Consumer Financial Protection Circular 2022-06: Unanticipated Overdraft Fee Assessment Practices, 66935-66940 [2022-23982]

Agencies

• BUREAU OF CONSUMER FINANCIAL PROTECTION

[Federal Register Volume 87, Number 214 (Monday, November 7, 2022)]
[Rules and Regulations]
[Pages 66935-66940]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-23982]


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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Chapter X


Consumer Financial Protection Circular 2022-06: Unanticipated 
Overdraft Fee Assessment Practices

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Consumer financial protection circular.

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SUMMARY: The Consumer Financial Protection Bureau (Bureau or CFPB) has 
issued Consumer Financial Protection Circular 2022-06, titled, 
``Unanticipated Overdraft Fee Assessment Practices.'' In this Circular, 
the Bureau responds to the question, ``Can the assessment of overdraft 
fees constitute an unfair act or practice under the Consumer Financial 
Protection Act (CFPA), even if the entity complies with the Truth in 
Lending Act (TILA) and Regulation Z, and the Electronic Fund Transfer 
Act (EFTA) and Regulation E?''

DATES: The Bureau released this Circular on its website on October 26, 
2022.

ADDRESSES: Enforcers, and the broader public, can provide feedback and 
comments to [email protected].

FOR FURTHER INFORMATION CONTACT: Sonya Pass, Senior Legal Counsel, 
Legal Division, at 202-435-7700. If you require this document in an 
alternative electronic format, please contact 
[email protected].

SUPPLEMENTARY INFORMATION:

Question Presented

    Can the assessment of overdraft fees constitute an unfair act or 
practice under the Consumer Financial Protection Act (CFPA), even if 
the entity complies with the Truth in Lending Act (TILA) and Regulation 
Z, and the Electronic Fund Transfer Act (EFTA) and Regulation E?

Response

    Yes. Overdraft fee practices must comply with TILA, EFTA, 
Regulation Z, Regulation E, and the prohibition against unfair, 
deceptive, and abusive acts or practices in section 1036 of the 
CFPA.\1\ In particular, overdraft fees assessed by financial 
institutions on transactions that a consumer would not reasonably 
anticipate are likely unfair. These unanticipated overdraft fees are 
likely to impose substantial injury on consumers that they cannot 
reasonably avoid and that is not outweighed by countervailing benefits 
to consumers or competition.
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    \1\ CFPA section 1036, 12 U.S.C. 5536.
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    As detailed in this Circular, unanticipated overdraft fees may 
arise in a variety of circumstances. For example, financial 
institutions risk charging overdraft fees that consumers would not 
reasonably anticipate when the transaction incurs a fee even though the 
account had a sufficient available balance at the time the financial 
institution authorized the payment (sometimes referred to as 
``authorize positive, settle negative (APSN)'').

Background

    An overdraft occurs when consumers have insufficient funds in their 
account to cover a transaction, but the financial institution 
nevertheless pays it. Unlike non-sufficient funds penalties, where a 
financial institution incurs no credit risk when it returns a 
transaction unpaid for insufficient funds, clearing an overdraft 
transaction is extending a loan that can create credit risk for the 
financial institution. Most financial institutions today charge a flat 
per-transaction fee, which can be as high as $36, for overdraft 
transactions, regardless of the amount of credit risk, if any, that 
they take.
    Overdraft programs started as courtesy programs under which 
financial institutions would decide on a manual, ad hoc basis to pay 
particular check transactions for which consumers lacked funds in their 
deposit accounts rather than to return the transactions unpaid, which 
may have other negative consequences for consumers. Although Congress 
did not exempt overdraft programs offered in connection with deposit 
accounts when it enacted TILA,\2\ the Federal Reserve Board (Board) in 
issuing Regulation Z in 1969 created a limited exemption from the new 
regulation for financial institutions' overdraft programs at that time 
(also then commonly known as ``bounce protection programs'').\3\
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    \2\ Public Law 90-321, 82 Stat. 146 (May 29, 1968), codified as 
amended at 15 U.S.C. 1601 et seq.
    \3\ 34 FR 2002 (Feb. 11, 1969). See also, e.g., 12 CFR 
1026.4(c)(3) (excluding 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); 12 
CFR 1026.4(b)(2) (providing that any charge imposed on a checking or 
other transaction account is an example of a finance charge only to 
the extent that the charge exceeds the charge for a similar account 
without a credit feature).
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    Overdraft programs in the 1990s began to evolve away from this 
historical model in a number of ways. One major industry change was a 
shift away from manual ad hoc decision-making by financial institution 
employees to a system involving heavy reliance on automated programs to 
process transactions and to make overdraft decisions. A second was to 
impose higher overdraft fees. In addition, broader changes in payment 
transaction types increased the impacts of these other changes on 
overdraft programs. In particular, debit card use expanded 
dramatically, and financial institutions began charging overdraft

[[Page 66936]]

fees on debit card transactions, which, unlike checks, are authorized 
by financial institutions at the time consumers initiate the 
transactions. And unlike checks, there are no similar potential 
negative consequences to consumers from a financial institution's 
decision to decline to authorize a debit card transaction.
    As a result of these operational changes, overdraft programs became 
a significant source of revenue for banks and credit unions as the 
volume of transactions involving checking accounts increased due 
primarily to the growth of debit cards.\4\ Before debit card use grew, 
overdraft fees on check transactions formed a greater portion of 
deposit account overdrafts. Debit card transactions presented consumers 
with markedly more chances to incur an overdraft fee when making a 
purchase because of increased acceptance and use of debit cards for 
relatively small transactions (e.g., fast food and grocery stores).\5\ 
Over time, revenue from overdraft increased and began to influence 
significantly the overall pricing structure for many deposit accounts, 
as providers began relying heavily on back-end pricing while 
eliminating or reducing front-end pricing (i.e., ``free'' checking 
accounts with no monthly fees).\6\
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    \4\ CFPB, Study of Overdraft Programs: A White Paper of Initial 
Data Findings, at 16 (June 2013), available at https://files.consumerfinance.gov/f/201306_cfpb_whitepaper_overdraft-practices.pdf.
    \5\ Id. at 11-12.
    \6\ Id. at 16-17.
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    As a result of the rapid growth in overdraft programs, Federal 
banking regulators expressed increasing concern about consumer 
protection issues and began a series of issuances and rulemakings. In 
the late 2000s as the risk of significant harm regarding overdraft 
programs continued to mount despite the increase in regulatory 
activity, Federal agencies began exploring various additional measures 
with regard to overdraft, including whether to require that consumers 
affirmatively opt in before being charged for overdraft programs. In 
February 2005, the Board, the Federal Deposit Insurance Corporation 
(FDIC), the National Credit Union Administration (NCUA), and the Office 
of the Comptroller of the Currency (OCC) issued Joint Guidance on 
Overdraft Protection Programs.\7\ In May 2005, the Board amended its 
Regulation DD (which implements the Truth in Savings Act) to expand 
disclosure requirements and revise periodic statement requirements for 
institutions that advertise their overdraft programs to provide 
aggregate totals for overdraft fees and for returned item fees for the 
periodic statement period and the year to date.\8\ In May 2008, the 
Board along with the NCUA and the now-defunct Office of Thrift 
Supervision proposed to exercise their authority to prohibit unfair or 
deceptive acts or practices under section 5 of the Federal Trade 
Commission Act (FTC Act) \9\ to prohibit institutions from assessing 
any fees on a consumer's account in connection with an overdraft 
program, unless the consumer was given notice and the right to opt out 
of the service, and the consumer did not opt out.\10\ In January 2009, 
the Board finalized a Regulation DD rule that, among other things, 
expanded the previously mentioned disclosure and periodic statement 
requirements for overdraft programs to all depository institutions (not 
just those that advertise the programs).\11\ In addition, although the 
three agencies did not finalize their FTC Act proposal, the Board 
ultimately adopted an opt-in requirement for overdraft fees assessed on 
ATM and one-time debit card transactions under Regulation E (which 
implements EFTA) \12\ in late 2009.\13\
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    \7\ 70 FR 9127 (Feb. 24, 2005).
    \8\ 70 FR 29582 (May 24, 2005).
    \9\ 15 U.S.C. 45.
    \10\ 73 FR 28904 (May 19, 2008).
    \11\ 74 FR 5584 (Jan. 29, 2009). The rule also addressed balance 
disclosures that institutions provide to consumers through automated 
systems.
    \12\ Public Law 90-321, 92 Stat. 3728 (Nov. 10, 1978), codified 
as amended at 15 U.S.C. 1693 et seq.
    \13\ 74 FR 59033 (Nov. 17, 2009).
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    More recently, Federal financial regulators, such as the CFPB, the 
Board, and the FDIC, issued guidance around practices that lead to the 
assessment of overdraft fees. In 2010, the FDIC issued Final Overdraft 
Payment Supervisory Guidance on automated overdraft payment programs 
and warned about product over-use that may harm consumers.\14\ In 2015, 
the CFPB issued public guidance explaining that one or more 
institutions had acted unfairly and deceptively when they charged 
certain overdraft fees.\15\ Beginning in 2016, the Board publicly 
discussed issues with unfair fees related to transactions that 
authorize positive and settle negative.\16\ In July 2018, the Board 
issued a Consumer Compliance Supervision Bulletin finding certain 
overdraft fees assessed based on the account's available balance to be 
an unfair practice in violation of section 5 of the FTC Act.\17\ In 
June 2019, the FDIC issued its Consumer Compliance Supervisory 
Highlights and raised risks regarding certain use of the available 
balance method.\18\ In September 2022, the CFPB found that a financial 
institution had engaged in unfair and abusive conduct when it charged 
APSN fees.
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    \14\ FDIC, Final Overdraft Payment Supervisory Guidance, FIL-81-
2010 (Nov. 24, 2010), available at https://www.fdic.gov/news/financial-institution-letters/2010/fil10081.pdf.
    \15\ CFPB Supervisory Highlights, Winter 2015, at 8-9, available 
at https://files.consumerfinance.gov/f/201503_cfpb_supervisory-highlights-winter-2015.pdf.
    \16\ Interagency Overdraft Services Consumer Compliance 
Discussion (Nov. 9, 2016), available at https://www.consumercomplianceoutlook.org/outlook-live/2016/interagency-overdraft-services-consumer-compliance-discussion/ (follow 
``Presentation Slides'' hyperlink), at slides 20-21.
    \17\ See Federal Reserve Board, Consumer Compliance Supervision 
Bulletin 12 (July 2018), available at https://www.federalreserve.gov/publications/files/201807-consumer-compliance-supervision-bulletin.pdf (stating that it had identified 
``a UDAP violation . . . when a bank imposed overdraft fees on 
[point-of-sale] transactions based on insufficient funds in the 
account's available balance at the time of posting, even though the 
bank had previously authorized the transaction based on sufficient 
funds in the account's available balance when the consumer entered 
into the transaction'').
    \18\ FDIC, Consumer Compliance Supervisory Highlights 2-3 (June 
2019), available at https://www.fdic.gov/regulations/examinations/consumercomplsupervisoryhighlights.pdf?source=govdelivery&utm_medium=email&utm_source=govdelivery. The agency referred to the available 
balance method as assessing overdraft fees based on the consumer's 
``available balance'' rather than the consumer's ``ledger balance.'' 
The agency stated that use of the available balance method ``creates 
the possibility of an institution assessing overdraft fees in 
connection with transactions that did not overdraw the consumer's 
account,'' and that entities could mitigate risk ``[w]hen using an 
available balance method, [by] ensuring that any transaction 
authorized against a positive available balance does not incur an 
overdraft fee, even if the transaction later settles against a 
negative available balance.''
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Analysis

Violations of the Consumer Financial Protection Act

    The CFPA prohibits conduct that constitutes an unfair act or 
practice. An act or practice is unfair when: (1) It causes or is likely 
to cause substantial injury to consumers that is not reasonably 
avoidable by consumers; and (2) The injury is not outweighed by 
countervailing benefits to consumers or to competition.\19\
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    \19\ CFPA sections 1031, 1036, 12 U.S.C. 5531, 5536.
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    An unanticipated overdraft fee occurs when financial institutions 
assess overdraft fees on transactions that a consumer would not 
reasonably expect would give rise to such fees. The CFPB has observed 
that in many circumstances, financial institutions have created serious 
obstacles to consumers making informed decisions about their use of 
overdraft services. Overdraft practices are complex--and differ among 
institutions. Even if a consumer closely monitors their

[[Page 66937]]

account balances and carefully calibrates their spending in accordance 
with the balances shown, they can easily incur an overdraft fee they 
could not reasonably anticipate because financial institutions use 
processes that are unintelligible for many consumers and that consumers 
cannot control. Though financial institutions may provide disclosures 
related to their transaction processing and overdraft assessment 
policies, these processes are extraordinarily complex, and evidence 
strongly suggests that, despite such disclosures, consumers face 
significant uncertainty about when transactions will be posted to their 
account and whether or not they will incur overdraft fees.\20\
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    \20\ See, e.g., CFPB, Consumer voices on overdraft programs 
(Nov. 2017), available at https://files.consumerfinance.gov/f/documents/cfpb_consumer-voices-on-overdraft-programs_report_112017.pdf.
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    For example, even when the available balance on a consumer's 
account--that is, the balance that, at the time the consumer initiates 
the transaction, would be displayed as available to the consumer--is 
sufficient to cover a debit card transaction at the time the consumer 
initiates it, the balance on the account may not be sufficient to cover 
it at the time the debit settles. The account balance that is not 
reduced by any holds from pending transactions is often referred to as 
the ledger balance. The available balance is generally the ledger 
balance plus any deposits that have not yet cleared but are made 
available, less any pending (i.e., authorized but not yet settled) 
debits. Since consumers can easily access their available balance via 
mobile application, online, at an ATM, or by phone, they reasonably may 
not expect to incur an overdraft fee on a debit card transaction when 
their balance showed there were sufficient available funds in the 
account to pay the transaction at the time they initiated it. Such 
transactions, which industry commonly calls ``authorize positive, 
settle negative'' or APSN transactions, thus can give rise to 
unanticipated overdraft fees.
    This Circular highlights potentially unlawful patterns of financial 
institution practices regarding unanticipated overdraft fees and 
provides some examples of practices that might trigger liability under 
the CFPA. This list of examples is illustrative and not exhaustive.\21\ 
Enforcers should closely scrutinize whether and when charging overdraft 
fees may contravene Federal consumer financial law. A ``substantial 
injury'' typically takes the form of monetary harm, such as fees or 
costs paid by consumers because of the unfair act or practice. In 
addition, actual injury is not required; a significant risk of concrete 
harm is sufficient.\22\ An injury is not reasonably avoidable by 
consumers when consumers cannot make informed decisions or take action 
to avoid that injury. Injury that occurs without a consumer's knowledge 
or consent, when consumers cannot reasonably anticipate the injury, or 
when there is no way to avoid the injury even if anticipated, is not 
reasonably avoidable. Finally, an act or practice is not unfair if the 
injury it causes or is likely to cause is outweighed by its consumer or 
competitive benefits.
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    \21\ Depending on the circumstances, assessing overdraft fees 
may also implicate deceptive or abusive acts or practices, or other 
unfair acts or practices under CFPA sections 1031, 1036, 12 U.S.C. 
5531, 5536.
    \22\ See F.T.C. v. Wyndham Worldwide Corp., 799 F.3d 236, 246 
(3d Cir. 2015).
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    Charging an unanticipated overdraft fee may generally be an unfair 
act or practice. Overdraft fees inflict a substantial injury on 
consumers. Such fees can be as high as $36; thus consumers suffer a 
clear monetary injury when they are charged an unexpected overdraft 
fee. Depending on the circumstances of the fee, such as when 
intervening transactions settle against the account or how the 
financial institution orders the transactions at the end of the banking 
day, consumers could be assessed more than one such fee, further 
exacerbating the injury. These overdraft fees are particularly harmful 
for consumers, as consumers likely cannot reasonably anticipate them 
and thus plan for them.
    As a general matter, a consumer cannot reasonably avoid 
unanticipated overdraft fees, which by definition are assessed on 
transactions that a consumer would not reasonably anticipate would give 
rise to such fees. There are a variety of reasons consumers might 
believe that a transaction would not incur an overdraft fee, because 
financial institutions use complex policies to assess overdraft fees 
that are likely to be unintelligible to many consumers. These policies 
include matters such as the timing gap between authorization and 
settlement and the significance of that gap, the amount of time a 
credit may take to be posted on an account, the use of one kind of 
balance over another for fee calculation purposes, or the order of 
transaction processing across different types of credit and debits. 
Mobile banking and the widespread use of debit card transactions could 
create a consumer expectation that account balances can be closely 
monitored. Consumers who make use of these tools may reasonably think 
that the balance shown in their mobile banking app, online, by 
telephone, or at an ATM, for example, accurately reflects the balance 
that they have available to conduct a transaction and, therefore, that 
conducting the transaction will not result in being assessed one or 
more overdraft fees. But unanticipated overdraft fees are caused by 
often convoluted settlement processes of financial institutions that 
occur after the consumer enters into the transaction, the intricacies 
of which are explained only in fine print, if at all.
    Consumers are likely to reasonably expect that a transaction that 
is authorized at point of sale with sufficient funds will not later 
incur overdraft fees. Consumers may understand their account balance 
based on keeping track of their expenditures, or increasingly through 
the use of mobile and online banking, where debit card transactions are 
immediately reflected in mobile and online banking balances. Consumers 
may reasonably assume that when they have sufficient available balance 
in their account at the time they entered into the transaction, they 
will not incur overdraft fees for that transaction. But consumers 
generally cannot reasonably be expected to understand and thereby 
conduct their transactions to account for the delay between 
authorization and settlement--a delay that is generally not of the 
consumers' own making but is the product of payment systems. Nor can 
consumers control the methods by which the financial institution will 
settle other transactions--both transactions that precede and that 
follow the current one--in terms of the balance calculation and 
ordering processes that the financial institution uses, or the methods 
by which prior deposits will be taken into account for overdraft fee 
purposes.\23\
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    \23\ While financial institutions must obtain a consumer's 
``opt-in'' before the consumer can be charged overdraft fees on one-
time debit card and ATM transactions, 12 CFR 1005.17(b), this does 
not mean that the consumer intended to make use of those services in 
these transactions where the consumer believed they had sufficient 
funds to pay for the transaction without overdrawing their account.
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    The injury from unanticipated overdraft fees likely is not 
outweighed by countervailing benefits to consumers or competition. 
Where a financial institution has authorized a debit card transaction, 
the institution is obligated to pay the transaction, irrespective of 
whether an overdraft fee is assessed. Access to overdraft programs 
therefore is not a countervailing benefit to the

[[Page 66938]]

assessment of overdraft fees in such unanticipated circumstances.
    Nor does it seem plausible that the ability to generate revenue 
through unanticipated overdraft fees allows for lower front-end account 
or maintenance fees that would outweigh the substantial injury in terms 
of the total costs of the unanticipated overdraft fees charged to 
consumers. Indeed, in recent months, several large banks have announced 
plans to entirely eliminate or significantly reduce overdraft fees.\24\ 
In other consumer finance contexts, research has shown that where back-
end fees decreased, companies did not increase front-end prices in an 
equal amount.\25\ But even a corresponding front-end increase in 
pricing would generally not outweigh the substantial injury from 
unexpected back-end fees.
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    \24\ CFPB, ``Comparing overdraft fees and policies across 
banks'' (Feb. 10, 2022), available at https://www.consumerfinance.gov/about-us/blog/comparing-overdraft-fees-and-policies-across-banks/.
    \25\ Sumit Agarwal, Souphala Chomsisengphet, Neale Mahoney, & 
Johannes Stroebel, Regulating Consumer Financial Products: Evidence 
from Credit Cards, Quarterly Journal of Economics, Vol. 130, Issue 1 
(Feb. 2015), pp. 111-64, at p. 5 & 42-43, available at https://academic.oup.com/qje/article/130/1/111/2338025?login=true.
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    As for benefits to competition, economic research suggests that 
shifting the cost of products from front-end prices to back-end fees 
risks harming competition by making it more difficult to compete on 
transparent front-end fees and reduces the portion of the overall cost 
that is subject to competitive price shopping.\26\ This is especially 
the case, where, as here, the fees likely cannot reasonably be 
anticipated by consumers. Given that back-end fees are likely to be 
harmful to competition, it may be difficult for institutions to 
demonstrate countervailing benefits of this practice. A substantial 
injury that is not reasonably avoidable and that is not outweighed by 
such countervailing benefits would trigger liability under existing 
law.
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    \26\ Xavier Gabaix & David Laibson, Shrouded Attributes, 
Consumer Myopia, and Information Suppression in Competitive Markets, 
Quarterly Journal of Economics, Vol. 121, Issue 2 (May 2006), pp. 
505-40, available at https://pages.stern.nyu.edu/~xgabaix/papers/
shrouded.pdf; see also Steffen Huck & Brian Wallace, The impact of 
price frames on consumer decision making: Experimental evidence 
(2015), available athttps://www.ucl.ac.uk/~uctpbwa/papers/price-
framing.pdf; Agarwal et al., Regulating Consumer Financial Products, 
supra note 25; Sumit Agarwal, Souphala Chomsisengphet, Neale 
Mahoney, & Johannes Stroebel, A Simple Framework for Establishing 
Consumer Benefits from Regulating Hidden Fees, Journal of Legal 
Studies, Vol. 43, Issue S2 (June 2014), pp. S239-52, available at 
https://nmahoney.people.stanford.edu/sites/g/files/sbiybj23976/files/media/file/mahoney_hidden_fees_jls.pdf.
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Examples of Potential Unfair Acts or Practices Involving Overdraft Fees 
That Consumers Would Not Reasonably Anticipate

    In light of the complex systems that financial institutions use for 
overdraft, such as different balance calculations and transaction 
processing orders, enforcers should scrutinize situations likely to 
give rise to unanticipated overdraft fees. The following are non-
exhaustive examples of such practices that may warrant scrutiny.
    Unanticipated overdraft fees can occur on ``authorize positive, 
settle negative'' or APSN transactions, when financial institutions 
assess an overdraft fee for a debit card transaction where the consumer 
had sufficient available balance in their account to cover the 
transaction at the time the consumer initiated the transaction and the 
financial institution authorized it, but due to intervening 
authorizations, settlement of other transactions (including the 
ordering in which transactions are settled), or other complex 
processes, the financial institution determined that the consumer's 
balance was insufficient at the time of settlement.\27\ These 
unanticipated overdraft fees are assessed on consumers who are opted in 
to overdraft coverage for one-time debit card and ATM transactions, but 
they likely did not expect overdraft fees for these transactions.
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    \27\ See, e.g., CFPB Supervisory Highlights, supra note 15; 
Interagency Overdraft Services Consumer Compliance Discussion, supra 
note Error! Bookmark not defined.; Federal Reserve Board, Consumer 
Compliance Supervision Bulletin, supra note Error! Bookmark not 
defined.; FDIC, Consumer Compliance Supervisory Highlights, supra 
note Error! Bookmark not defined.
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    The following table (Table 1) shows an example of unanticipated 
overdraft fees involving a debit card transaction with an intervening 
debit transaction. The consumer is charged an overdraft fee even though 
the consumer's available balance was positive at the time the consumer 
entered into the debit card transaction.

          Table 1--Unanticipated Overdraft Fee Assessed Through APSN With Intervening Debit Transaction
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                                                                                     Available
                           Description                              Transaction       balance     Ledger balance
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Day 1:
    Opening Balance.............................................                            $100            $100
    Debit card transaction--authorized..........................            -$50              50             100
Day 2:
    Preauthorized ACH debit--posted.............................            -120             -70             -20
    Overdraft fee...............................................             -34            -104             -54
Day 3:
    Debit card transaction--posted..............................             -50            -104            -104
    Overdraft fee...............................................             -34            -138            -138
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    For example, as illustrated above in Table 1, on Day 1, a consumer 
has $100 in her account available to spend based on her available 
balance displayed. The consumer enters into a debit card transaction 
that day for $50. On Day 2, a preauthorized ACH debit that the consumer 
had authorized previously for $120 is settled against her account. The 
financial institution charges the consumer an overdraft fee. On Day 3, 
the debit card transaction from Day 1 settles, but by that point the 
consumer's account balance has been reduced by the $120 ACH debit 
settling and the $34 overdraft fee, leaving the balance as negative $54 
using ledger balance, or negative $104 using available balance. When 
the $50 debit card transaction settles against the negative balance, 
the financial institution charges the consumer another overdraft fee. 
Consumers may not reasonably expect to be charged this second overdraft 
fee, based on a debit card transaction that has been authorized with a 
sufficient account balance. The consumer may reasonably expect that if 
their account balance shows sufficient funds for the transaction just 
before entering into the

[[Page 66939]]

transaction, as reflected in their account balance in their mobile 
application, online, at an ATM, or by telephone, then that debit card 
transaction will not incur an overdraft fee. Consumers may not 
reasonably be able to navigate the complexities of the delay between 
authorization and settlement of overlapping transactions that are 
processed on different timelines and impact the balance for each 
transaction. If consumers are presented with a balance that they can 
view in real-time, they are reasonable to believe that they can rely on 
it, rather than have overdraft fees assessed based on the financial 
institution's use of different balances at different times and 
intervening processing complexities for fee-decisioning purposes.
    Certain financial institution practices can exacerbate the injury 
from unanticipated overdraft fees from APSN transactions by assessing 
overdraft fees in excess of the number of transactions for which the 
account lacked sufficient funds. In these APSN situations, financial 
institutions assess overdraft fees at the time of settlement based on 
the consumer's available balance reduced by debit holds, rather than 
the consumer's ledger balance, leading to consumers being assessed 
multiple overdraft fees when they may reasonably have expected only 
one.
    The following table (Table 2) shows an example of how financial 
institutions may process overdraft fees on two transactions. The 
consumer is charged an additional overdraft fee when the financial 
institution assesses fees based on available balance, because the 
financial institution is assessing an overdraft fee on a transaction 
which the institution has already used in making a fee decision on 
another transaction. By contrast, the consumer would not have been 
charged the additional overdraft fee if the financial institution used 
ledger balance.

 Table 2--Unanticipated Overdraft Fee Assessed Through APSN by Financial Institution Using Available Balance for
                                                  Fee Decision
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                                                                                     Available
                           Description                              Transaction       balance     Ledger balance
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Day 1:
    Opening Balance.............................................  ..............            $100            $100
    Debit card transaction--authorized..........................            -$50              50             100
Day 2:
    Preauthorized ACH debit--posted.............................             -60             -10             -40
    Overdraft fee (assessed based on available balance).........             -34             -44             * 6
Day 3:
    Debit card transaction--posted..............................             -50             -44             -44
    Overdraft fee...............................................             -34             -78             -78
----------------------------------------------------------------------------------------------------------------
* (But if the financial institution had used ledger balance for fee assessment, the balance would not have been
  reduced by an overdraft fee.)

    For example, as illustrated above in Table 2, on Day 1, a consumer 
has $100 in her account, which is the amount displayed on her online 
account. The consumer enters into a debit card transaction that day for 
$50. On Day 2, a preauthorized ACH debit that the consumer had 
authorized previously for $60 is settled against her account. Because 
the debit card transaction from Day 1 has not yet settled, the 
consumer's ledger balance, prior to posting of the $60 ACH debit, is 
still $100. But some financial institutions will consider the 
consumer's balance for purposes of an overdraft fee decision as $50, as 
already having been reduced by the not-yet-settled debit card 
transaction from Day 1, and thus the settlement of the $60 ACH debit 
will take the account negative and incur an overdraft fee. On Day 3, 
the debit card transaction from Day 1 settles, but by that point the 
consumer's balance has been reduced by the settlement of the $60 ACH 
debit plus the overdraft fee for that transaction. If the overdraft fee 
is $34, the consumer's account has $6 left in ledger balance. The $50 
debit card transaction then settles, overdrawing the account and the 
financial institution charges the consumer an overdraft fee. The 
consumer would not expect two overdraft fees, since her account balance 
showed sufficient funds at the time she entered into the debit card 
transaction to cover either one of them. But in this example, the 
financial institution charged two overdraft fees, by assessing an 
overdraft fee on a transaction which the institution has already used 
in making a fee decision on another transaction. By contrast, a 
financial institution using ledger balance for the overdraft fee 
decision would have charged only one overdraft fee.

About Consumer Financial Protection Circulars

    Consumer Financial Protection Circulars are issued to all parties 
with authority to enforce Federal consumer financial law. The CFPB is 
the principal Federal regulator responsible for administering Federal 
consumer financial law, see 12 U.S.C. 5511, including the Consumer 
Financial Protection Act's prohibition on unfair, deceptive, and 
abusive acts or practices, 12 U.S.C. 5536(a)(1)(B), and 18 other 
``enumerated consumer laws,'' 12 U.S.C. 5481(12). However, these laws 
are also enforced by State attorneys general and State regulators, 12 
U.S.C. 5552, and prudential regulators including the Federal Deposit 
Insurance Corporation, the Office of the Comptroller of the Currency, 
the Board of Governors of the Federal Reserve System, and the National 
Credit Union Administration. See, e.g., 12 U.S.C. 5516(d), 5581(c)(2) 
(exclusive enforcement authority for banks and credit unions with $10 
billion or less in assets). Some Federal consumer financial laws are 
also enforceable by other Federal agencies, including the Department of 
Justice and the Federal Trade Commission, the Farm Credit 
Administration, the Department of Transportation, and the Department of 
Agriculture. In addition, some of these laws provide for private 
enforcement.
    Consumer Financial Protection Circulars are intended to promote 
consistency in approach across the various enforcement agencies and 
parties, pursuant to the CFPB's statutory objective to ensure Federal 
consumer financial law is enforced consistently. 12 U.S.C. 5511(b)(4).
    Consumer Financial Protection Circulars are also intended to 
provide transparency to partner agencies regarding the CFPB's intended 
approach when cooperating in enforcement actions. See, e.g., 12 U.S.C. 
5552(b) (consultation with CFPB by State attorneys general and 
regulators); 12

[[Page 66940]]

U.S.C. 5562(a) (joint investigatory work between CFPB and other 
agencies).
    Consumer Financial Protection Circulars are general statements of 
policy under the Administrative Procedure Act. 5 U.S.C. 553(b). They 
provide background information about applicable law, articulate 
considerations relevant to the Bureau's exercise of its authorities, 
and, in the interest of maintaining consistency, advise other parties 
with authority to enforce Federal consumer financial law. They do not 
restrict the Bureau's exercise of its authorities, impose any legal 
requirements on external parties, or create or confer any rights on 
external parties that could be enforceable in any administrative or 
civil proceeding. The CFPB Director is instructing CFPB staff as 
described herein, and the CFPB will then make final decisions on 
individual matters based on an assessment of the factual record, 
applicable law, and factors relevant to prosecutorial discretion.

Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2022-23982 Filed 11-4-22; 8:45 am]
BILLING CODE 4810-AM-P