On December 12, several banking associations and individual financial institutions filed a complaint in the U.S. District Court of the Southern District of Mississippi against the CFPB, challenging its final rule amending Regulation Z to cover overdraft services not previously regulated under TILA. As previously covered by InfoBytes, the CFPB finalized its rule to restrict the amount that certain financial institutions can charge for overdraft services. Under the new rule, which is planned to go into effect on October 1, 2025, overdraft fees will be considered “finance charges” on “overdraft credit” and subject to Regulation Z disclosure requirements unless a financial institution limits overdraft fees to a specified benchmark fee ($5) or a “breakeven” fee based on its own costs (i.e., without generating any profit).

In their complaint, the banking associations and financial institutions argued these overdraft services do not constitute “credit” as that term is defined in TILA. They rely on TILA’s definition of “credit” as “the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment.” The plaintiffs claimed the discretionary overdraft services covered by the final rule do not meet this definition, because customers have no right to overdraw their accounts or retain the funds covered by financial institutions. Based on their claim that the Bureau’s final rule is inconsistent with TILA’s text, they contended the CFPB’s actions exceed its authority under TILA.

The plaintiffs also claimed the CFPB’s rulemaking is arbitrary and capricious, arguing that the Bureau failed to adequately consider the costs and benefits associated with the rule. The complaint asserted that creating the definition of credit, which hinges on the financial institution’s size and “breakeven cost” rather than the nature of the charge, is arbitrary and capricious because the distinctions lack any adequate basis in law or policy. Additionally, the complaint argued the CFPB acted arbitrarily in ignoring available data regarding whether the rule would result in overdraft users losing access to overdraft services, resulting in a distorted cost-benefit analysis.

The complaint raised four distinct causes of action under the Administrative Procedure Act (APA), TILA and the CFPA. Specifically, the complaint seeks relief based on: (1) the final rule exceeding statutory authority under TILA by unlawfully interpreting “credit” and “finance charge”; (2) the final rule exceeding statutory authority by imposing substantive credit restrictions beyond the scope of TILA; (3) exceeding statutory authority under the CFPA by imposing a fee cap inconsistent with statutory language; and (4) acting arbitrarily and capriciously in promulgating the final rule. The plaintiffs seek a declaration that the final rule violates the APA, TILA and CFPA and an accompanying court order enjoining the final rule, along with any other appropriate relief.

On December 18, the plaintiffs filed a motion for a preliminary injunction, asking the court to stay the effective date of the rule pending resolution of their challenge.