CFPB Proposes Rule to Close Bank Overdraft Loophole

Regulatory Developments

CFPB Proposes Rule to Close Bank Overdraft Loophole
On January 17, the CFPB issued a notice of proposed rulemaking to limit overdraft fees charged by insured financial institutions with more than $10 billion in assets by closing a loophole that exempted overdraft loans from disclosure provisions of the Truth in Lending Act (TILA) and other consumer protection laws (the Proposed Rule).

The Proposed Rule would, among other changes, amend Regulation Z to treat an institution providing covered overdraft credit as a “creditor,” a checking account agreement offered in connection with covered overdraft credit as an “open-end credit plan,” and a checking account overdraft fee as a “finance charge.” As a result, consumers receiving covered overdraft credit would receive disclosures required under TILA, including account opening disclosures, interest rate and fee disclosures, and periodic statements. A financial institution’s overdraft services would not be treated as credit if the institution were to provide its overdraft service as a courtesy to consumers who overdraw their accounts by setting its fees at or below its breakeven point, as determined by calculating its costs and losses using prescribed standards or relying on a benchmark fee set by the CFPB (currently contemplated at $3, $6, $7, or $14).

The Proposed Rule would also amend Regulation E to require that consumers be offered at least one method of repaying an overdraft credit balance other than automatic repayment by preauthorized EFT and to clarify that covered overdraft credit is not an overdraft service under Regulation E but is instead a line of credit subject to Regulation Z.

Comments to the Proposed Rule must be received by April 1, 2024, with a final rule expected to take effect on October 1, 2025.

“By closing the loophole, we are not shutting banks from profits or consumers from credit. Overdraft loans will simply have to play by the rules.”
‒ Rohit Chopra, Director, CFPB

CFPB Issues Advisory Opinions on Reasonable Procedures and CRA Obligations under the FCRA
On January 11, the CFPB issued an advisory opinion clarifying that the “reasonable procedures” required of CRAs under the FCRA must be designed to prevent reporting information that is duplicative or that has been expunged, sealed, or otherwise legally restricted from public access, such as expunged, sealed, or duplicative records, and to include any existing disposition information about arrests, criminal charges, eviction proceedings, or other court filings, such as if an individual were arrested on charges that were subsequently dropped. The CFPB also clarified that when adverse information is included in consumer reports the reporting period for that adverse information begins on the occurrence of the adverse event, is not restarted or reopened by the occurrence of subsequent events, and a nonconviction disposition of a criminal charge cannot be reported beyond the seven-year period that begins to run at the time of the charge.

Also on January 11, the CFPB issued an advisory opinion clarifying that a consumer does not need to use specific language to trigger a CRA's obligation under the FCRA to disclose to the consumer, upon request, all information in the consumer’s file and both the original and intermediate sources of that information, as applicable. Rather, a consumer need only make the request and provide proper identification. The opinion also clarifies that in responding to a consumer’s request, a CRA must provide to the consumer all information it has collected on that consumer and not merely a summary.

SEC Releases Statement on the Approval of Spot Bitcoin Exchange-Traded Products
On January 10, SEC Chair Gary Gensler released a statement announcing the SEC’s approval of the listing and trading of spot bitcoin exchange-traded products (ETP) shares. The statement noted certain investor protections that the SEC believes will result from the listing of the spot bitcoin ETPs, including that (i) sponsors of the ETPs will be required to provide substantial disclosures about their products in registration statements and periodic reports and (ii) the registered national exchanges where the bitcoin ETPs will be listed have adopted rules aimed at preventing and deterring fraud against investors.  The statement emphasized that the listing approval should not be seen as either an indication of the SEC’s view on crypto assets under federal securities laws or an endorsement of crypto trading platforms or intermediaries.

OCC Issues New Bulletin on Shortened Securities Settlement Cycle
On January 17, the OCC issued Bulletin 2024-3 (Bulletin) reminding banks to be prepared for a change in the standard securities settlement cycle for most U.S. securities transactions, beginning May 28, 2024. The Bulletin replaces and rescinds OCC Bulletin 2017-22, “Securities Operations: Shortening the Settlement Cycle.” The Bulletin also replaces and rescinds OCC Bulletin 2018-15, “T+2 Securities Transaction Settlement Cycle: Final Rule.”

The SEC has adopted final rules that shorten the standard settlement cycle for most broker-dealer transactions from the second business day after the trade date (T+2) to the first business day after the trade date (T+1), beginning May 28. This change in the settlement cycle will affect banks’ securities activities, including activities related to their investment and trading portfolios and securities settlement and servicing provided to banks’ custody and fiduciary accounts. Banks that offer nondeposit investment products through a third-party broker-dealer should assess the broker-dealer’s preparedness for the new settlement time frames. The Bulletin includes detailed guidance on how banks should be preparing for the change.

OCC Releases Notice Adjusting Maximum Civil Money Penalties for 2024
On January 8, the OCC announced the maximum inflation-adjusted civil money penalties for institutions within its jurisdiction. The updated amounts are effective for penalties imposed on or after January 8, 2024, for violations occurring on or after November 2, 2015. Federal agencies are required to annually adjust each civil monetary penalty it administers in accordance with the guidance and inflation adjustment multiplier published by the Office of Management and Budget.

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