Overdraft fee litigation
Mississippi Bankers Association v. CFPB
Date: Jan. 28, 2025
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 filed a reply brief urging the Southern District of Mississippi to grant its motion for preliminary injunction in its lawsuit challenging CFPB’s overdraft 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 According to CFPB, the final rule is intended to “close an outdated overdraft loophole that exempted overdraft loans from lending laws” and end so-called “junk fees.”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 final 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.
ABA and its co-plaintiffs sued CFPB, arguing that: CFPB exceeded its authority under TILA by classifying discretionary overdraft services as “credit” and overdraft fees as “finance charges”; CFPB exceeded its statutory authority under TILA by imposing substantive credit restrictions on overdraft products; CFPB exceeded its authority under the CFPA; and the final rule is arbitrary and capricious. ABA also moved for a preliminary injunction, arguing that it is likely to succeed on the merits of its lawsuit, would face irreparable harm without an injunction, and that the balance of equities supports issuing an injunction.
Amicus Briefs. Several organizations filed amicus briefs supporting ABA. The Bank Policy Institute and Independent Community Bankers of America filed an amicus brief arguing that the final rule breaks with decades of regulatory practice and interpretation by reclassifying discretionary overdraft protection services as credit; will leave consumers with fewer, more expensive options to purchase necessities; and will limit access of low-income consumers to banking services. The U.S. Chamber of Commerce and Mississippi Economic Council also filed their amicus brief arguing that the final rule adopts an unprecedented and impermissibly broad definition of credit and will harm consumers because financial institutions will reduce or end their overdraft services. In addition, a coalition of state bankers’ associations also filed a brief arguing ABA is likely to succeed on the merits because CFPB exceeded its statutory authority, the final rule conflicts with federal law, and their members would suffer irreparable harm absent an injunction.
CFPB Opposition Brief. On Jan. 14, 2025, CFPB filed its opposition brief to ABA’s motion for a preliminary injunction. CFPB argued that ABA did not demonstrate a likelihood of success on the merits because it acted within its statutory authority under TILA, the final rule is not an improper substantive regulation, and the major questions doctrine does not apply. CFPB also argued that ABA did not establish an imminent likelihood of irreparable injury, and the balance of equities and public interest weighed against preliminary relief.
ABA Reply Brief. In its brief, ABA reiterated that it has a substantial likelihood of success on the merits for four reasons. First, ABA argued consumers cannot overdraw their accounts or defer payment. ABA explained a “right” as something a person is entitled to have, do, or receive under the law. VLFIs that offer discretionary overdraft services do not give consumers the right to incur debt or defer payment under TILA’s definition of “credit.” ABA stressed that standard deposit agreements do not obligate VLFIs to cover overdrafts, so customers cannot claim a guaranteed right to overdraw their accounts. Even when a VLFI covers an overdraft, customers must repay the amount immediately, as the institution can recover the overdraft and fee from any incoming deposit. Because consumers lack the right to overdraw or delay repayment, overdraft services do not meet TILA’s definition of “credit.”
Second, Second, ABA criticized CFPB’s flawed arguments, especially its claim of a “right to incur debt,” which fails to pass muster. CFPB asserts, without evidence, that discretionary overdraft services function like a credit card. However, this claim is incorrect. One bank’s declaration confirms that its account agreement explicitly states customers have no right to overdraw their accounts or defer payment. In contrast, another bank’s agreement expressly allows customers to incur debt and defer payment. Without a legally enforceable obligation for the CLFI to cover the overdraft, consumers have no corresponding “right” to incur debt, regardless of how often an institution chooses to pay overdrafts. ABA also criticized CFPB’s selective use of regulatory history, arguing that its evidence is cherry-picked and unpersuasive.
Third, ABA argued that CFPB lacks the authority to substantively regulate credit under TILA. TILA’s purpose is to “assure a meaningful disclosure of credit terms,” and CFPB’s authority under TILA is limited to this objective. As a result, ABA underscored that the Bureau cannot use TILA to impose substantive credit regulations. Even if discretionary overdraft services qualify as credit, the final rule’s substantive restrictions go beyond CFPB’s legal authority.
Fourth, ABA argued that the major questions doctrine bars the final rule. This doctrine requires clear congressional authorization for agency rules that address politically or economically significant issues. ABA asserted that the final rule unquestionably falls within this standard. Executive branch statements contradict CFPB’s claim that the final rule lacks political significance, as officials have labeled overdraft fees “junk fees” and included them in the administration’s “junk fee initiative.” CFPB also claimed that the final rule has no economic significance, but this argument does not hold. The Bureau acknowledged that the final rule affects at least $6 billion in annual fees and billions of overdraft transactions.
Additionally, ABA argued that the final rule poses a substantial threat of irreparable injury. ABA submitted detailed declarations from associations and their members, showing that VLFIs must immediately incur significant costs to meet the October 2025 compliance deadline. These costs include major changes to IT systems, operating procedures, staffing, training, and business operations. The Fifth Circuit has ruled that such costs are enough to establish irreparable harm.
Bottom Line: CFPB’s answer to ABA’s complaint is due March 10, 2025.
Documents: Brief
