CFPB Alive and Kicking – Issues New Guidance to Eliminate "Junk Fees" with Banks and Fintechs in its Cross Hairs

Despite a recent Fifth Circuit decision that found the Consumer Financial Protection Bureau’s (“CFPB”) funding structure unconstitutional in a years-long series of attacks to undermine the constitutionality of the agency, the CFPB shows no signs of slowing down. Since the Fifth Circuit decision, the CFPB issued two different forms of guidance to warn financial institutions that overdraft and returned deposit or “bounced check” fees are likely unfair acts or practices that violate consumer protection laws.

1. “Surprise” Authorized Positive Overdraft Fees Declared Unfair

On October 26, 2022, the CFPB issued a Consumer Financial Protection Circular 2022-06 (the “October Circular”), that takes the position that it is an unfair act or practice to charge “Authorized Positive Overdraft Fees” for debit card and ATM transactions where a customer’s balance was positive at the time of the purchase or withdrawal but where the balance later goes negative because of other unrelated debits from the account that occur before the initial transaction settles. The October Circular is a move to codify the findings of the CFPB’s September 28, 2022 Consent Order (the “September Order”) that imposed a $50 million civil money penalty and required $141 million dollars in refunds. The September Order was the first public enforcement action by a federal regulator to exact this level of penalty and redress for overdraft fees. The October Circular states the CFPB’s position that even if a deposit account provider complies with core financial services statutes and their implementing statutes such as the Truth in Lending Act (TILA)/Regulation Z, and the Electronic Fund Transfer Act (EFTA)/Regulation E, an overdraft fee may still violate the prohibition against unfair, deceptive, and abusive acts or practices.

Why Does This Matter?

The CFPB is setting expectations for other regulators. Consumer Financial Protection Circulars (“Circulars”) are more formal statements of regulatory interpretation that are “issued to all parties with authority to enforce federal consumer financial law.” As a result, other federal and state regulators, including the FDIC, OCC, the Federal Reserve and the NCUA as well as state attorneys general and banking departments, may refer to these Circulars for guidance when interpreting what constitutes unfair acts or practices.

Financial technologies (“Fintechs”) and other non-bank companies whose services may result in downstream overdraft fees are not immune. This past summer, the CFPB successfully brought an action against a Fintech savings app, for similarly engaging in deceptive acts or practices regarding overdraft fees.

Large banks have shifted away from overdraft fees. The CFPB has already successfully convinced many large banks to eliminate overdraft fees. The September Consent Order and the October Circular advance the CFPB’s efforts to eliminate these fees at other banks and Fintechs.

2. CFPB Defines A New Type Of “Illegal Junk Fee” For The First Time

On October 26, 2022, the CFPB took a first step in defining a new class of “illegal junk fees” by taking on the long-standing industry practice of charging fees when a customer deposits a check into their account that cannot be processed against the payor’s account (“Return Deposit Item Fees”). Generally, these Return Deposited Item Fees are clearly disclosed in deposit account agreements. Nevertheless, the CFPB Bulletin (the “Bulletin”) states that “[b]lanket policies of charging Returned Deposit Item [F]ees to consumers for all transaction irrespective of the circumstances of the transaction or patterns of behavior on the account are likely unfair. ”

The CFPB appears to ground its theories of unfairness on an individual’s lack of control over whether a check they deposit might be returned. The agency noted that a customer is not likely to anticipate, and cannot verify, whether a payor has the funds to cover the check they are depositing and therefore cannot reasonably avoid related fees. In addition, even though Returned Deposit Item Fees (typically $10- $19) are significantly lower than overdraft fees (typically $35-$37), the Bulletin takes issue with the amount of the fees as not being “well-tailored to recoup costs from the consumers actually responsible for the costs to institutions of expected losses.” The CFPB claims that the fee amounts help support the conclusion that charging blanket Returned Deposited Item Fees are an unfair practice because the harm caused by these fees is not outweighed by the benefits to consumers as a whole or competition. Notably, the Bulletin equates Returned Deposited Item Fees as the type of “add-on” or “hidden” fee that some studies have found to stifle competition. Therefore, even if these fees are clearly disclosed and agreed to in deposit account agreements, they are unfair practices that constitute “illegal junk fees.”

The CFPB’s decision to issue this guidance in the form of a bulletin may be an acknowledgment of its position as a regulatory first mover in declaring these Returned Deposit Item Fees to be unfair. Unlike Circulars, bulletins provide “background information about applicable law,” but do “not confer any rights of any kind.” Circulars, including the recent Circular on overdraft fees, also typically acknowledge that other federal and state agencies have been addressing similar issues for years. With respect to Returned Deposit Item Fees, however, the CFPB currently stands alone. Thus, the release of a bulletin for this new class of junk fees likely reflects the CFPB’s intent to exercise its enforcement and supervisory authority to target these types of fees notwithstanding that other agencies have not yet signed on to do so. Likely in recognition that the Bulletin provides the first notice to the industry of this position, the CFPB will provide companies a thirteen-month grace period and “does not intend to seek monetary relief for potential unfair practices regarding Returned Deposited Item fees assessed prior to November 1, 2023.”

Why Does This Matter?

The Bulletin is a signal that the CFPB may expand its definition of “illegal junk fees” by considering facts related to consumer control, consumer impact, and price. Therefore, even companies that do not charge these specific types of Return Deposit Item Fees should take stock of fees that the CFPB may target as unfair using similar logic used in this Bulletin.

3. What’s Next?

As payments and banking activities move from traditional chartered banks to Fintech companies, the CFPB continues to assert its authority to cover consumer financial products and services regardless of charter or license. For financial institutions that provide payments, deposits, or prepaid services, we offer some food for thought below.

• Enforcement Actions Are Forthcoming: We expect the CFPB Office of Enforcement to remain active. Since January 1, 2021, the CFPB has commenced 35 enforcement actions, including both consent orders and litigation. We expect this guidance to form the basis of future enforcement action as well as examinations.
• Overdraft Fees May Be Found “Unfair”: Overdraft fees that are charged by banks or related to Fintech products and services will continue to be reviewed as possibly unfair acts or practices by federal and state regulators.
• “Surprise” Fees Are Under Scrutiny: The CFPB will scrutinize blanket fees that may appear to be a “surprise” to your customers or are considered outside their control.
• Fees Should Reasonably Relate To Costs: The CFPB will scrutinize whether the amount of fees charged for products or services reasonably relate to the costs of providing that product or service.

In all, news about the demise of the CFPB are premature. With the publication of this recent guidance, the CFPB continues to fire on all cylinders and stake its claim as a leader in consumer protection regulation. Banks and Fintech companies should consider the impact of this recent guidance on their products and services.