What is Going On? CFPB Releases Guidance on “Junk” Fees
On the heels of a late September regulatory enforcement action against Regions Bank, requiring the financial institution to pay $191 million dollars for charging consumers “illegal surprise overdraft fees,” the Consumer Financial Protection Bureau (CFPB or bureau) recently issued guidance highlighting what the CFPB may consider junk fees. The CFPB addresses two types of fees that it may consider as “junk.” The first fee is a surprise overdraft fee, including “overdraft fees charged when consumers [have] enough money in their account to cover a debit charge at the time the [financial institution] authorizes it.” The next fee is a surprise depositor fee. This type of fee occurs when a person cashes a check and the check bounces. The CFPB outlines what practices may likely break the law in a Consumer Financial Protection Circular (circular) for surprise overdraft fees and a compliance bulletin on surprise depositor fees, respectively. The bureau writes a circular as a “general statement of policy” with the hope to provide consistency and transparency.
Surprise Overdraft Fees
The CFPB characterizes an unanticipated overdraft fee as occurring “when financial institutions assess overdraft fees on transactions that a consumer would not reasonably expect” in the circular. The CFPB maintains these fees may still be considered surprise or unanticipated even when required disclosures are followed and the consumer closely monitors account balances. The CFPB provides examples of “potentially unlawful patterns” that may trigger liability. A credit union will likely face scrutiny under this CFPB guidance if the act or practice (1) causes or is likely to cause substantial injury to consumers that is not reasonably avoidable by consumers; and (2) the injury is not outweighed by countervailing benefits to consumers or to competition.
A “substantial injury” typically takes the form of monetary harm, such as fees or costs paid by consumers because of the unfair act or practice. In addition, actual injury is not required; a significant risk of concrete harm is sufficient. An injury is not reasonably avoidable by consumers when consumers cannot make informed decisions or take action to avoid that injury. Injury that occurs without a consumer’s knowledge or consent, when consumers cannot reasonably anticipate the injury, or when there is no way to avoid the injury even if anticipated, is not reasonably avoidable. Finally, an act or practice is not unfair if the injury it causes or is likely to cause is outweighed by its consumer or competitive benefits.
The CFPB identifies practices by financial institutions that may lead a consumer to believe he or she will not incur an overdraft fee. For example, the bureau points to “complex policies…that are likely to be unintelligible to many consumers” and the use of mobile banking and debit cards by consumers as some of the practices the CFPB recognizes as reasons for surprise fees. The circular suggests the injury is not outweighed by the countervailing benefits to the consumer or competition. The CFPB also outlines the types of situations examiners should scrutinize by providing a “non-exhaustive” list of examples that may warrant scrutiny.
Surprise Depositor Fees
The CFPB proposes in a compliance bulletin that “[b]lanket policies of charging Returned Deposited Item fees to consumers for all returned transactions irrespective of the circumstances of the transaction or patterns of behavior on the account are likely unfair.” The bureau maintains a consumer is unlikely to avoid “substantial monetary injury imposed by the fees” because a consumer “would normally be unaware of and have little to no control over whether a check originator has funds in their account, will issue a stop payment instruction, or has closed the account.” In addition, a payee is “[un]able to verify whether a check will clear with the check originator’s depository institution before depositing the check or be able to pass along the cost of the fee to the check originator.” In other words, a person is unable to avoid harm when the is risk is not fully known. The bureau finds the countervailing benefits of blanket policies of Returned Deposited Item fees to competition and the consumer are outweighed by the injury to the consumer. The CFPB maintains these policies do little to deter “fraud or other circumstances where the consumer reasonably should have anticipated that the check would be returned” and may make “it more difficult to compete on transparent front-end prices.”
If there are any other questions concerning relating to these recent CFPB updates, please do not hesitate to contact NAFCU’s compliance team at compliance@nafcu.org.
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