CFPB’s Guidance on Junk Fees

Fee income practices have been making headlines for months, and in some cases years.

Financial institutions that have had the unfortunate experience of being cited or accused of having potentially unfair, deceptive, or abusive policies can attest to the damage certain unchecked fee income practices can have on the organization.  Reputation, income, and company morale are all negatively affected when fee income policies are determined to be unfair or deceptive.

We here at COMPLIANCE RESOURCE have previously made suggestions and sought to raise awareness of the ever-increasing risk surrounding overdraft fees and the potential for enforcement action danger.

We suggest reviewing your fee income practices and comparing them to the information provided by the Federal Deposit Insurance Company (FDIC), the New York State Department of Financial Services (DFS), and the Consumer Financial Protection Bureau (CFPB).

On October 26, 2022,  the CFPB issued guidance explaining that two junk fee practices are unfair and unlawful – effectively banning both.

First, the CFPB is making clear that surprise overdraft fees are unlawful. These are fees charged for overdrawing a checking account even though at the time the account owner made a purchase, the bank’s website, mobile app, or ATM terminal showed the customer that they had sufficient available funds for the purchase (authorize positive, settle negative (APSN)).

Second, the CFPB is making clear that surprise depositor fees are unlawful. These are fees charged to customers who deposit someone else’s bounced check, penalizing the victim.

Together, the CFPB stated the elimination of these fees will save consumers more than $1 billion annually.

Prior to the notice issued on the 26th, in June the CFPB  published a Protection Circular clearly stating that 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. Most recently, they cited Regions Bank for their unfair and abusive overdraft practices resulting in a $191 million fine.

What led up to the CFPB’s ban?

Decades of research and warnings!

  • Late 2000: Federal agencies focused on the risk of significant harm regarding overdraft programs. They began exploring various additional measures about overdraft practices, including whether to require consumers to opt in before being charged for overdraft programs.
  • February 2005: The Federal Reserve Board (Board), the FDIC, the National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC) issued Joint Guidance on Overdraft Protection Programs.
  • May 2005: The Board amended the Truth in Savings Act (TILA/Reg. DD) 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.
  • 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 practices under Section 5 of the Federal Trade Commission Act (FTC Act) 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.
  • January 2009: The Board finalized a Reg. DD rule that expanded disclosure and periodic statement requirements for overdraft programs to all depository institutions (not just those that advertise the programs). The Board adopted an opt-in requirement for overdraft fees assessed on ATM and one-time debit card transactions under EFTA) in late 2009.
  • 2010: The FDIC issued Final Overdraft Payment Supervisory Guidance on automated overdraft payment programs and warned about product over-use that may harm consumers.
  • 2015: The CFPB issued public guidance explaining that one or more institutions had acted unfairly and deceptively when they charged certain overdraft fees.
  • 2016: The Board publicly discussed issues with unfair fees related to transactions that authorize positive and settle negative.
  • 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.
  • June 2019: The FDIC issued its Consumer Compliance Supervisory Highlights and raised risks regarding certain use of the available balance method.
  • January 2022: The CFPB launched an initiative to scrutinize back-end junk fees that cost Americans billions of dollars. Tens of thousands of people responded to a CFPB Request for Information with their stories and complaints about unnecessary fees in banking. Since then, the CFPB has took action to constrain “pay-to-pay” fees, and  announced a rulemaking proceeding on credit card late fees.
  • August 2022: The FDIC issued it Supervisory Guidance on Multiple Re-resentment NSF fees.

In addition to the CFPB’s Supervisory Guidance and years of Regulatory scrutiny and warnings, President Biden called on all agencies to reduce or eliminate hidden fees, charges, and add-ons for everything from banking services to cable and internet bills to airline and concert tickets. “These so called “junk fees” are not just an irritant – they can weaken market competition, raise costs for consumers and businesses, and hit the most vulnerable Americans the hardest.”

What are Junk Fees?

Junk Fees can be defined as fees designed either to confuse or deceive consumers or to take advantage of lock-in or other forms of situational market power. Academic research and agency experience suggest the following fees and fee practices fall within this category:

  • Mandatory fees – fees designed to hide the full price. Some sellers publish a low price and then add mandatory fees later, at the “back-end” of the buying process or when a consumer tries to terminate the service. As the research shows, by hiding the full price the practice can lead consumers to pay more than they would otherwise. It also makes it hard for consumers to comparison shop. An example is the “service fees” added to the cost of a ticket to a concert or sporting event.
  • Surprise fees – fees are charged after purchase. Surprise fees that consumers do not expect! They  may not be mandatory but make it hard to comparison shop and can burden household finances. Surprise hospital bills from out-of-network doctors at in-network hospitals and airline  “family seating fees” are prominent examples.
  • Exploitative or predatory fees – Excessive fees that target consumers who have limited alternative options because they are locked into a product or service.  Which makes them economically vulnerable and  can  impose a financial burden. As the CFPB explains, a sign of exploitative fees is that they “far exceed the marginal cost of the service they purport to cover.” Bank overdraft fees, which greatly exceed the bank’s cost of credit, and surprise “termination fees” are leading examples.
  • Fraudulent fees – fees involving outright fraud or misrepresentations on the part of the seller. An example is advertising a “no fee” bank account that in practice carries significant fees.

If your FI has not looked closely into to the overdraft and NSF practices issue, now is the time to. Waiting is no longer an option especially because financial institutions aren’t alone in needing to examine and change practices. The entire merchant system has been put on notice.

As always, the team here at COMPLIANCE RESOURCE are here to help. We have developed several sessions to help with conducting this review and implementing an Overdraft program that serves both your bank and your community. Consider looking at these courses to help you manage your program.

Upcoming or On-Demand training sessions related to fees.

  1. Overdraft Risks, Requirements, and Best Practices Webinar Recording
  2. 10 Overdraft Privilege Hotspots Including Regulations, Lawsuits & Guidance Webinar Recording
  3. 2022 Deposit Regulation & Operations Update Webinar Recording