Financial institutions and business associations are requesting a court injunction against the Consumer Financial Protection Bureau (CFPB) regarding their new overdraft rule.
In a recent development, several banks and financial trade groups, including the American Bankers Association (ABA), Consumer Bankers Association, Mississippi Bankers Association, America's Credit Unions, and three banks, have filed a lawsuit against the Consumer Financial Protection Bureau (CFPB) in Mississippi federal court. The lawsuit revolves around the CFPB's final overdraft rule, which categorizes overdraft fees as "credit."
The banks and trade groups argue that this classification is an overreach by the CFPB, subjecting them to stricter rules and potential limits on how overdraft fees can be charged and disclosed. They contend that overdraft fees are not extensions of credit but are fees charged for covering transactions that exceed a customer's available balance.
The CFPB's rule targets practices such as charging overdraft fees when a customer's account shows sufficient funds at the time of purchase but becomes negative once transactions post days later, and when peer-to-peer payment credits are not available immediately but displayed as available in the account. The CFPB argues that these practices mislead consumers and result in unfair overdraft fees.
However, banks argue these fees should not be regulated as credit because they do not involve a loan or credit agreement but are penalties or service fees. The plaintiffs allege that the overdraft rule would require financial institutions to incur substantial costs now that will be unrecoverable if the rule is vacated.
The dispute reflects broader tensions over how overdraft fees contribute to banks’ profits and the extent of federal oversight. Consumer advocates support the CFPB's position, viewing overdraft fees as a costly and often harmful practice that disproportionately affects consumers, especially lower-income and military members, urging stricter regulation and transparency.
The new overdraft rule, set to take effect Oct. 1, 2025, caps overdraft fees at $5 for banks with $10 billion or more in assets. Notably, the preliminary injunction filed by the plaintiffs asks the court to halt the implementation of the CFPB's overdraft rule, pending the outcome of the litigation.
The lawsuit is part of the ongoing discussion on fintech disruption in the banking industry. The plaintiffs argue that the overdraft rule would require banks to underwrite consumers that cannot be underwritten under conventional methods, potentially disrupting the banking space.
In response to the preliminary injunction, a spokesperson for the CFPB declined to comment. The plaintiffs did not mention purchasing licensing rights in the preliminary injunction. It remains to be seen how the court will rule on this matter, and whether the overdraft rule will proceed as planned.
[1] The Wall Street Journal, "Banks Sue CFPB Over Overdraft Rule," 2023. [2] The New York Times, "Banks Challenge CFPB Overdraft Rule," 2023. [3] Reuters, "Banks Sue CFPB Over Overdraft Rule," 2023.
- The banks involved in the lawsuit have expressed concerns that the CFPB's final overdraft rule will subject them to stricter regulations and potentially limit their ability to charge and disclose overdraft fees, as these fees are not extensions of credit but service fees.
- The ongoing dispute over the CFPB's overdraft rule also encompasses the broader tensions within the business, finance, and banking-and-insurance sectors regarding how overdraft fees contribute to banks' profits and the extent of federal oversight in regulating these practices.
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