Bank Overdraft Fee Cap Is Latest CFPB Rule Hit With Lawsuit

Bank and credit union lobbying groups are suing the Consumer Financial Protection Bureau to block a newly finalized rule that would cap overdraft fees, in the latest industry challenge to a Biden administration priority.

The suit was filed in the US District Court for the Southern District of Mississippi on Thursday, shortly after the CFPB unveiled the final rule. The court falls under the Fifth Circuit, known as a hot spot for challenging federal regulations.

The complaint alleges the CFPB exceeded its authority, in part by violating a 1968 law requiring lenders to disclose fees associated with credit products, when it adopted the overdraft rule.

Plaintiffs include national trade groups such as the American Bankers Association, Consumer Bankers Association, and America’s Credit Unions, as well as the Mississippi Bankers Association and several local banks.

The banking industry has fiercely opposed the rule—set to cap the overdraft fees large US banks can charge at $5, or an amount that covers their costs and losses—since it was first proposed in January.

The 1968 Truth in Lending Act, which dictates disclosure obligations for credit products, doesn’t support the new rule because overdraft services don’t qualify as “credit” under the law, according to the complaint.

Additionally, the imposition of price caps and restrictions on overdraft services goes beyond the scope of the disclosure-focused statute, the banking groups said.

Overdraft programs aren’t considered credit under the law because customers have no right to overdraw their accounts, and banks have the discretion to pay or decline transactions that would overdraw an account, they added.

Courts and agencies have adopted the reading that TILA doesn’t confer authority to regulate discretionary overdraft services, and that view was reaffirmed by the Federal Reserve Board as recently as 2009, the lawsuit said.

Additionally, the suit alleges the CFPB acted “arbitrarily and capriciously” by failing to sufficiently consider the potential harm to consumers in its cost-benefit analysis, and “and by making the definition of credit hinge on the financial institution’s size and ‘breakeven cost,’ rather than the nature of the charge.”

The rule, set to take effect in October 2025, applies to banks and credit unions with more than $10 billion in assets.

The agency’s “radical redesign” of the regulatory authority afforded to it by TILA is “a textbook example of administrative overreach,” the banking groups said in the complaint.

The CFPB defended its rule in a statement Friday.

“The CFPB has heard from tens of thousands of Americans who are sick and tired of paying billions in junk fees,” CFPB spokesperson Allison Preiss said. “This rule is common sense and long overdue, and it’s unclear why big banks are scared to be transparent with their customers about the interest rate they’re charging on overdraft loans.”

Industry, GOP Attacks

Bank industry groups have had a mixed record so far challenging CFPB actions in court.

One federal judge in Texas halted the agency’s cap on credit card late fees, and said last week a suit challenging that rule was likely to succeed.

A different Texas judge in August upheld the CFPB’s rule requiring lenders to collect demographic data on small-business borrowers; banking groups are asking the Fifth Circuit to overturn that decision.

Industry groups have also filed suits in recent months challenging CFPB rules on banking data and on buy now, pay later products.

The overdraft rule is among those that could also be overturned by the GOP-led Congress next year or rolled back by President-elect Donald Trump’s appointees.

The House Financial Services Committee, in a Thursday post on X, said the overdraft rule “is the latest in a series of last-minute efforts to assert the agency’s influence even as other regulators have vowed to halt rulemakings in anticipation of the coming administration.”

Butler Snow LLP represents the banking groups challenging the overdraft rule.

The case is Miss. Bankers Ass’n v. CFPB, S.D. Miss., No. 3:24-cv-00792, complaint filed 12/12/24.