Your Friends Your Credit: Social
Capital Measures Derived From Social Media and the Credit Market
(2023), https://www.federalreserve.gov/econres/feds/files/2023048pap.pdf.
---------------------------------------------------------------------------
IX. Regulatory Flexibility Act Analysis
The Regulatory Flexibility Act (RFA) generally requires an agency
to conduct an initial regulatory flexibility analysis (IRFA) and a
final regulatory flexibility analysis of any rule subject to notice-
and-comment rulemaking requirements unless the agency certifies that
the rule will not have a significant economic impact on a substantial
number of small entities (SISNOSE). The CFPB is also subject to
specific additional procedures under the RFA involving convening a
panel to consult with small business representatives before proposing a
rule for which an IRFA is required. An IRFA is not required for this
proposal because the proposal, if adopted, would not have a SISNOSE.
Small institutions, for the purposes of the Small Business
Regulatory Enforcement Fairness Act (SBREFA) of 1996, are defined by
the Small Business Administration. Effective March 17, 2023, financial
institutions with less than $850 million in total assets are determined
to be small.\263\
---------------------------------------------------------------------------
\263\ See U.S. Small Bus. Admin., Table of size standards,
https://www.sba.gov/document/support-table-size-standards (last
updated Oct. 25, 2023).
---------------------------------------------------------------------------
As this proposed rule only applies to financial institutions with
more than $10 billion in total assets, it affects no small entities.
Accordingly, the Director hereby certifies that 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. The CFPB requests comment
on the analysis above.
X. Paperwork Reduction Act
Under the Paperwork Reduction Act of 1995 (PRA), Federal agencies
are generally required to seek the Office of Management and Budget's
(OMB's) approval for information collection requirements prior to
implementation.
Under the PRA, the CFPB may not conduct or sponsor and,
notwithstanding any other provision of law, a person is not required to
respond to an information collection unless the information collection
displays a valid control number assigned by OMB.
The proposed rule amends 12 CFR 1005 (Regulation E), which
implements the Electronic Funds Transfer Act, which is assigned OMB
control number 3170-0014, which expires 5/31/2025, as well as 12 CFR
1026 (Regulation Z), which implements the Truth in Lending Act and is
assigned OMB Control number 3170-0015, which expires 05/31/2025.
However, this proposed rule may, in addition to the information
collection requirements of Regulation Z, affect the information
collection requirements contained in 12 CFR part 1002 (Regulation B),
which implements ECOA, which is assigned OMB Control number 3170-0013
which expires 08/31/2026. A full description of those changes and the
estimated burdens thereof can be found in the Supporting Statements for
each affected regulation that have been filed with OMB in connection
with this proposed rule and are available as part of its public docket.
The CFPB has a continuing interest in the public's opinions
regarding this determination. At any time, comments regarding this
determination may be
[[Page 13897]]
sent to: The Consumer Financial Protection Bureau (Attention: PRA
Office), 1700 G Street NW, Washington, DC 20552, or by email to
[email protected].
List of Subjects
12 CFR Part 1005
Banks, Banking, Consumer protection, Credit unions, Electronic fund
transfers, National banks, Reporting and recordkeeping requirements,
Savings associations.
12 CFR Part 1026
Advertising, Banks, Banking, Consumer protection, Credit, Credit
unions, Mortgages, National banks, Reporting and recordkeeping
requirements, Savings associations, Truth-in-lending.
Authority and Issuance
For the reasons set forth in the preamble, the CFPB proposes to
amend Regulation E, 12 CFR part 1005, and Regulation Z, 12 CFR part
1026, as set forth below:
PART 1005--ELECTRONIC FUND TRANSFER ACT (REGULATION E)
0
1. The authority citation for part 1005 continues to read as follows:
Authority: 12 U.S.C. 5512, 5581; 15 U.S.C. 1693b. Subpart B is
also issued under 12 U.S.C. 5601 and 15 U.S.C. 1693o-1.
Subpart A--General
0
2. Section 1005.10 is amended by revising paragraph (e)(1) to read as
follows:
Sec. 1005.10 Preauthorized transfers.
* * * * *
(e) Compulsory use--(1) Credit. No financial institution or other
person may condition an extension of credit to a consumer on the
consumer's repayment by preauthorized electronic fund transfers, except
for credit extended under an overdraft credit plan or extended to
maintain a specified minimum balance in the consumer's account. This
exception does not apply to a covered separate credit feature
accessible by a hybrid prepaid-credit card as defined in Regulation Z,
12 CFR 1026.61. This exception also does not apply to covered overdraft
credit extended by very large financial institutions as those terms are
defined in Regulation Z, 12 CFR 1026.62.
* * * * *
0
3. In Supplement I to Part 1005--Official Interpretations:
0
a. Under Section 1005.10--Preauthorized Transfers, 10(e)(1) Credit is
revised.
0
b. Under Section 1005.17--Requirements for Overdraft Services, 17(a)
Definition is revised.
The revisions read as follows:
Supplement I to Part 1005--Official Interpretations
* * * * *
Section 1005.10--Preauthorized Transfers
* * * * *
10(e) Compulsory Use
10(e)(1) Credit
1. General rule for loan payments. Creditors may not require
repayment of loans by electronic means on a preauthorized, recurring
basis.
2. Overdraft credit plans not accessible by hybrid prepaid-credit
cards and covered overdraft credit extended by very large financial
institutions.
i. Section 1005.10(e)(1) provides an exception from the general
rule for an overdraft credit plan other than for a covered separate
credit feature accessible by a hybrid prepaid-credit card as defined in
Regulation Z, 12 CFR 1026.61 and for covered overdraft credit extended
by very large financial institutions as those terms are defined in
Regulation Z, 12 CFR 1026.62. A financial institution may therefore
require the automatic repayment of an overdraft credit plan, other than
a covered separate credit feature accessible by a hybrid prepaid-credit
card or covered overdraft credit extended by very large financial
institutions, even if the overdraft extension is charged to an open-end
account that may be accessed by the consumer in ways other than by
overdrafts.
ii. Credit extended through a negative balance on the asset feature
of a prepaid account that meets the conditions of Regulation Z, 12 CFR
1026.61(a)(4), is considered credit extended pursuant to an overdraft
credit plan for purposes of Sec. 1005.10(e)(1). Thus, the exception
for overdraft credit plans in Sec. 1005.10(e)(1) applies to this
credit.
3. Applicability to covered separate credit features accessible by
hybrid prepaid-credit cards.
i. Under Sec. 1005.10(e)(1), creditors may not require by
electronic means on a preauthorized, recurring basis repayment of
credit extended under a covered separate credit feature accessible by a
hybrid prepaid-credit card as defined in Regulation Z, 12 CFR 1026.61.
The prohibition in Sec. 1005.10(e)(1) applies to any credit extended
under such a credit feature, including preauthorized checks. See
Regulation Z, 12 CFR 1026.61, and comment 61(a)(1)-3.
ii. Under Regulation Z, 12 CFR 1026.12(d)(1), a card issuer may not
take any action, either before or after termination of credit card
privileges, to offset a cardholder's indebtedness arising from a
consumer credit transaction under the relevant credit card plan against
funds of the cardholder held on deposit with the card issuer. Under
Regulation Z, 12 CFR 1026.12(d)(3), with respect to covered separate
credit features accessible by hybrid prepaid-credit cards as defined in
12 CFR 1026.61, a card issuer generally is not prohibited from
periodically deducting all or part of the cardholder's credit card debt
from a deposit account (such as a prepaid account) held with the card
issuer under a plan that is authorized in writing by the cardholder, so
long as the card issuer does not make such deductions to the plan more
frequently than once per calendar month. A card issuer is prohibited
under Regulation Z, 12 CFR 1026.12(d), from automatically deducting all
or part of the cardholder's credit card debt under a covered separate
credit feature from a deposit account (such as a prepaid account) held
with the card issuer on a daily or weekly basis, or whenever deposits
are made to the deposit account. Section 1005.10(e)(1) further
restricts the card issuer from requiring payment from a deposit account
(such as a prepaid account) of credit card balances of a covered
separate credit feature accessible by a hybrid prepaid-credit card by
electronic means on a preauthorized, recurring basis.
4. Incentives. A creditor may offer a program with a reduced annual
percentage rate or other cost-related incentive for an automatic
repayment feature, provided the program with the automatic payment
feature is not the only loan program offered by the creditor for the
type of credit involved. Examples include:
i. Mortgages with graduated payments in which a pledged savings
account is automatically debited during an initial period to supplement
the monthly payments made by the borrower.
ii. Mortgage plans calling for preauthorized biweekly payments that
are debited electronically to the consumer's account and produce a
lower total finance charge.
* * * * *
[[Page 13898]]
Section 1005.17--Requirements for Overdraft Services
17(a) Definition
1. Exempt securities- and commodities-related lines of credit. The
definition of ``overdraft service'' does not include the payment of
transactions in a securities or commodities account pursuant to which
credit is extended by a broker-dealer registered with the Securities
and Exchange Commission or the Commodity Futures Trading Commission.
2. Covered overdraft credit. Under Sec. 1005.17(a)(1), a line of
credit subject to Regulation Z (12 CFR 1026) is not an overdraft
service. Covered overdraft credit as that term is defined in 12 CFR
1026.62, is a line of credit subject to Regulation Z and is therefore
not an overdraft service. Covered overdraft credit includes above
breakeven overdraft credit extended by a very large financial
institution as those terms are defined in 12 CFR 1026.62. Above
breakeven overdraft credit extended by a very large financial
institution is therefore not an overdraft service under Sec.
1005.17(a).
* * * * *
PART 1026--TRUTH IN LENDING (REGULATION Z)
0
4. The authority citation for part 1026 continues to read as follows:
Authority: 12 U.S.C. 2601, 2603-2605, 2607, 2609, 2617, 3353,
5511, 5512, 5532, 5581; 15 U.S.C. 1601 et seq.
Subpart A--General
0
5. Section 1026.2 is amended by revising paragraph (a)(15) to read as
follows:
Sec. 1026.2 Definitions and rules of construction.
(a) * * *
(15)(i) Credit card means any card, plate, or other single credit
device that may be used from time to time to obtain credit. The term
credit card includes both a hybrid prepaid-credit card as defined in
Sec. 1026.61 and a hybrid debit-credit card as defined in Sec.
1026.62.
(ii) Credit card account under an open-end (not home-secured)
consumer credit plan means any open-end credit account that is accessed
by a credit card, except:
(A) A home-equity plan subject to the requirements of Sec. 1026.40
that is accessed by a credit card; or
(B) A covered overdraft credit account as defined in Sec. 1026.62
offered by a creditor other than a very large financial institution as
defined in Sec. 1026.62 that is accessed by a debit card or account
number.
(iii) Charge card means a credit card on an account for which no
periodic rate is used to compute a finance charge. The term does not
include a hybrid debit-credit card as defined in Sec. 1026.62.
(iv) Debit card means any card, plate, or other single device that
may be used from time to time to access an asset account other than a
prepaid account as defined in Sec. 1026.61. The term debit card does
not include a prepaid card as defined in Sec. 1026.61.
* * * * *
0
6. Section 1026.4 is amended by revising paragraph (b)(2), adding
paragraph (b)(12), and revising paragraph (c)(3) to read as follows:
Sec. 1026.4 Finance charge.
* * * * *
(b) * * *
(2) Service, transaction, activity, and carrying charges, including
any charge imposed on a checking or other transaction account (except a
prepaid account as defined in Sec. 1026.61 or a covered asset account
as that term is defined in Sec. 1026.62) to the extent that the charge
exceeds the charge for a similar account without a credit feature.
* * * * *
(12) With regard to a covered asset account as that term is defined
in Sec. 1026.62(b)(2):
(i) Any service, transaction, activity, or carrying charge imposed
on the separate credit account required by Sec. 1026.62(c); and
(ii) Any service, transaction, activity, or carrying charge imposed
on the covered asset account to the extent that the charge exceeds a
comparable charge imposed on a checking or other transaction account
that does not have overdraft credit.
(iii) For purposes of paragraph (b)(12)(ii) of this section, the
following charges imposed on a checking or other transaction account
without covered overdraft credit are not comparable to charges imposed
on a covered asset account. Thus, to determine pursuant to paragraph
(b)(12)(ii) of this section the amount of a charge on a covered asset
account that is a finance charge, the following fees and charges on a
checking or other transaction account that does not have covered
overdraft credit may not be subtracted from the amount of the charge on
the covered asset account.
(A) A charge for authorizing or paying a transaction that overdraws
the checking or other transaction account.
(B) A charge for declining to authorize or pay a transaction.
(C) A charge for returning a transaction unpaid.
(D) A charge for transferring funds into the checking or other
transaction account from any credit account.
(E) A charge for transferring funds into the checking or other
transaction account from any other asset account.
* * * * *
(c) * * *
(3) Charges imposed by a financial institution for paying items
that overdraw an account, unless the payment of such items and the
imposition of the charge were previously agreed upon in writing. This
paragraph (c)(3) does not apply to credit offered in connection with a
prepaid account as defined in Sec. 1026.61. This paragraph (c)(3) also
does not apply to above breakeven overdraft credit as defined in Sec.
1026.62.
* * * * *
Subpart G--Special Rules Applicable to Credit Card Accounts and
Open-End Credit Offered to College Students
* * * * *
0
7. Section 1026.60 is amended by revising paragraph (a)(5) to read as
follows:
Sec. 1026.60 Credit and charge card applications and solicitations.
(a) * * *
(5) Exceptions. This section does not apply to:
(i) Home-equity plans accessible by a credit or charge card that
are subject to the requirements of Sec. 1026.40;
(ii) Covered overdraft credit as defined in Sec. 1026.62 tied to
asset accounts accessed by check-guarantee cards or by debit cards
other than hybrid debit-credit cards as defined in Sec. 1026.62;
(iii) Lines of credit accessed by check-guarantee cards or by debit
cards, other than covered overdraft credit accessed by hybrid debit-
credit cards, that can be used only at automated teller machines;
(iv) Lines of credit accessed solely by account numbers except for
a covered separate credit feature solely accessible by an account
number that is a hybrid prepaid-credit card as defined in Sec. 1026.61
or covered overdraft credit accessible by an account number that is a
hybrid debit-credit card;
(v) Additions of a credit or charge card to an existing open-end
plan;
(vi) General purpose applications unless the application, or
material accompanying it, indicates that it can be used to open a
credit or charge card account; or
(vii) Consumer-initiated requests for applications.
* * * * *
[[Page 13899]]
0
8. Section 1026.62 is added to read as follows:
Sec. 1026.62 Overdraft Credit.
(a) In general--(1) Overdraft credit is subject to this section and
this part as specified below.
(2) Overdraft credit is any consumer credit extended by a financial
institution to pay a transaction from a checking or other transaction
account (other than a prepaid account as defined in Sec. 1026.61) held
at the financial institution when the consumer has insufficient or
unavailable funds in that account. The term overdraft credit includes,
but is not limited to, any such consumer credit extended through a
transfer from a credit card account or overdraft line of credit. The
term does not include credit exempt from this part pursuant to Sec.
1026.3.
(b) Definitions. For purposes of this section and this part, the
following definitions apply:
(1) Above Breakeven Overdraft Credit means overdraft credit
extended by a very large financial institution to pay a transaction on
which, as an incident to or a condition of the overdraft credit, the
very large financial institution imposes a charge or combination of
charges exceeding the average of its costs and charge-off losses for
providing non-covered overdraft credit as described in Sec.
1026.62(d).
(2) Covered Asset Account means a checking or other transaction
account (other than a prepaid account as defined in Sec. 1026.61)
provided by a very large financial institution that is tied to
overdraft credit provided by the very large financial institution.
(3) Covered Overdraft Credit means overdraft credit that is subject
to a finance charge or is payable by written agreement in more than
four installments.
(4) Covered Overdraft Credit Account means a credit account through
which a financial institution extends or can extend covered overdraft
credit. For example, the term includes any line of credit, credit card
account, credit feature, credit plan, or credit subaccount through
which the financial institution extends or can extend covered overdraft
credit.
(5) Hybrid Debit-Credit Card means any card, plate, or other single
credit device that a consumer may use from time to time to obtain
covered overdraft credit from a very large financial institution.
(6) Non-Covered Overdraft Credit means overdraft credit that is not
subject to a finance charge and is not payable by written agreement in
more than four installments.
(7) Overdraft credit has the meaning set out in Sec.
1026.62(a)(2).
(8) Very Large Financial Institution means an insured depository
institution or an insured credit union that has total assets of more
than $10,000,000,000 and any affiliate thereof, as determined under 12
U.S.C. 5515(a).
(c) Structure of covered overdraft credit. A very large financial
institution shall not structure covered overdraft credit as a negative
balance on a checking or other transaction account. The very large
financial institution shall structure covered overdraft credit as a
separate credit account. The separate credit account is a covered
overdraft credit account. The tied checking or other transaction
account is a covered asset account.
(d) Charges exceeding the average of its costs and charge-off
losses for providing non-covered overdraft credit--(1) General rule.
For purposes of paragraph 62(b)(1) of this section, any charge or
combination of charges to pay a transaction exceeds the average of a
very large financial institution's costs and charge-off losses for
providing non-covered overdraft credit if the charge or combination of
charges exceeds the greater of:
(i) The pro rata share of the very large financial institution's
total direct costs and charge-off losses for providing non-covered
overdraft credit in the previous year, calculated in accordance with
this paragraph; or
(ii) [$3/$6/$7/$14].
(2) Cost and loss calculation. When calculating the pro rata share
of the very large financial institution's total direct costs and
charge-off losses for providing non-covered overdraft credit in the
previous year, a very large financial institution may consider only
those costs and charge-off losses specifically traceable to its
provision of non-covered overdraft credit in the previous year. Such
costs and charge-off losses include, but are not limited to, its cost
of funds, its net charge-off losses, and operating expenses for its
non-covered overdraft credit program. Such costs and charge-off losses
do not include general overhead costs or charge-off losses due to
unauthorized use, EFT errors, billing errors, returned deposit items,
or rescinded provisional credit.
0
9. In Supplement I to Part 1026--Official Interpretations:
0
a. Under Section 1026.2--Definitions and Rules of Construction:
0
i. 2(a)(14) Credit is revised.
0
ii. Paragraph 2(a)(15) is revised.
0
iii. 2(a)(20) Open-End Credit is revised.
0
b. Under Section 1026.4--Finance Charge:
0
i. Paragraph 4(b)(2) is revised.
0
ii. Paragraph 4(b)(12) is added.
0
iii. Paragraph 4(c)(3) is revised.
0
c. Under Section 1026.12--Special Credit Card Provisions:
0
i. Introductory paragraph 1 is revised.
0
ii. 12(a)(1) is revised.
0
iii. 12(a)(2) is revised.
0
iv. 12(c) is revised.
0
v. 12(c)(1) General Rule is revised.
0
d. Under Section 1026.55--Limitations on increasing annual percentage
rates, fees, and charges, revise 55(a).
0
e. Under Section 1026.57--Reporting and Marketing Rules for College
Student Open-End Credit, revise 57(a)(1).
The revisions and addition read as follows:
Supplement I to Part 1026--Official Interpretations
* * * * *
Subpart A--General
* * * * *
Section 1026.2--Definitions and Rules of Construction
* * * * *
2(a)(14) Credit
1. Exclusions. The following situations are not considered credit
for purposes of the regulation:
i. Layaway plans, unless the consumer is contractually obligated to
continue making payments. Whether the consumer is so obligated is a
matter to be determined under applicable law. The fact that the
consumer is not entitled to a refund of any amounts paid towards the
cash price of the merchandise does not bring layaways within the
definition of credit.
ii. Tax liens, tax assessments, court judgments, and court
approvals of reaffirmation of debts in bankruptcy. However, third-party
financing of such obligations (for example, a bank loan obtained to pay
off a tax lien) is credit for purposes of the regulation.
iii. Insurance premium plans that involve payment in installments
with each installment representing the payment for insurance coverage
for a certain future period of time, unless the consumer is
contractually obligated to continue making payments.
iv. Home improvement transactions that involve progress payments,
if the consumer pays, as the work progresses, only for work completed
and has no contractual obligation to continue making payments.
v. Borrowing against the accrued cash value of an insurance policy
or a pension account, if there is no independent obligation to repay.
[[Page 13900]]
vi. Letters of credit.
vii. The execution of option contracts. However, there may be an
extension of credit when the option is exercised, if there is an
agreement at that time to defer payment of a debt.
viii. Investment plans in which the party extending capital to the
consumer risks the loss of the capital advanced. This includes, for
example, an arrangement with a home purchaser in which the investor
pays a portion of the downpayment and of the periodic mortgage payments
in return for an ownership interest in the property, and shares in any
gain or loss of property value.
ix. Mortgage assistance plans administered by a government agency
in which a portion of the consumer's monthly payment amount is paid by
the agency. No finance charge is imposed on the subsidy amount, and
that amount is due in a lump-sum payment on a set date or upon the
occurrence of certain events. (If payment is not made when due, a new
note imposing a finance charge may be written, which may then be
subject to the regulation.)
2. Payday loans; deferred presentment. Credit includes a
transaction in which a cash advance is made to a consumer in exchange
for the consumer's personal check, or in exchange for the consumer's
authorization to debit the consumer's deposit account, and where the
parties agree either that the check will not be cashed or deposited, or
that the consumer's deposit account will not be debited, until a
designated future date. This type of transaction is often referred to
as a ``payday loan'' or ``payday advance'' or ``deferred-presentment
loan.'' A fee charged in connection with such a transaction may be a
finance charge for purposes of Sec. 1026.4, regardless of how the fee
is characterized under state law. Where the fee charged constitutes a
finance charge under Sec. 1026.4 and the person advancing funds
regularly extends consumer credit, that person is a creditor and is
required to provide disclosures consistent with the requirements of
Regulation Z. (See Sec. 1026.2(a)(17).)
3. Transactions on the asset features of prepaid accounts when
there are insufficient or unavailable funds. Credit includes
authorization of a transaction on the asset feature of a prepaid
account as defined in Sec. 1026.61 where the consumer has insufficient
or unavailable funds in the asset feature of the prepaid account at the
time the transaction is authorized to cover the amount of the
transaction. It also includes settlement of a transaction on the asset
feature of a prepaid account where the consumer has insufficient or
unavailable funds in the asset feature of the prepaid account at the
time the transaction is settled to cover the amount of the transaction.
This includes a transaction where the consumer has sufficient or
available funds in the asset feature of a prepaid account to cover the
amount of the transaction at the time the transaction is authorized but
insufficient or unavailable funds in the asset feature of the prepaid
account to cover the transaction amount at the time the transaction is
settled. See Sec. 1026.61 and related commentary on the applicability
of this regulation to credit that is extended in connection with a
prepaid account.
4. Overdraft credit. Funds extended by a financial institution to a
consumer to pay transactions that overdraw a checking or other
transaction account held at the financial institution are credit
whenever the consumer has a contractual obligation to repay the funds.
Paragraph 2(a)(15)
1. Usable from time to time. A credit card must be usable from time
to time. Since this involves the possibility of repeated use of a
single device, checks and similar instruments that can be used only
once to obtain a single credit extension are not credit cards.
2. Examples.
i. Examples of credit cards include:
A. A card that guarantees checks or similar instruments, if the
asset account is also tied to covered overdraft credit or if the
instrument directly accesses a line of credit.
B. A debit card (other than a debit card that is solely an account
number) that also accesses a credit account (that is, a debit-credit
card or hybrid debit-credit card as defined in Sec. 1026.62). See
comment 2(a)(15)-2.ii.C for guidance on whether a debit card that is
solely an account number is a credit card.
C. An identification card that permits the consumer to defer
payment on a purchase.
D. An identification card indicating loan approval that is
presented to a merchant or to a lender, whether or not the consumer
signs a separate promissory note for each credit extension.
E. A card or device that can be activated upon receipt to access
credit, even if the card has a substantive use other than credit, such
as a purchase-price discount card. Such a card or device is a credit
card notwithstanding the fact that the recipient must first contact the
card issuer to access or activate the credit feature.
F. A prepaid card that is a hybrid prepaid-credit card as defined
in Sec. 1026.61.
ii. In contrast, credit card does not include, for example:
A. A check-guarantee or debit card with no credit feature or
agreement.
B. Any card, key, plate, or other device that is used in order to
obtain petroleum products for business purposes from a wholesale
distribution facility or to gain access to that facility, and that is
required to be used without regard to payment terms.
C. An account number that accesses a credit account, unless the
account number can access an open-end line of credit to purchase goods
or services or as provided in Sec. 1026.61 with respect to a hybrid
prepaid-credit card. An account number that can access an open-end line
of credit to purchase goods or services includes an account number that
can access a covered overdraft credit account offered by a very large
financial institution. For example, if a creditor provides a consumer
with an open-end line of credit that can be accessed by an account
number in order to transfer funds into another account (such as an
asset account with the same creditor), the account number is not a
credit card for purposes of Sec. 1026.2(a)(15)(i). However, if the
account number can also access the line of credit to purchase goods or
services (such as an account number that can be used to purchase goods
or services on the internet), the account number is a credit card for
purposes of Sec. 1026.2(a)(15)(i), regardless of whether the creditor
treats such transactions as purchases, cash advances, or some other
type of transaction. Furthermore, if the line of credit can also be
accessed by a card (such as a debit card), that card is a credit card
for purposes of Sec. 1026.2(a)(15)(i).
D. A prepaid card that is not a hybrid prepaid-credit card as
defined in Sec. 1026.61.
E. A check-guarantee or debit card that can access non-covered
overdraft credit as defined in Sec. 1026.62 and cannot access any
other form of credit.
3. Charge card.
i. Charge cards are credit cards where no periodic rate is used to
compute the finance charge. The term charge card does not include a
hybrid debit-credit card as defined in Sec. 1026.62. Thus, covered
overdraft credit extended by a very large financial institution through
a hybrid debit-credit card is not subject to special charge card rules.
A. Under the regulation, a reference to credit cards generally
includes charge cards. In particular, references to credit
[[Page 13901]]
card accounts under an open-end (not home-secured) consumer credit plan
in subparts B and G generally include charge cards.
B. The term charge card is, however, distinguished from credit card
or credit card account under an open-end (not home-secured) consumer
credit plan in Sec. Sec. 1026.6(b)(2)(xiv), 1026.7(b)(11) (except as
described in comment 2(a)(15)-3.ii below), 1026.7(b)(12), 1026.9(e),
1026.9(f), 1026.28(d), 1026.52(b)(1)(ii)(C), 1026.60, and appendices G-
10 through G-13.
ii. A hybrid prepaid-credit card as defined in Sec. 1026.61 is a
charge card with respect to a covered separate credit feature if no
periodic rate is used to compute the finance charge in connection with
the covered separate credit feature. Unlike other charge card accounts,
the requirements in Sec. 1026.7(b)(11) apply to a covered separate
credit feature accessible by a hybrid prepaid-credit card that is a
charge card when that covered separate credit feature is a credit card
account under an open-end (not home-secured) consumer credit plan.
Thus, under Sec. 1026.5(b)(2)(ii)(A), with respect to a covered
separate credit feature that is a credit card account under an open-end
(not home-secured) consumer credit plan, a card issuer of a hybrid
prepaid-credit card that meets the definition of a charge card because
no periodic rate is used to compute a finance charge in connection with
the covered separate credit feature must adopt reasonable procedures
for the covered separate credit feature designed to ensure that
(1) periodic statements are mailed or delivered at least 21 days
prior to the payment due date disclosed on the statement pursuant to
Sec. 1026.7(b)(11)(i)(A); and
(2) the card issuer does not treat as late for any purposes a
required minimum periodic payment received by the card issuer within 21
days after mailing or delivery of the periodic statement disclosing the
due date for that payment.
4. Credit card account under an open-end (not home-secured)
consumer credit plan.
i. An open-end consumer credit account is a credit card account
under an open-end (not home-secured) consumer credit plan for purposes
of Sec. 1026.2(a)(15)(ii) if:
A. The account is accessed by a credit card, as defined in Sec.
1026.2(a)(15)(i); and
B. The account is not excluded under Sec. 1026.2(a)(15)(ii)(A) or
(B).
ii. The exclusion from credit card account under an open-end (not
home-secured) consumer credit plan provided by Sec.
1026.2(a)(15)(ii)(B) for covered overdraft credit offered by a creditor
that is not a very large financial institution does not apply to a
covered separate credit feature accessible by a hybrid prepaid-credit
card (including a hybrid prepaid-credit card that is solely an account
number) as defined in Sec. 1026.61.
* * * * *
2(a)(20) Open-End Credit
1. General. This definition describes the characteristics of open-
end credit (for which the applicable disclosure and other rules are
contained in Subpart B), as distinct from closed-end credit. Open-end
credit is consumer credit that is extended under a plan and meets all 3
criteria set forth in the definition.
2. Existence of a plan.
i. The definition requires that there be a plan, which connotes a
contractual arrangement between the creditor and the consumer.
ii. With respect to a covered separate credit feature accessible by
a hybrid prepaid-credit card as defined in Sec. 1026.61, a plan means
a program where the consumer is obligated contractually to repay any
credit extended by the creditor. For example, a plan includes a program
under which a creditor routinely extends credit from a covered separate
credit feature offered by the prepaid account issuer, its affiliate, or
its business partner where the prepaid card can be used from time to
time to draw, transfer, or authorize the draw or transfer of credit
from the covered separate credit feature in the course of authorizing,
settling, or otherwise completing transactions conducted with the card
to obtain goods or services, obtain cash, or conduct person-to-person
transfers, and the consumer is obligated contractually to repay those
credit transactions. Such a program constitutes a plan notwithstanding
that, for example, the creditor has not agreed in writing to extend
credit for those transactions, the creditor retains discretion not to
extend credit for those transactions, or the creditor does not extend
credit for those transactions once the consumer has exceeded a certain
amount of credit. See Sec. 1026.61(a) and related commentary for
guidance on the applicability of this regulation to credit accessible
by hybrid prepaid-credit cards.
iii. Some creditors offer programs containing a number of different
credit features. The consumer has a single account with the institution
that can be accessed repeatedly via a number of sub-accounts
established for the different program features and rate structures.
Some features of the program might be used repeatedly (for example, an
overdraft line) while others might be used infrequently (such as the
part of the credit line available for secured credit). If the program
as a whole is subject to prescribed terms and otherwise meets the
definition of open-end credit, such a program would be considered a
single, multifeatured plan.
iv. With respect to covered overdraft credit as defined in Sec.
1026.62, a plan means a program where the consumer is obligated
contractually to repay any credit extended by the creditor. Such a
program constitutes a plan notwithstanding that, for example, the
creditor has not agreed in writing to extend credit for those
transactions, the creditor retains discretion not to extend credit for
those transactions, or the creditor does not extend credit for those
transactions once the consumer has exceeded a certain amount of credit.
3. Repeated transactions. Under this criterion, the creditor must
reasonably contemplate repeated transactions. This means that the
credit plan must be usable from time to time and the creditor must
legitimately expect that there will be repeat business rather than a
one-time credit extension. The creditor must expect repeated dealings
with consumers under the credit plan as a whole and need not believe a
consumer will reuse a particular feature of the plan. The determination
of whether a creditor can reasonably contemplate repeated transactions
requires an objective analysis. Information that much of the creditor's
customer base with accounts under the plan make repeated transactions
over some period of time is relevant to the determination, particularly
when the plan is opened primarily for the financing of infrequently
purchased products or services. A standard based on reasonable belief
by a creditor necessarily includes some margin for judgmental error.
The fact that particular consumers do not return for further credit
extensions does not prevent a plan from having been properly
characterized as open-end. For example, if much of the customer base of
a clothing store makes repeat purchases, the fact that some consumers
use the plan only once would not affect the characterization of the
store's plan as open-end credit. The criterion regarding repeated
transactions is a question of fact to be decided in the context of the
creditor's type of business and the creditor's relationship with its
customers. For example, it would be more reasonable for a bank or
depository institution to contemplate repeated transactions with a
customer than for a seller of aluminum siding to
[[Page 13902]]
make the same assumption about its customers.
4. Finance charge on an outstanding balance.
i. The requirement that a finance charge may be computed and
imposed from time to time on the outstanding balance means that there
is no specific amount financed for the plan for which the finance
charge, total of payments, and payment schedule can be calculated. A
plan may meet the definition of open-end credit even though a finance
charge is not normally imposed, provided the creditor has the right,
under the plan, to impose a finance charge from time to time on the
outstanding balance. For example, in some plans, a finance charge is
not imposed if the consumer pays all or a specified portion of the
outstanding balance within a given time period. Such a plan could meet
the finance charge criterion, if the creditor has the right to impose a
finance charge, even though the consumer actually pays no finance
charges during the existence of the plan because the consumer takes
advantage of the option to pay the balance (either in full or in
installments) within the time necessary to avoid finance charges.
ii. With regard to a covered separate credit feature and an asset
feature on a prepaid account that are both accessible by a hybrid
prepaid-credit card as defined in Sec. 1026.61, any service,
transaction, activity, or carrying charges imposed on the covered
separate credit feature, and any such charges imposed on the asset
feature of the prepaid account to the extent that the amount of the
charge exceeds comparable charges imposed on prepaid accounts in the
same prepaid account program that do not have a covered separate credit
feature accessible by a hybrid prepaid-credit card, generally is a
finance charge. See Sec. 1026.4(a) and (b)(11). Such charges include a
periodic fee to participate in the covered separate credit feature,
regardless of whether this fee is imposed on the credit feature or on
the asset feature of the prepaid account. With respect to credit from a
covered separate credit feature accessible by a hybrid prepaid-credit
card, any service, transaction, activity, or carrying charges that are
finance charges under Sec. 1026.4 constitute finance charges imposed
from time to time on an outstanding unpaid balance as described in
Sec. 1026.2(a)(20) if there is no specific amount financed for the
credit feature for which the finance charge, total of payments, and
payment schedule can be calculated.
iii. Regardless of whether the financial institution assesses such
charges on the deposit account itself or a separate credit account, any
service, transaction, activity, or carrying charges imposed by a
financial institution for paying a transaction that overdraws a
consumer's deposit account held at the financial institution are
finance charges unless they are excluded from the definition of finance
charge by Sec. 1026.4(c). See Sec. 1026.4(a), (b)(12), and (c).
Additionally, such charges would constitute finance charges imposed
from time to time on an outstanding unpaid balance, as described in
Sec. 1026.2(a)(20), if there is no specific amount financed for the
plan for which the finance charge, total of payments, and payment
schedule can be calculated.
5. Reusable line. The total amount of credit that may be extended
during the existence of an open-end plan is unlimited because available
credit is generally replenished as earlier advances are repaid. A line
of credit is self-replenishing even though the plan itself has a fixed
expiration date, as long as during the plan's existence the consumer
may use the line, repay, and reuse the credit. The creditor may
occasionally or routinely verify credit information such as the
consumer's continued income and employment status or information for
security purposes but, to meet the definition of open-end credit, such
verification of credit information may not be done as a condition of
granting a consumer's request for a particular advance under the plan.
In general, a credit line is self-replenishing if the consumer can take
further advances as outstanding balances are repaid without being
required to separately apply for those additional advances. A credit
card account where the plan as a whole replenishes meets the self-
replenishing criterion, notwithstanding the fact that a credit card
issuer may verify credit information from time to time in connection
with specific transactions. This criterion of unlimited credit
distinguishes open-end credit from a series of advances made pursuant
to a closed-end credit loan commitment. For example:
i. Under a closed-end commitment, the creditor might agree to lend
a total of $10,000 in a series of advances as needed by the consumer.
When a consumer has borrowed the full $10,000, no more is advanced
under that particular agreement, even if there has been repayment of a
portion of the debt. (See Sec. 1026.2(a)(17)(iv) for disclosure
requirements when a credit card is used to obtain the advances.)
ii. This criterion does not mean that the creditor must establish a
specific credit limit for the line of credit or that the line of credit
must always be replenished to its original amount. The creditor may
reduce a credit limit or refuse to extend new credit in a particular
case due to changes in the creditor's financial condition or the
consumer's creditworthiness. (The rules in Sec. 1026.40(f), however,
limit the ability of a creditor to suspend credit advances for home
equity plans.) While consumers should have a reasonable expectation of
obtaining credit as long as they remain current and within any preset
credit limits, further extensions of credit need not be an absolute
right in order for the plan to meet the self-replenishing criterion.
6. Verifications of collateral value. Creditors that otherwise meet
the requirements of Sec. 1026.2(a)(20) extend open-end credit
notwithstanding the fact that the creditor must verify collateral
values to comply with Federal, state, or other applicable law or
verifies the value of collateral in connection with a particular
advance under the plan.
7. Open-end real estate mortgages. Some credit plans call for
negotiated advances under so-called open-end real estate mortgages.
Each such plan must be independently measured against the definition of
open-end credit, regardless of the terminology used in the industry to
describe the plan. The fact that a particular plan is called an open-
end real estate mortgage, for example, does not, by itself, mean that
it is open-end credit under the regulation.
* * * * *
Section 1026.4--Finance Charge
* * * * *
Paragraph 4(b)(2)
1. Checking or transaction account charges. A charge imposed in
connection with a credit feature on a checking or transaction account
(other than a prepaid account as defined in Sec. 1026.61 or a covered
asset account as that term is defined in Sec. 1026.62) is a finance
charge under Sec. 1026.4(b)(2) to the extent the charge exceeds the
charge for a similar account without a credit feature and the charge is
not addressed by Sec. 1026.4(b)(12). If a charge for an account with a
credit feature does not exceed the charge for an account without a
credit feature, the charge is not a finance charge under Sec.
1026.4(b)(2). To illustrate:
i. A $5 service charge is imposed on an account with an overdraft
line of credit (where the institution has agreed in writing to pay an
overdraft), while a $3 service charge is imposed on an account without
a credit feature; the $2 difference is a finance charge. (If the
[[Page 13903]]
difference is not related to account activity, however, it may be
excludable as a participation fee. See the commentary to Sec.
1026.4(c)(4).)
ii. A $5 service charge is imposed for each item that results in an
overdraft on an account with an overdraft line of credit, while a $25
service charge is imposed for paying or returning each item on a
similar account without a credit feature; the $5 charge is not a
finance charge.
2. Prepaid accounts. Fees or charges related to credit offered in
connection with prepaid accounts as defined in Sec. 1026.61 are
discussed in Sec. Sec. 1026.4(b)(11) and 1026.61 and related
commentary.
* * * * *
Paragraph 4(c)(3)
1. Assessing interest on an overdraft balance. Except with respect
to credit offered in connection with a prepaid account as defined in
Sec. 1026.61, a charge on an overdraft balance computed by applying a
rate of interest to the amount of the overdraft is not a finance
charge, even though the consumer agrees to the charge in the account
agreement, unless the financial institution agrees in writing that it
will pay such items.
2. Credit accessed in connection with a prepaid account. See
comment 4(b)(11)-1 for guidance on when fees imposed with regard to
credit accessed in connection with a prepaid account as defined in
Sec. 1026.61 are finance charges.
3. Credit accessed in connection with a covered asset account. See
12 CFR 1026.4(b)(12) for guidance on when fees imposed on a covered
asset account as defined in Sec. 1026.62 are finance charges.
* * * * *
Section 1026.12--Special Credit Card Provisions
1. Scope. Sections 1026.12(a) and (b) deal with the issuance and
liability rules for credit cards, whether the card is intended for
consumer, business, or any other purposes. Sections 1026.12(a) and (b)
are exceptions to the general rule that the regulation applies only to
consumer credit. (See Sec. Sec. 1026.1 and 1026.3.) Notwithstanding
paragraph (g) of this section or Regulation E, 12 CFR 1005.12(a),
paragraphs (a) through (f) of this section apply to hybrid debit credit
cards.
2. Definition of ``accepted credit card''. For purposes of this
section, ``accepted credit card'' means any credit card that a
cardholder has requested or applied for and received, or has signed,
used, or authorized another person to use to obtain credit. Any credit
card issued as a renewal or substitute in accordance with Sec.
1026.12(a) becomes an accepted credit card when received by the
cardholder.
12(a) Issuance of Credit Cards
Paragraph 12(a)(1)
1. Explicit request. A request or application for a card must be
explicit. For example, a request for an overdraft plan tied to a
checking account does not constitute an application for a credit card
with overdraft checking features. Therefore, a very large financial
institution cannot issue a hybrid debit-credit card to a person without
first receiving an oral or written request or application for the
hybrid debit-credit card. The term hybrid debit-credit card has the
same meaning as provided in Sec. 1026.62.
2. Addition of credit features. If the consumer has a non-credit
card, including a prepaid card, the addition of a credit feature or
plan to the card that would make the card into a credit card under
Sec. 1026.2(a)(15)(i) constitutes issuance of a credit card. For
example, the following constitute issuance of a credit card:
i. Granting overdraft privileges on a checking account when the
consumer already has a check guarantee card; or
ii. Allowing a prepaid card to access a covered separate credit
feature that would make the card into a hybrid prepaid-credit card as
defined in Sec. 1026.61 with respect to the covered separate credit
feature.
iii. Extending covered overdraft credit through a hybrid debit-
credit card as defined in Sec. 1026.62.
3. Variance of card from request. The request or application need
not correspond exactly to the card that is issued. For example:
i. The name of the card requested may be different when issued.
ii. The card may have features in addition to those reflected in
the request or application.
4. Permissible form of request. The request or application may be
oral (in response to a telephone solicitation by a card issuer, for
example) or written.
5. Time of issuance. A credit card may be issued in response to a
request made before any cards are ready for issuance (for example, if a
new program is established), even if there is some delay in issuance.
6. Persons to whom cards may be issued. A card issuer may issue a
credit card to the person who requests it, and to anyone else for whom
that person requests a card and who will be an authorized user on the
requester's account. In other words, cards may be sent to consumer A on
A's request, and also (on A's request) to consumers B and C, who will
be authorized users on A's account. In these circumstances, the
following rules apply:
i. The additional cards may be imprinted in either A's name or in
the names of B and C.
ii. No liability for unauthorized use (by persons other than B and
C), not even the $50, may be imposed on B or C since they are merely
users and not cardholders as that term is defined in Sec. 1026.2 and
used in Sec. 1026.12(b); of course, liability of up to $50 for
unauthorized use of B's and C's cards may be imposed on A.
iii. Whether B and C may be held liable for their own use, or on
the account generally, is a matter of state or other applicable law.
7. Issuance of non-credit cards.
i. Issuance of non-credit cards other than prepaid cards.
A. Under Sec. 1026.12(a)(1), a credit card cannot be issued except
in response to a request or an application. (See comment 2(a)(15)-2 for
examples of cards or devices that are and are not credit cards.) A non-
credit card other than a prepaid card may be sent on an unsolicited
basis by an issuer that does not propose to connect the card to any
credit plan; a credit feature may be added to a previously issued non-
credit card other than a prepaid card only upon the consumer's specific
request.
B. Examples. A purchase-price discount card may be sent on an
unsolicited basis by an issuer that does not propose to connect the
card to any credit plan. An issuer demonstrates that it proposes to
connect the card to a credit plan by, for example, including
promotional materials about credit features or account agreements and
disclosures required by Sec. 1026.6. The issuer will violate the rule
against unsolicited issuance if, for example, at the time the card is
sent a credit plan can be accessed by the card or the recipient of the
unsolicited card has been preapproved for credit that the recipient can
access by contacting the issuer and activating the card.
ii. Issuance of a prepaid card. Section 1026.12(a)(1) does not
apply to the issuance of a prepaid card where an issuer does not
connect the card to any covered separate credit feature that would make
the prepaid card into a hybrid prepaid-credit card as defined in Sec.
1026.61 at the time the card is issued and only opens a covered
separate credit feature, or provides an application or solicitation to
open a covered separate credit feature, or allows an existing credit
feature to become a covered separate credit feature
[[Page 13904]]
accessible by a hybrid prepaid-credit card as defined in Sec. 1026.61
in compliance with Sec. 1026.61(c). A covered separate credit feature
may be added to a previously issued prepaid card only upon the
consumer's application or specific request and only in compliance with
Sec. 1026.61(c). An issuer does not connect a prepaid card to a
covered separate credit feature that would make the card into a credit
card simply by providing the disclosures required by Regulation E, 12
CFR 1005.18(b)(2)(x), (b)(4)(iv), and (vii), with the prepaid card. See
Sec. 1026.12(a)(2) and related commentary for when a hybrid prepaid-
credit card as defined in Sec. 1026.61 may be issued as a replacement
or substitution for another hybrid prepaid-credit card. See also
Regulation E, 12 CFR 1005.5 and 1005.18(a), and related commentary,
governing issuance of access devices under Regulation E.
8. Unsolicited issuance of PINs. A card issuer may issue personal
identification numbers (PINs) to existing credit cardholders without a
specific request from the cardholders, provided the PINs cannot be used
alone to obtain credit. For example, the PINs may be necessary if
consumers wish to use their existing credit cards at automated teller
machines or at merchant locations with point of sale terminals that
require PINs.
Paragraph 12(a)(2)
1. Renewal. Renewal generally contemplates the regular replacement
of existing cards because of, for example, security reasons or new
technology or systems. It also includes the re-issuance of cards that
have been suspended temporarily, but does not include the opening of a
new account after a previous account was closed.
2. Substitution--examples. Substitution encompasses the replacement
of one card with another because the underlying account relationship
has changed in some way--such as when the card issuer has:
i. Changed its name.
ii. Changed the name of the card.
iii. Changed the credit or other features available on the account.
For example, the original card could be used to make purchases and
obtain cash advances at teller windows. The substitute card might be
usable, in addition, for obtaining cash advances through automated
teller machines. (If the substitute card constitutes an access device,
as defined in Regulation E, then the Regulation E issuance rules would
have to be followed.) The substitution of one card with another on an
unsolicited basis is not permissible, however, where in conjunction
with the substitution an additional credit card account is opened and
the consumer is able to make new purchases or advances under both the
original and the new account with the new card. For example, if a
retail card issuer replaces its credit card with a combined retailer/
bank card, each of the creditors maintains a separate account, and both
accounts can be accessed for new transactions by use of the new credit
card, the card cannot be provided to a consumer without solicitation.
iv. Substituted a card user's name on the substitute card for the
cardholder's name appearing on the original card.
v. Changed the merchant base, provided that the new card is honored
by at least one of the persons that honored the original card. However,
unless the change in the merchant base is the addition of an affiliate
of the existing merchant base, the substitution of a new card for
another on an unsolicited basis is not permissible where the account is
inactive. A credit card cannot be issued in these circumstances without
a request or application. For purposes of Sec. 1026.12(a), an account
is inactive if no credit has been extended and if the account has no
outstanding balance for the prior 24 months. (See Sec. 1026.11(b)(2).)
3. Substitution--successor card issuer. Substitution also occurs
when a successor card issuer replaces the original card issuer (for
example, when a new card issuer purchases the accounts of the original
issuer and issues its own card to replace the original one). A
permissible substitution exists even if the original issuer retains the
existing receivables and the new card issuer acquires the right only to
future receivables, provided use of the original card is cut off when
use of the new card becomes possible.
4. Substitution--non-credit-card plan. A credit card that replaces
a retailer's open-end credit plan not involving a credit card is not
considered a substitute for the retailer's plan--even if the consumer
used the retailer's plan. A credit card cannot be issued in these
circumstances without a request or application.
5. One-for-one rule. An accepted card may be replaced by no more
than one renewal or substitute card. For example, the card issuer may
not replace a credit card permitting purchases and cash advances with
two cards, one for the purchases and another for the cash advances.
6. One-for-one rule--exceptions. The regulation does not prohibit
the card issuer from:
i. Replacing a single card that is both a debit card and a credit
card, such as a hybrid debit-credit card as defined in Sec. 1026.62,
with a credit card and a separate debit card with only debit functions
(or debit functions plus an associated capability to extend overdraft
credit that is not covered overdraft credit as defined in Sec.
1026.62), since the latter card could be issued on an unsolicited basis
under Regulation E.
ii. Replacing a single card that is both a prepaid card and a
credit card with a credit card and a separate prepaid card where the
latter card is not a hybrid prepaid-credit card as defined in Sec.
1026.61.
iii. Replacing an accepted card with more than one renewal or
substitute card, provided that:
A. No replacement card accesses any account not accessed by the
accepted card;
B. For terms and conditions required to be disclosed under Sec.
1026.6, all replacement cards are issued subject to the same terms and
conditions, except that a creditor may vary terms for which no change
in terms notice is required under Sec. 1026.9(c); and
C. Under the account's terms the consumer's total liability for
unauthorized use with respect to the account does not increase.
7. Methods of terminating replaced card. The card issuer need not
physically retrieve the original card, provided the old card is voided
in some way, for example:
i. The issuer includes with the new card a notification that the
existing card is no longer valid and should be destroyed immediately.
ii. The original card contained an expiration date.
iii. The card issuer, in order to preclude use of the card,
reprograms computers or issues instructions to authorization centers.
8. Incomplete replacement. If a consumer has duplicate credit cards
on the same account (Card A--one type of bank credit card, for
example), the card issuer may not replace the duplicate cards with one
Card A and one Card B (Card B--another type of bank credit card) unless
the consumer requests Card B.
9. Multiple entities. Where multiple entities share
responsibilities with respect to a credit card issued by one of them,
the entity that issued the card may replace it on an unsolicited basis,
if that entity terminates the original card by voiding it in some way,
as described in comment 12(a)(2)-7. The other entity or entities may
not issue a card on an unsolicited basis in these circumstances.
* * * * *
[[Page 13905]]
12(c) Right of Cardholder To Assert Claims or Defenses Against Card
Issuer
1. Relationship to Sec. 1026.13. The Sec. 1026.12(c) credit card
``holder in due course'' provision deals with the consumer's right to
assert against the card issuer a claim or defense concerning property
or services purchased with a credit card, if the merchant has been
unwilling to resolve the dispute. Even though certain merchandise
disputes, such as non-delivery of goods, may also constitute ``billing
errors'' under Sec. 1026.13, that section operates independently of
Sec. 1026.12(c). The cardholder whose asserted billing error involves
undelivered goods may institute the error resolution procedures of
Sec. 1026.13; but whether or not the cardholder has done so, the
cardholder may assert claims or defenses under Sec. 1026.12(c).
Conversely, the consumer may pay a disputed balance and thus have no
further right to assert claims and defenses, but still may assert a
billing error if notice of that billing error is given in the proper
time and manner. An assertion that a particular transaction resulted
from unauthorized use of the card could also be both a ``defense'' and
a billing error.
2. Claims and defenses assertible. Section 1026.12(c) merely
preserves the consumer's right to assert against the card issuer any
claims or defenses that can be asserted against the merchant. It does
not determine what claims or defenses are valid as to the merchant;
this determination must be made under state or other applicable law.
3. Transactions excluded. Section 1026.12(c) does not apply to the
use of a check guarantee card or a debit card (other than a hybrid
debit-credit card) in connection with an overdraft credit plan, or to a
check guarantee card used in connection with cash-advance checks.
4. Method of calculating the amount of credit outstanding. The
amount of the claim or defense that the cardholder may assert shall not
exceed the amount of credit outstanding for the disputed transaction at
the time the cardholder first notifies the card issuer or the person
honoring the credit card of the existence of the claim or defense.
However, when a consumer has asserted a claim or defense against a
creditor pursuant to Sec. 1026.12(c), the creditor must apply any
payment or other credit in a manner that avoids or minimizes any
reduction in the amount subject to that claim or defense. Accordingly,
to determine the amount of credit outstanding for purposes of this
section, payments and other credits must be applied first to amounts
other than the disputed transaction.
i. For examples of how to comply with Sec. Sec. 1026.12 and
1026.53 for credit card accounts under an open-end (not home-secured)
consumer credit plan, see comment 53-3.
ii. For other types of credit card accounts, creditors may, at
their option, apply payments consistent with Sec. 1026.53 and comment
53-3. In the alternative, payments and other credits may be applied to:
Late charges in the order of entry to the account; then to finance
charges in the order of entry to the account; and then to any debits
other than the transaction subject to the claim or defense in the order
of entry to the account. In these circumstances, if more than one item
is included in a single extension of credit, credits are to be
distributed pro rata according to prices and applicable taxes.
5. Prepaid cards.
i. Section 1026.12(c) applies to property or services purchased
with the hybrid prepaid-credit card that accesses a covered separate
credit feature as defined in Sec. 1026.61. The following examples
illustrate when a hybrid prepaid-credit card is used to purchase
property or services:
A. A consumer uses a hybrid prepaid-credit card as defined in Sec.
1026.61 to make a purchase to obtain goods or services from a merchant
and credit is drawn directly from a covered separate credit feature
accessed by the hybrid prepaid-credit card without transferring funds
into the asset feature of the prepaid account to cover the amount of
the purchase. For example, assume that the consumer has $10 of funds in
the asset feature of the prepaid account and initiates a transaction
with a merchant to obtain goods or services with the hybrid prepaid-
credit card for $25. In this case, $10 is debited from the asset
feature and $15 of credit is drawn directly from the covered separate
credit feature accessed by the hybrid prepaid-credit card without any
transfer of funds into the asset feature of the prepaid account to
cover the amount of the purchase. In this case, the consumer is using
credit accessed by the hybrid prepaid-credit card to purchase property
or services where credit is drawn directly from the covered separate
credit feature accessed by the hybrid prepaid-credit card to cover the
amount of the purchase.
B. A consumer uses a hybrid prepaid-credit card as defined in Sec.
1026.61 to make a purchase to obtain goods or services from a merchant
and credit is transferred from a covered separate credit feature
accessed by the hybrid prepaid-credit card into the asset feature of
the prepaid account to cover the amount of the purchase. For example,
assume the same facts as above, except that the $15 will be transferred
from a covered separate credit feature to the asset feature, and a
transaction of $25 is debited from the asset feature of the prepaid
account. In this case, the consumer is using credit accessed by the
hybrid prepaid-credit card to purchase property or services because
credit is transferred to the asset feature of the prepaid account to
cover the amount of a purchase made with the card. This is true even
though the $15 credit transaction is treated as ``nonsale credit''
under Sec. 1026.8(b). See comments 8(a)-9.ii and 8(b)-1.vi.
ii. For a transaction at point of sale where a hybrid prepaid-
credit card is used to obtain goods or services from a merchant and the
transaction is partially paid with funds from the asset feature of the
prepaid account, and partially paid with credit from the covered
separate credit feature, the amount of the purchase transaction that is
funded by credit generally would be subject to the requirements of
Sec. 1026.12(c). The amount of the transaction funded from the prepaid
account would not be subject to the requirements of Sec. 1026.12(c).
12(c)(1) General Rule
1. Situations excluded and included. The consumer may assert claims
or defenses only when the goods or services are ``purchased with the
credit card.'' This would include when the goods or services are
purchased by a consumer using a hybrid prepaid-credit card to access a
covered separate credit feature as defined in Sec. 1026.61 or using a
hybrid debit-credit card to access a covered overdraft credit account
as defined in Sec. 1026.62. This could include mail, the internet or
telephone orders, if the purchase is charged to the credit card
account. But it would exclude:
i. Use of a credit card to obtain a cash advance, even if the
consumer then uses the money to purchase goods or services. Such a
transaction would not involve ``property or services purchased with the
credit card.''
ii. The purchase of goods or services by use of a check accessing
an overdraft account and a credit card used solely for identification
of the consumer. (On the other hand, if the credit card is used to make
partial payment for the purchase and not merely for identification, the
right to assert claims or defenses would apply to credit extended via
the credit card, although not to credit extended by the overdraft line.
If partial payment for the purchase is made with a hybrid prepaid-
credit card or a hybrid debit-
[[Page 13906]]
credit card, the right to assert claims or defenses would apply to
credit accessed from a covered separate credit feature or covered
overdraft credit account, respectively.)
iii. Purchases made by use of a check guarantee card in conjunction
with a cash advance check (or by cash advance checks alone). (See
comment 12(c)-3.) A cash advance check is a check that, when written,
does not draw on an asset account; instead, it is charged entirely to
an open-end credit account.
iv. Purchases effected by use of either a check guarantee card or a
debit card (other than a hybrid debit-credit card) when used to draw on
overdraft credit plans. (See comment 12(c)-3.) The debit card exemption
applies whether the card accesses an asset account via point of sale
terminals, automated teller machines, or in any other way, and whether
the card qualifies as an ``access device'' under Regulation E or is
only a paper based debit card. If a card serves both as an ordinary
credit card and also as a check guarantee or debit card, a transaction
will be subject to this rule on asserting claims and defenses when used
as an ordinary credit card (including when used as a hybrid debit-
credit card to access a covered overdraft credit account), but not when
used as a check guarantee or debit card. For purchases effected by use
of a hybrid debit-credit card where the transaction is partially paid
with funds from the asset account, and partially paid with covered
overdraft credit, the provisions of Sec. 1026.12(c) apply only to the
credit portion of the purchase transaction.
* * * * *
Section 1026.55--Limitations on Increasing Annual Percentage Rates,
Fees, and Charges
55(a) General Rule
1. Increase in rate, fee, or charge. Section 1026.55(a) prohibits
card issuers from increasing an annual percentage rate or any fee or
charge required to be disclosed under Sec. 1026.6(b)(2)(ii),
(b)(2)(iii), or (b)(2)(xii) on a credit card account unless
specifically permitted by one of the exceptions in Sec. 1026.55(b).
Except as specifically provided in Sec. 1026.55(b), this prohibition
applies even if the circumstances under which an increase will occur
are disclosed in advance. The following examples illustrate the general
application of Sec. 1026.55(a) and (b). Additional examples
illustrating specific aspects of the exceptions in Sec. 1026.55(b) are
provided in the commentary to those exceptions.
i. Account-opening disclosure of non-variable rate for six months,
then variable rate. Assume that, at account opening on January 1 of
year one, a card issuer discloses that the annual percentage rate for
purchases is a non-variable rate of 15% and will apply for six months.
The card issuer also discloses that, after six months, the annual
percentage rate for purchases will be a variable rate that is currently
18% and will be adjusted quarterly by adding a margin of 8 percentage
points to a publicly-available index not under the card issuer's
control. Furthermore, the card issuer discloses that the annual
percentage rate for cash advances is the same variable rate that will
apply to purchases after six months. Finally, the card issuer discloses
that, to the extent consistent with Sec. 1026.55 and other applicable
law, a non-variable penalty rate of 30% may apply if the consumer makes
a late payment. The payment due date for the account is the twenty-
fifth day of the month and the required minimum periodic payments are
applied to accrued interest and fees but do not reduce the purchase and
cash advance balances.
A. Change-in-terms rate increase for new transactions after first
year. On January 15 of year one, the consumer uses the account to make
a $2,000 purchase and a $500 cash advance. No other transactions are
made on the account. At the start of each quarter, the card issuer may
adjust the variable rate that applies to the $500 cash advance
consistent with changes in the index (pursuant to Sec. 1026.55(b)(2)).
All required minimum periodic payments are received on or before the
payment due date until May of year one, when the payment due on May 25
is received by the creditor on May 28. At this time, the card issuer is
prohibited by Sec. 1026.55 from increasing the rates that apply to the
$2,000 purchase, the $500 cash advance, or future purchases and cash
advances. Six months after account opening (July 1), the card issuer
may begin to accrue interest on the $2,000 purchase at the previously-
disclosed variable rate determined using an 8-point margin (pursuant to
Sec. 1026.55(b)(1)). Because no other increases in rate were disclosed
at account opening, the card issuer may not subsequently increase the
variable rate that applies to the $2,000 purchase and the $500 cash
advance (except due to increases in the index pursuant to Sec.
1026.55(b)(2)). On November 16, the card issuer provides a notice
pursuant to Sec. 1026.9(c) informing the consumer of a new variable
rate that will apply on January 1 of year two (calculated using the
same index and an increased margin of 12 percentage points). On
December 15, the consumer makes a $100 purchase. On January 1 of year
two, the card issuer may increase the margin used to determine the
variable rate that applies to new purchases to 12 percentage points
(pursuant to Sec. 1026.55(b)(3)). However, Sec. 1026.55(b)(3)(ii)
does not permit the card issuer to apply the variable rate determined
using the 12-point margin to the $2,000 purchase balance. Furthermore,
although the $100 purchase occurred more than 14 days after provision
of the Sec. 1026.9(c) notice, Sec. 1026.55(b)(3)(iii) does not permit
the card issuer to apply the variable rate determined using the 12-
point margin to that purchase because it occurred during the first year
after account opening. On January 15 of year two, the consumer makes a
$300 purchase. The card issuer may apply the variable rate determined
using the 12-point margin to the $300 purchase.
B. Account becomes more than 60 days delinquent during first year.
Same facts as above except that the required minimum periodic payment
due on May 25 of year one is not received by the card issuer until July
30 of year one. Because the card issuer received the required minimum
periodic payment more than 60 days after the payment due date, Sec.
1026.55(b)(4) permits the card issuer to increase the annual percentage
rate applicable to the $2,000 purchase, the $500 cash advance, and
future purchases and cash advances. However, Sec. 1026.55(b)(4)(i)
requires the card issuer to first comply with the notice requirements
in Sec. 1026.9(g). Thus, if the card issuer provided a Sec. 1026.9(g)
notice on July 25 stating that all rates on the account would be
increased to the 30% penalty rate, the card issuer could apply that
rate beginning on September 8 to all balances and to future
transactions.
ii. Account-opening disclosure of non-variable rate for six months,
then increased non-variable rate for six months, then variable rate;
change-in-terms rate increase for new transactions after first year.
Assume that, at account opening on January 1 of year one, a card issuer
discloses that the annual percentage rate for purchases will increase
as follows: A non-variable rate of 5% for six months; a non-variable
rate of 10% for an additional six months; and thereafter a variable
rate that is currently 15% and will be adjusted monthly by adding a
margin of 5 percentage points to a publicly-available index not under
the card issuer's control. The payment due date for the account is the
fifteenth day of the month and the required minimum periodic payments
are applied to
[[Page 13907]]
accrued interest and fees but do not reduce the purchase balance. On
January 15 of year one, the consumer uses the account to make a $1,500
purchase. Six months after account opening (July 1), the card issuer
may begin to accrue interest on the $1,500 purchase at the previously-
disclosed 10% non-variable rate (pursuant to Sec. 1026.55(b)(1)). On
September 15, the consumer uses the account for a $700 purchase. On
November 16, the card issuer provides a notice pursuant to Sec.
1026.9(c) informing the consumer of a new variable rate that will apply
on January 1 of year two (calculated using the same index and an
increased margin of 8 percentage points). One year after account
opening (January 1 of year two), the card issuer may begin accruing
interest on the $2,200 purchase balance at the previously-disclosed
variable rate determined using a 5-point margin (pursuant to Sec.
1026.55(b)(1)). Section 1026.55 does not permit the card issuer to
apply the variable rate determined using the 8-point margin to the
$2,200 purchase balance. Furthermore, Sec. 1026.55 does not permit the
card issuer to subsequently increase the variable rate determined using
the 5-point margin that applies to the $2,200 purchase balance (except
due to increases in the index pursuant to Sec. 1026.55(b)(2)). The
card issuer may, however, apply the variable rate determined using the
8-point margin to purchases made on or after January 1 of year two
(pursuant to Sec. 1026.55(b)(3)).
iii. Change-in-terms rate increase for new transactions after first
year; penalty rate increase after first year. Assume that, at account
opening on January 1 of year one, a card issuer discloses that the
annual percentage rate for purchases is a variable rate determined by
adding a margin of 6 percentage points to a publicly-available index
outside of the card issuer's control. The card issuer also discloses
that, to the extent consistent with Sec. 1026.55 and other applicable
law, a non-variable penalty rate of 28% may apply if the consumer makes
a late payment. The due date for the account is the fifteenth of the
month. On May 30 of year two, the account has a purchase balance of
$1,000. On May 31, the card issuer provides a notice pursuant to Sec.
1026.9(c) informing the consumer of a new variable rate that will apply
on July 16 for all purchases made on or after June 15 (calculated by
using the same index and an increased margin of 8 percentage points).
On June 14, the consumer makes a $500 purchase. On June 15, the
consumer makes a $200 purchase. On July 1, the card issuer has not
received the payment due on June 15 and provides the consumer with a
notice pursuant to Sec. 1026.9(g) stating that the 28% penalty rate
will apply as of August 15 to all transactions made on or after July 16
and that, if the consumer becomes more than 60 days late, the penalty
rate will apply to all balances on the account. On July 17, the
consumer makes a $300 purchase.
A. Account does not become more than 60 days delinquent. The
payment due on June 15 of year two is received on July 2. On July 16,
Sec. 1026.55(b)(3)(ii) permits the card issuer to apply the variable
rate determined using the 8-point margin disclosed in the Sec.
1026.9(c) notice to the $200 purchase made on June 15 but does not
permit the card issuer to apply this rate to the $1,500 purchase
balance. On August 15, Sec. 1026.55(b)(3)(ii) permits the card issuer
to apply the 28% penalty rate disclosed at account opening and in the
Sec. 1026.9(g) notice to the $300 purchase made on July 17 but does
not permit the card issuer to apply this rate to the $1,500 purchase
balance (which remains at the variable rate determined using the 6-
point margin) or the $200 purchase (which remains at the variable rate
determined using the 8-point margin).
B. Account becomes more than 60 days delinquent after provision of
Sec. 1026.9(g) notice. Same facts as above except the payment due on
June 15 of year two has not been received by August 15. Section
1026.55(b)(4) permits the card issuer to apply the 28% penalty rate to
the $1,500 purchase balance and the $200 purchase because it has not
received the June 15 payment within 60 days after the due date.
However, in order to do so, Sec. 1026.55(b)(4)(i) requires the card
issuer to first provide an additional notice pursuant to Sec.
1026.9(g). This notice must be sent no earlier than August 15, which is
the first day the account became more than 60 days' delinquent. If the
notice is sent on August 15, the card issuer may begin accruing
interest on the $1,500 purchase balance and the $200 purchase at the
28% penalty rate beginning on September 29.
2. Relationship to grace period. Nothing in Sec. 1026.55 prohibits
a card issuer from assessing interest due to the loss of a grace period
to the extent consistent with Sec. 1026.5(b)(2)(ii)(B) and Sec.
1026.54. In addition, a card issuer has not reduced an annual
percentage rate on a credit card account for purposes of Sec. 1026.55
if the card issuer does not charge interest on a balance or a portion
thereof based on a payment received prior to the expiration of a grace
period. For example, if the annual percentage rate for purchases on an
account is 15% but the card issuer does not charge any interest on a
$500 purchase balance because that balance was paid in full prior to
the expiration of the grace period, the card issuer has not reduced the
15% purchase rate to 0% for purposes of Sec. 1026.55.
3. Fees in connection with covered separate credit features
accessible by hybrid prepaid-credit cards. With regard to a covered
separate credit feature and an asset feature on a prepaid account that
are both accessible by a hybrid prepaid-credit card as defined in Sec.
1026.61 where the credit feature is a credit card account under an
open-end (not home-secured) consumer credit plan, Sec. 1026.55(a)
prohibits card issuers from increasing an annual percentage rate or any
fee or charge required to be disclosed under Sec. 1026.6(b)(2)(ii),
(iii), or (xii) on a credit card account unless specifically permitted
by one of the exceptions in Sec. 1026.55(b). This is true regardless
of whether these fees or annual percentage rates are imposed on the
asset feature of the prepaid account or on the credit feature.
4. Fees imposed on the asset feature of a prepaid account that are
not charges imposed as part of the plan. Section 1026.55(a) does not
apply to any fee or charge imposed on the asset feature of the prepaid
account that is not a charge imposed as part of the plan under Sec.
1026.6(b)(3). See Sec. 1026.6(b)(3)(iii)(D) and (E) and related
commentary regarding fees imposed on the asset feature of the prepaid
account that are not charges imposed as part of the plan under Sec.
1026.6(b)(3) with respect to covered separate credit features
accessible by hybrid prepaid-credit cards and non-covered separate
credit features as those terms are defined in Sec. 1026.61.
5. Fees in connection with covered overdraft credit. With regard to
covered overdraft credit accessible by a hybrid debit-credit card,
Sec. 1026.55(a) prohibits card issuers from increasing an annual
percentage rate or any fee or charge required to be disclosed under
Sec. 1026.6(b)(2)(ii), (iii), or (xii) on a credit card account unless
specifically permitted by one of the exceptions in Sec. 1026.55(b).
This is true regardless of whether these fees or annual percentage
rates are imposed on the covered asset account associated with the
covered overdraft credit or on the covered overdraft credit account.
* * * * *
[[Page 13908]]
Section 1026.57--Reporting and Marketing Rules for College Student
Open-End Credit
57(a) Definitions
57(a)(1) College Student Credit Card
1. Definition. The definition of college student credit card
excludes home-equity lines of credit accessed by credit cards and
covered overdraft credit accounts as defined in 1026.62 offered by a
creditor other than a very large financial institution as defined in
1026.62 that is accessed by a debit card or account number. A college
student credit card includes a college affinity card within the meaning
of TILA section 127(r)(1)(A). In addition, a card may fall within the
scope of the definition regardless of the fact that it is not
intentionally targeted at or marketed to college students. For example,
an agreement between a college and a card issuer may provide for
marketing of credit cards to alumni, faculty, staff, and other non-
student consumers who have a relationship with the college, but also
contain provisions that contemplate the issuance of cards to students.
A credit card issued to a student at the college in connection with
such an agreement qualifies as a college student credit card. The
definition of college student credit card includes a hybrid prepaid-
credit card as defined by Sec. 1026.61 that is issued to any college
student where the card can access a covered separate credit feature
that is a credit card account under an open-end (not home-secured)
consumer credit plan. The definition of college student credit card
also includes a prepaid account as defined in Sec. 1026.61 that is
issued to any college student where a covered separate credit feature
that is a credit card account under an open-end (not home-secured)
consumer credit plan accessible by a hybrid prepaid-credit card as
defined by Sec. 1026.61 may be added in the future to the prepaid
account.
* * * * *
Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2024-01095 Filed 2-22-24; 8:45 am]
BILLING CODE 4810-AM-P