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The Consumer Financial Protection Bureau’s (CFPB) changes to the regulations governing bank account overdrafts for large financial institutions in the US are under attack from multiple directions.
The final rule, which essentially compared overdrafts to credit, capped the fees that banks can charge customers at $5 — enough to recover losses, while providing consumers with “substantive protections”.
The changes to Regulations E and Z, key US consumer protection laws, closed a loophole that exempted overdraft lending from existing lending laws, in a move the bureau expected would save the US household an average of $225 annually.
Set to take effect on October 1 of this year, the rule faced an immediate backlash from the US banking industry, which had led an immediate charge to see it rolled back.
The American Bankers Association (ABA), the Consumer Bankers Association (CBA), America’s Credit Unions and the Mississippi Bankers Association, alongside Arvest Bank, Bank of Franklin and the Commercial Bank, filed a lawsuit in the Southern District Court of Mississippi following the rule’s passage on December 12, 2024.
They argued that the rule had been an overreach of the CFPB’s regulatory authority and that the bureau had failed to consider the impact of its actions on consumers.
On February 13, 2025, Senate Banking Committee chairman Tim Scott and House Financial Services Committee chairman French Hill introduced a resolution under the Congressional Review Act (CRA) to overturn the rule in Congress.
They suggested it limits consumer access to important financial services and pushes them to riskier payments options. The resolution was also backed by a number of banking lobbyists.
“The CFPB’s final rule on overdraft services is an illegal and harmful overreach that threatens millions of Americans' access to liquidity,” said Weston Loyd, spokesperson for the CBA.
“The current effort from members of Congress to repeal the rule under the CRA underscores the serious concerns about how this rule will negatively impact Americans — particularly those who lack access to credit and use overdraft to pay for things like food and utilities. We support this effort from policymakers and will continue to advance our litigation to stop the rule from taking effect.”
The banks argue that the CFPB rule reverses 50 years of legal precedent without justification, suggesting that the regulator not only lacked the legal authority to issue the rule in the first place, but by imposing a one-size-fits-all mandate ignored free market innovations.
They say the rule would force them to reduce the service they provide customers, adding that overdraft fees allow them to offer a much-needed payments lifeline for financially vulnerable customers with little in the way of access to alternative credit or liquidity.
The path to overturning the rule
New regulations must be reported to Congress once they are ratified, where they are reviewed and it is determined if they were passed under the required procedures.
Under the CRA, if both houses of Congress pass a resolution voicing disapproval of the new rule it can be overturned.
If the congressional route fails, then the onus will pass to the court case (and there could be additional cases brought in different courts), and to attempts to unroll the rule within the CFPB itself.
This method, while possible, would require the CFPB to remain functional, as changing a rule in this way would require a process similar to a new rule with a comment letter period process.
Doing so would enable the new leadership to delay the rule while it was being revisited, before it was repealed.
According to John Coleman, a partner at Orrick and former deputy general counsel at the CFPB, where he worked for more than a decade, it seems more likely than not that one of the three approaches will work, and that the congressional route is the most efficient.
“The effect is not just to repeal it, but also to prevent the CFPB from adopting a substantially similar rule in the future [per CRA stipulations], so from the industry's perspective that is the best outcome,” he said.
Although the rule affects larger banks, there are also implications for community and smaller banks.
Some larger banks, including Citi and Capital One, have already eliminated overdraft fees, so this case is more about regulatory precedent and potentially politics than any direct financial impact.
Smaller banks are typically more reliant on overdraft fees to offset costs and have a financial exposure to the rule.
However, the CEO of one community bank in the US told Vixio that he would prefer a compromise to either the status quo or the eradication of the rule.
“Finding a middle ground, such as increased transparency, lower fees or opt-in requirements-could be a better solution than a full rollback of the CFPB’s rule,” he said.
The path ahead
The CRA has no filibuster in Congress and, given Republican control of both houses, the resolution against the CFPB’s rule is likely to succeed.
The second most likely outcome, Coleman said, is that the court grants the pending motion to stay the litigation and push back the compliance date to the end of the year, then within that time period the CFPB announces its intention to revisit the rule and takes action to push back the compliance date further while it engages in the rulemaking process.
This is not the first time that this has happened. The payday lending rule was issued in 2017 by previous CFPB director Richard Cordray and then challenged in 2018 during Trump’s first administration.
The litigation was put on hold and the agency repealed most of the rule, but left parts of it in place.
This route would, however, require the CFPB to have a full staff and funding, something that is by no means guaranteed, given that Elon Musk has voiced a desire to either unravel the entire organisation or roll it into another, such as the Office of the Comptroller of the Currency.
“What the future of the CFPB really depends on is what the appointed and confirmed leadership wants to do with the agency,” said Chris Willis, a partner at Troutman Pepper and co-leader of the consumer financial services regulatory practice.
The bureau is currently being led by Russell Vought, director of the Office of Management and Budget, although day-to-day operations are being led by Mark Calabria on a temporary basis until Jonathan McKernan, who has been nominated to be permanent director, is confirmed by the Senate.
“I don’t think it's that likely that either Calabria or McKernan is going to just shut down the agency and fire everybody,” he said.
“They may cause the agency to behave differently, and the size of the agency may be smaller than it was six months ago, but a complete shutdown is not likely, although that really is up to them.”
Reports suggest that as many as 100 staffers at the CFPB have been let go already.
The employees union and some CFPB employees filed a lawsuit to stop additional downsizing and that stay will remain in place until March 3, when there will be a preliminary injunction.
“The future of the CFPB is determined by what the new leadership wants to do, and what constraint, if any, the court will put on it after the hearing in March,” Willis added.
Of course, it is not only the overdraft rule that is under threat. Several other rules that were passed in the period between President Trump’s election and his inauguration could be attacked using the CRA process.
The 1033 Rule on open banking, for example, is under threat, despite its backing from the fintech industry. In addition, the Credit Card Late Fee Rule, which passed in March 2024, is being contested in a Texas court.
But Coleman, who worked at the CFPB during the last attempts to dismantle it, said that there are some fundamental differences this time compared to the previous Trump administration.
“Nobody was fired, and that is already not the case here, as substantial numbers of people have lost their jobs,” he said.
“The leadership of the CFPB during the last Trump administration made decisions, which was their prerogative, but they relied on their career staff to help them and inform them about decisions that were before them. The actions undertaken to date are much more dramatic than what we experienced last time. Revisiting rules is normal in a transition, but this is a different thing altogether.”
He added that McKernan has a reputation as a reasonable person, but the size and functionality of the agency that will be left for him to direct is currently uncertain.
