On Wednesday, January 24, 2024, the Consumer Financial Protection Bureau (CFPB) announced a Proposed Rule aimed at blocking nonsufficient funds (NSF) fees on debit card, ATM, and certain peer-to-peer payment transactions that financial institutions decline in real time. The Proposed Rule would prohibit these NSF fees, deeming them unlawful as abusive practices under the unfair, deceptive, or abusive acts or practices (UDAAP) provisions of the Consumer Financial Protection Act.
Covered Financial Institutions and Transactions
This Proposed Rule covers "Financial Institutions" as defined in the Electronic Fund Transfer Act's (EFTA) implementing regulation, Regulation E. Covered financial institutions include banks, savings associations, credit unions, and people who hold consumer accounts or provide electronic fund transfer services.
Under the Proposed Rule, covered institutions would be required to eliminate NSF fees for instantaneous transactions, or transactions where the charge, withdraw, or transfer of funds is declined immediately because of insufficient funds. Because checks and Automated Clearing House (ACH) transactions are typically processed by clearing within a few business days or through overnight batch processing, respectively, checks and ACH transactions are not captured in this Proposed Rule.
NSF Fees
An NSF fee is a charge a consumer incurs if there are insufficient funds in the consumer's account when the consumer attempts to withdraw, debit, pay, or transfer funds.
The Proposed Rule identifies NSF fees as an abusive practice, or a practice that "takes unreasonable advantage of a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service." The Proposed Rule explains that NSF fees tend to impact consumers who struggle to meet regular expenses and take advantage of those consumers by gaining a fee from them while providing no benefit, since they do not cover the rejected transaction or otherwise assist the consumer. The Proposed Rule would also cover "returned item fees," "returned payment fees," "uncollected funds fees," "overdraft — unpaid fees," and "shortage of funds fees."1
Impact of this Proposed Rule
In the commentary to the Proposed Rule, the CFPB asserts that this rulemaking is a preventative measure, acknowledging that NSF fees are not frequently charged at point-of-sale or debit transactions and are instead most frequently employed with check or ACH transactions, which are not in scope of the Proposed Rule. Additionally, 65% of banks with over $10 billion in assets have eliminated NSF fees.
The CFPB claims, however, that since 80% of credit unions with over $10 billion in assets still charge NSF fees,2 and since the median fee is $32 in banks with over $10 billion in assets that do still charge NSF fees, this Proposed Rule addresses a substantial penalty for consumers.3 Considering these factors, the CFPB estimates that the Proposed Rule would benefit consumers by about $16.2 to $64.6 million in reduced fees.4 Additionally, the CFPB calculates that the combined costs of NSF and overdraft fees are higher to consumers than maintenance and ATM fees and are often borne by those with high financial vulnerability.5 This Proposed Rule was not offered in isolation and is part of the CFPB's larger effort to reduce "junk fees."
CFPB Junk Fees Initiative
In January 2022, the CFPB launched an initiative to target financial institutions that add "junk fees," described by the CFPB to encompass late fees, NSF and overdraft fees, or other practices where an institution may add fees after disclosing a specific price or rate to a consumer. In October 2023, the CFPB's bulletin focused on its investigation into bank account deposits, auto loan services, and remittances that led companies to refund $120 million to consumers because of surprise overdraft and excessive NSF fees. In July 2023, the CFPB and Office of the Comptroller of the Currency (OCC) fined a national bank a combined $150 million for alleged improper fees and opening consumer accounts without consent.6
Even beyond CFPB enforcement actions, this "junk fees" initiative continues to have wide repercussions. In February 2024, a complaint was filed against another national bank by a proposed class action alleging unjust enrichment and various state unfair, deceptive, and abusive practices (UDAP) law violations under its previous policy of charging fees on all return deposits.7 The complaint cites to the CFPB bulletin to illustrate the alleged violations.
The CFPB also recently announced a Proposed Rule to limit overdraft fees by very large financial institutions (VLFI) that had previously been exempted from the Truth in Lending Act. This Proposed Rule would cover financial institutions with more than $10 billion in assets. The Proposed Rule aims to bring all charges VLFIs employ as overdraft fees to finance charges, subjecting them to Truth in Lending regulations (Regulations Z and E). Under the Proposed Rule, if a VLFI charges an overdraft fee above its breakeven cost, an overdraft charge would become a finance charge, eliminating a previous exemption that an overdraft fee is not a finance charge when the VLFI did not agree in writing to cover an overdrawn charge. That breakeven cost would be set by either the VLFI (after accounting for its costs) or by using a benchmark the CFPB creates (right now, the Proposed Rule states that the CFPB is considering benchmark fees of $3, $6, $7, or $14). A VLFI that charges for overdrafts at a level at or below the breakeven cost would still be permissible and exempted from consideration as a finance charge. Relatedly, the Proposed Rule would further recharacterize overdraft fees as finance charges, despite previously being exempted when the charge is less than a charge for a similar account without overdraft services, shifting overdraft services to a form of credit to consumers. The CFPB's actions reflect a broader regulatory agenda to reduce what the current administration sees as a proliferation of confusing and deceptive costs to the consumers.
The Larger Regulatory Landscape
In October 2023, President Biden made an announcement that he sees addressing "junk fees," or hidden fees on consumers, as part of his agenda to increase competition, since they distort the costs of goods, may be exploitative or fraudulent, and are often a surprise to consumers.
Agencies have been quick to follow this initiative. The Department of Transportation just announced a Final Rule requiring airlines to disclose fee information regarding baggage, cancellation, and change fees. The Federal Trade Commission proposed a rule, "Rule on Unfair or Deceptive Fees," which aims to prohibit omitting fees from listed prices or misrepresenting certain fees on goods or services, such as in hotel reservations, housing fees, ticket sales, restaurants bills, gym memberships, delivery applications, telecommunication businesses, or in financial services. Housing and Urban Development Secretary Marcia Fudge wrote an open letter urging elimination of "junk fees" for renters. The Federal Communications Commission ("FCC") proposed a rule to prohibit service providers from employing early termination fees and billing cycle fees in an effort to address "junk fees" by cable and satellite service providers. In addition, the FCC announced a proposed rule to eliminate "bulk billing" in housing where tenants must pay certain prices for internet, broadband, cable, or satellite service, without the ability to opt out. In the announcement, the FCC stated that this proposed rule is one of a series to "combat junk fees and support transparency for consumers."
Conclusion
In light of this Proposed Rule, in combination with the CFPB's other rulemaking and enforcement actions, it is important for financial institutions to evaluate and monitor fees it charges to consumers to ensure compliance within this regulatory landscape. By labeling NSF fees as abusive practices, the CFPB has signaled potentially steep penalties for noncompliance.
Footnotes
1 Fees for Instantaneously Declined Transactions ("Proposed Rule"), 89 Fed. Reg. 6031, 6037 (proposed January 24,2024) (to be codified at 12 C.F.R. pt. 1042).
2 Proposed Rule, 89 Fed. Reg. at 6035.
3 Proposed Rule, 89 Fed. Reg. at 6033.
4 Proposed Rule, 89 Fed. Reg. at 6047.
5 Proposed Rule, 89 Fed. Reg. at 6032.
6 The CFPB issued a fine of $30 million related to opening consumer credit card accounts and related rewards language, and $60 million for "junk fees." OCC issued a penalty of $60 million in response to the use of multiple overdraft and NSF funds fees against consumers in a single transaction.
7 Maslowski et al. v. JPMorgan Chase Bank, N.A., Docket No. 7:24-cv-01277 (S.D.N.Y. Feb 20, 2024).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.