Judge allows consumer groups to defend CFPB overdraft rule

Two public interest advocacy groups are countering a bank industry lawsuit — brought by financial industry trade groups — against a final Consumer Financial Protection Bureau rule capping overdraft fees at $5 for the largest banks in most cases.

The move comes after U.S. District Judge Carlton W. Reeves issued an opinion granting the groups — MyPath and the Mississippi Center for Justice — the motion to proceed as intervenor-defendants in support of the rule. The Judge cited the recent change in presidential administration as part of his rationale. 

“Had the administration and leadership of the CFPB not changed in January, the CFPB would have mounted a vigorous defense of the Overdraft Rule in this Litigation,” wrote U.S. District Judge Carlton W. Reeves in his opinion. “It seems undeniable that consumer groups such as the movants bring a perspective to the litigation that a large federal agency and America’s banking sector either institutionally cannot or in their discretion will not … the voice of ordinary people.”

The CFPB’s overdraft’ rule aims to curb excessive overdraft fees charged by banks as part of the Biden Administration’s broader campaign against so-called “junk fees.” The rule would apply exclusively to the largest banks and credit unions, defined as those with more than $10 billion in assets. The rule would cap overdraft fees at $5, or alternatively allow banks to charge a higher rate commensurate with the cost of providing overdraft services or disclose the overdraft fee’s annual percentage rate as required by the Truth in Lending Act. The CFPB under former Director Rohit Chopra estimated the measure would save households hundreds of dollars each year. 

In response, financial institutions and their lobbying groups — including the Consumer Bankers Association, the American Bankers Association, America’s Credit Unions, Mississippi Bankers Association and three banks directly affected by the rule — quickly filed a legal challenge, Mississippi Bankers Association et al v. Consumer Financial Protection Bureau et al. 

Shortly after the initial suit, the trade groups requested a preliminary injunction, arguing that the CFPB exceeded its authority by classifying overdraft fees as credit under the Truth in Lending Act and citing nonrecoverable compliance costs the rule would cause. The request is still pending before the court.

Congressional Republicans have also expressed disapproval with the rule. House Financial Services Committee Chair French Hill R-Ark. introduced a joint resolution in February to nullify the rule using the Congressional Review Act — a law which allows Congress to overturn agency rulemakings. Under the CRA, a resolution’s passage — which, unlike most laws, requires only a simple majority — would prevent agencies from issuing a similar rule in the future.

Consumer groups largely applauded the Judge’s Wednesday decision, touting the potential savings for consumers

“The CFPB’s overdraft fee rule returns $5 billion to consumer pocketbooks, saving households $225 a year or more, and it is critical that the rule be vigorously defended against challenges by banks trying to save their junk fees,” said Carla Sanchez-Adams, senior attorney at the National Consumer Law Center. “The overdraft fee rule protects families who live paycheck to paycheck and need every dollar to meet their basic needs.”

One of the groups intervening — MyPath, a nonprofit organization that empowers under-resourced communities with financial tools to build wealth — said the motion will allow the rule to get a “fair shot” in court. 

“Our youth participants, young adults pursuing their education, employment and entrepreneurship dreams in the face of economic barriers, will benefit from the reduction in overdraft fees and the much-needed transparency around overdraft itself set forth in the rule,” said Margaret Libby, the group’s Founder & CEO. “And it can help build trust between banks and their customers, which is what young people– and all Americans– want in their banking relationships.”