Overdraft fee litigation
Mississippi Bankers Association v. CFPB
Date: Dec. 13, 2024
Issue: Whether the Consumer Financial Protection Bureau (CFPB) exceeded its statutory authority and violated the Consumer Financial Protection Act (CFPA), Administrative Procedure Act (APA), and Truth in Lending Act (TILA) by issuing its overdraft final rule.
Case Summary: The American Bankers Association and its co-plaintiffs sued the CFPB in the Southern District of Mississippi, challenging its overdraft final rule while also moving the court for a preliminary injunction to enjoin enforcement of the final rule.
On Dec. 12, 2024, CFPB issued its final rule, set to take effect on Oct. 1, 2025, covering discretionary overdraft services previously not regulated under the TILA and Regulation Z. The final rule applies only to very large financial institutions (VLFIs) possessing total assets of $10 billion or more. According to CFPB, the final rule is intended to “close an outdated overdraft loophole that exempted overdraft loans from lending laws” and end so-called “junk fees.” Under the rule, VLFIs choose from several options when charging overdraft fees: cap their overdraft fee at $5; cap their fee at an amount that covers costs and losses; or disclose the terms of their overdraft loan to comply with the standard requirements governing other loans, like credit cards.
Complaint. In its complaint, ABA made four main arguments. First, ABA argued that CFPB exceeded its authority under TILA by classifying discretionary overdraft services as “credit” and overdraft fees as “finance charges.” TILA defines “credit” as “the right to defer or incur debt and delay repayment.” Financial institutions, however, retain the discretion to deny overdraft charges, so depositors lack a guaranteed right to defer or incur debt. Although CFPB acknowledged that institutions typically recover overdraft balances by applying incoming deposits immediately, CFPB nonetheless claimed these services qualify as “credit” under TILA. ABA also argued that CFPB overstepped by classifying overdraft fees as “finance charges.” TILA defines finance charges 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.” ABA asserted that because discretionary overdraft services are not “credit,” overdraft fees fall outside the statutory definition of “finance charges.”
ABA also emphasized that the final rule contradicts decades of precedent set by the Federal Reserve and the Office of the Comptroller of the Currency (OCC). ABA noted that the Fed has consistently declined to view discretionary overdraft services as extensions of “credit” under TILA. Similarly, the OCC has declared that discretionary overdraft services are not extensions of “credit,” and thus, the fees imposed on those services cannot be considered “interest” for purposes of the usury provision in the National Bank Act. On top of this, ABA emphasized that classifying discretionary overdraft services as “credit” presents a major question. Under the major questions doctrine, courts will presume Congress does not delegate to executive agencies issues of major political or economic significance. ABA explained that the economic and political impact of the final rule is significant as it will likely impact nearly everyone with a deposit account at a VLFI.
Second, ABA argued that CFPB exceeded its statutory authority under TILA by imposing substantive credit restrictions on overdraft products. ABA explained that TILA is a disclosure statute, meaning it authorizes the disclosure of the cost of credit and terms of credit so consumers can make an informed choice between credit products. TILA does not authorize CFPB to dictate substantive restrictions.
Third, ABA argued that CFPB exceeded its authority under the CFPA. ABA reiterated that the final rule imposes a complex, burdensome set of regulatory restrictions on overdraft services priced above $5 or the VLFIs’ truncated “breakeven” cost. Further, the final rule imposes a fee cap on the types of discretionary overdraft services currently offered in the market. However, the CFPA prohibits this price cap. Under the CFPA, CFPB is prohibited from “establishing a usury limit applicable to an extension of credit offered or made by a covered person to a consumer.”
Finally, ABA argued that several aspects of the final rule are arbitrary and capricious, including: CFPB’s inadequate cost-benefit analysis; CFPB’s unexplained change in its interpretation of TILA that discretionary overdraft services should be considered “credit”; CFPB’s $10 billion threshold for which institutions should be considered VLFIs; and the distinction between discretionary overdraft fees priced above and below $5 or “breakeven” cost.
Motion for preliminary injunction. ABA also moved the court for a preliminary injunction to enjoin the final rule and extend the compliance deadline day-for-day with the injunction. In its motion, ABA made three main arguments. First, ABA argued it is likely to succeed on the merits of its lawsuit. ABA claimed that CFPB overstepped its statutory authority by treating discretionary overdraft services as credit and using a disclosure statute to enforce substantive restrictions on those services. ABA also contended that the final rule violates the Major Questions Doctrine. Second, ABA argued its members will face irreparable harm without an injunction. It explained that VLFIs offering overdraft services at or below the rule’s price cap will face significant costs in assessing its impact, likely requiring an overhaul of their account options and business strategies. More specifically, institutions offering overdraft services above their breakeven cost would need to create separate “credit” accounts subject to Regulation Z and comply with its numerous requirements. ABA estimated the implementation costs of the rule’s regulatory regime to be in the millions. Finally, the ABA argued that the balance of harms and public interest supports an injunction. ABA claimed that the public has no interest in maintaining unlawful agency action and noted that delaying the regulation’s effective date would not harm the CFPB.
Bottom Line: CFPB’s response to ABA’s motion for a preliminary injunction is due Jan. 14, 2025.
