Compliance Blog

May 15, 2023

CFPB Limits Creative Control with Closed Accounts

I don’t know about you, but I’ve reopened many things in my life. My favorite thing to reopen is the plate of leftovers that my sister hid in the refrigerator the night before. Sure, she gets upset, but not my problem, right? She should have hidden it better.

So, you can imagine my surprise when I found out that reopening accounts without customer permission…is a bad thing? Or in the words of the CFPB: “an unfair act or practice.” Wow!

Ava Abbott Elementary

According to this Circular:

“The CFPB found that a financial institution engaged in an unfair practice by reopening deposit accounts consumers had previously closed without seeking prior authorization or providing timely notice. This practice of reopening closed deposit accounts caused some account balances to become negative and potentially subjected consumers to various fees, including overdraft and NSF fees. In addition, when the financial institution reopened an account to process a deposit, creditors had the opportunity to initiate debits to the account and draw down the funds, possibly resulting in a negative balance and the accumulation of fees. These practices resulted in hundreds of thousands of dollars in fees charged to consumers. The CFPB concluded that the institution’s practice of reopening. consumer accounts without obtaining consumers’ prior authorization and providing timely notice caused substantial injury to consumers that was not reasonably avoidable or outweighed by any countervailing benefit to consumers or to competition.”

I am shooketh. It’s almost as if reopening my sister’s plate, eating it, and then charging her fees if the food wasn’t that great… is not ethical. The agency determines an act or practice is unfair when it causes or is likely to cause consumers substantial injury that is not reasonably avoidable by consumers and the injury is not outweighed by countervailing benefits to consumers or to competition.”

The Circular mentioned many situations where reopening accounts unilaterally, or without a member’s permission or knowledge, causes substantial harm to the member. One hypothetical involves creditors who reopen closed accounts may eventually furnish negative credit information to credit reporting agencies, if the account incurs multiple fees the member fails to pay. Logically, a member will not maintain or avoid these types of financial injuries, if she did not know the account was reopened.

Mr Johnson

What’s even more interesting, Mr. Johnson is that the CFPB found this deceptive practice doesn't truly present financial institutions with meaningful benefits concerning consumers nor competition.

Since financial institutions typically require consumers to bring the account balance to zero before closing an account, reopening an account in response to a debit will likely result in penalty fees rather than payment of an amount owed by the consumer. While consumers might potentially benefit in some instances where their accounts are reopened to receive deposits, which then become available to them, that benefit does not outweigh the injuries that can be caused by unilateral account reopening.”

In other words, there is no tangible return for one-sidedly reopening accounts when unsuspecting consumers or members risk falling further into debt. The agency notes an alternative to reopening closed accounts, is opening a new account, presumably with member consent. Opening a new account with member authority more so leads to transparency and effective communication between all parties to a transaction, thus avoiding unfair practices.

Ava Creative Control

Unlike Ava’s alarming total creative control with elementary education, credit unions should NOT take complete creative control over member accounts, especially if they want to avoid a UDAAP violation. Account agreements normally govern account operation, including the closing thereof. Credit unions should consult with local counsel about credit union policy and account agreement provisions to definitively spell out how an account can be closed and if it can be reopened, specifically with member authorization.

See these relevant NAFCU resources:

·       CFPB is Still an Enforcer | NAFCU

·       Stimulus Payments FAQs | NAFCU

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About the Author

JaMonika Williams, Regulatory Compliance Counsel, NAFCU

JaMonika Williams, NAFCU-Regulatory-Compliance-Counsel

JaMonika Williams joined NAFCU as regulatory compliance counsel in July 2022. In this role, JaMonika assists credit unions with a variety of compliance issues.

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