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CFPB: Reopening a closed account could be a UDAAP
On May 10, the CFPB released Circular 2023-02 to opine that unilaterally reopening a closed account without a customer’s permission in order to process a transaction is a likely violation of federal law, particularly if a bank collects fees on the account. “When a bank unilaterally chooses to open an account in someone’s name after they have already closed it, this is a fake account,” CFPB Director Rohit Chopra said in the announcement. “The CFPB is acting on all fronts to halt the harvesting of illegal junk fees.”
The Bureau described receiving complaints from consumers about banks reopening closed accounts and then assessing overdraft/nonsufficient funds fees and monthly maintenance fees. Such practices, the Bureau warned, may violate the Consumer Financial Protection Act’s prohibition on unfair acts or practices. Consumers may experience substantial injury including monetary harm by paying fees due to the unfair practice, the Bureau said, explaining that because consumers likely cannot reasonably avoid the injury, “[a]ctual injury is not required; significant risk of concrete harm is sufficient.” Aside from subjecting consumers to fees, when a bank processes a credit through a reopened account, the consumers’ funds may become available to third parties, including those that do not have permission to access such funds, the Bureau warned, adding that there is also a risk that banks may furnish negative information to consumer reporting agencies if reopening the account overdraws the account and the consumer does not quickly repay the amount owed. The Bureau further noted that deposit account agreements typically indicate that a financial institution “may return any debits or deposits to the account that the financial institution receives after closure and faces no liability for failing to honor any debits or deposits received after closure.”
The Circular explained that rather than reopening an account when a third party attempts to deposit or withdraw money from it, banks should decline the transactions. This allows customers the opportunity to update their information with the entity attempting to access a closed account while avoiding potential fees. “Reopening a closed account does not appear to provide any meaningful benefits to consumers or competition,” the Bureau said in the Circular. “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.”
OCC, FDIC say some overdraft fees may be unfair or deceptive
On April 26, the OCC and FDIC issued supervisory guidance addressing consumer compliance risks associated with bank overdraft practices. (See OCC Bulletin 2023-12 and FDIC FIL-19-2023.) The guidance highlighted certain practices that may result in increased risk exposure, including assessing overdraft fees on “authorize positive, settle negative” (APSN) transactions and assessing representment fees each time a third party resubmits the same item for payment after being returned by a bank for non-sufficient funds. The agencies provided guidance for banks that may help control risks associated with overdraft protection programs and achieve compliance with Dodd-Frank’s UDAAP prohibitions and section 5 of the FTC Act, which prohibits unfair or deceptive acts or practices.
The FDIC’s supervisory guidance expanded on the 2019 Consumer Compliance Supervisory Highlights (covered by InfoBytes here), and warned that APSN overdraft fees present risks of unfairness under both statutes as consumers “cannot reasonably avoid” receiving these fees because they lack “the ability to effectively control payment systems and overdraft processing systems practices.” The FDIC cited the “complicated nature of overdraft processing systems” as another impediment to a consumer’s ability to avoid injury. The FDIC also emphasized that risks of unfairness exist both in “available balance” or “ledger balance” methods of assessing overdraft fees, but cautioned that risks may be “more pronounced” when a bank uses an available balance method. Furthermore, the FDIC warned that disclosures describing how transactions are processed may not mitigate UDAAP and UDAP risk. Banks are encouraged to “ensure customers are not charged overdraft fees for transactions consumers may not anticipate or avoid,” and should take measures to ensure overdraft programs provided by third parties comply with all applicable laws and regulations, as such arrangements may present additional risks if not properly managed, the FDIC explained.
The OCC’s guidance also warned that disclosures may be deceptive under section 5 if they fail to clearly explain that multiple or additional fees may result from multiple presentments of the same transaction. Recognizing that some banks have already implemented changes to their overdraft protection programs, the OCC also acknowledged that “[w]hen supported by appropriate risk management practices, overdraft protection programs may assist some consumers in meeting short-term liquidity and cash-flow needs.” The OCC encouraged banks to explore other options, such as offering low-cost accounts and low-cost alternatives for covering overdrafts, such as overdraft lines of credit and linked accounts.
Hsu says OCC focused on fairness in banking
On March 30, acting Comptroller of the Currency Michael J. Hsu commented that the safety and soundness of the federal banking system continues to be a top agency priority, as is improving fairness in banking. Speaking at a conference, Hsu discussed several measures taken by the OCC to elevate and advance fairness, particularly for the underserved and financially vulnerable. Explaining that OCC examiners are encouraging bank management to review existing overdraft protection programs and consider adopting pro-consumer reforms, Hsu referred to CFPB guidance issued last October to address unfair, deceptive, and abusive practices associated with “so-called ‘surprise overdraft’ fees.” (Covered by InfoBytes here.) He also commented that both the Federal Reserve Board and the FDIC have cited the risk of violating UDAP in connection with the certain overdraft practices. Hsu noted that not all overdraft practices are equal, stating that “authorize positive, settle negative” and “representment” fees both present heightened risks.
Recognizing the recent decline in banks’ reliance on overdraft fees, Hsu emphasized that most bankers he has spoken to “understand the importance of treating their customers fairly and have been open to learning about best practices.” He noted that “[t]hese bankers are committed to being there for their customers and providing them with short-term, small dollar liquidity when it is needed most. Many customers tell their banks, as well as groups that have studied overdraft practices, that this banking service helps them meet payments when they come due.” Hsu added that the OCC’s intended goal is to “improve the fairness of these programs by making them more pro-consumer, not to eliminate them,” and that “[m]ore fairness means more financially healthy communities, which means more trust in banking.” Hsu also discussed efforts taken by the OCC to combat discriminatory lending practices, including working to enhance supervisory methods for identifying appraisal discrimination.
Biden administration urges states to join fee crack down
On March 8, the Biden administration convened a gathering of state legislative leaders to hold discussions about so-called “junk fees”—described as the “unnecessary, unavoidable, or surprise charges” that obscure true prices and are often not disclosed upfront. While the announcement acknowledged actions taken by federal agencies over the past few years to crack down on these fees, the administration recognized the role states play in advancing this effort. The Guide for States: Cracking Down on Junk Fees to Lower Costs for Consumers outlined actions states can take to address these fees, and provided several examples of alleged junk fees, including hotel resort fees, debt settlement fees, event ticketing fees, rental car and car purchase fees, and cable and internet fees. The guide also highlighted “the banking industry’s excessive and unfair reliance on banking junk fees.” The administration pointed out that a number of businesses have changed their policies in response to the increased scrutiny of junk fees and said several banks have ended fees for overdraft protection. The same day, the CFPB released a new Supervisory Highlights, which focused on junk fees uncovered in deposit accounts and the auto, mortgage, student, and payday loan servicing markets (covered by InfoBytes here).
Additionally, HUD Secretary Marcia L. Fudge published an open letter to the housing industry and state and local governments, encouraging them to “limit and better disclose fees charged to renters in advance of and during tenancy.” Fudge noted that “actions should aim to promote fairness and transparency for renters while ensuring that fees charged to renters reflect the actual and legitimate costs to housing providers.”
California Attorney General Rob Bonta also issued a statement responding to the administration’s call to end junk fees. “Transparency and full disclosure in pricing are crucial for fair competition and consumer protection,” Bonta said, explaining that in February the state senate introduced legislation (see SB 478) to prohibit the practice of hiding mandatory fees.
CFPB report looks at junk fees; official says they remain agency focus
On March 8, the CFPB released a special edition of its Supervisory Highlights focusing on junk fees uncovered in deposit accounts and the auto, mortgage, student, and payday loan servicing markets. The findings in the report cover examinations completed between July 1, 2022 and February 1, 2023. Highlights of the supervisory findings include:
- Deposit accounts. Examiners found occurrences where depository institutions charged unanticipated overdraft fees where, according to the Bureau, consumers could not reasonably avoid these fees, “irrespective of account-opening disclosures.” Examiners also found that while some institutions unfairly assessed multiple non-sufficient (NSF) fees for a single item, institutions have agreed to refund consumers appropriately, with many planning to stop charging NSF fees entirely.
- Auto loan servicing. Recently examiners identified illegal servicing practices centered around the charging of unfair and abusive payment fees, including out-of-bounds and fake late fees, inflated estimated repossession fees, and pay-to-pay payment fees, and kickback payments. Among other things, examiners found that some auto loan servicers charged “payment processing fees that far exceeded the servicers’ costs for processing payments” after a borrower was locked into a relationship with a servicer selected by the dealer. Third-party payment processors collected the inflated fees, the Bureau said, and servicers then profited through kickbacks.
- Mortgage loan servicing. Examiners identified occurrences where mortgage servicers overcharged late fees, as well as repeated fees for unnecessary property inspections. The Bureau claimed that some servicers also included monthly private mortgage insurance premiums in homeowners’ monthly statements, and failed to waive fees or other changes for homeowners entering into certain types of loss mitigation options.
- Payday and title lending. Examiners found that lenders, in connection with payday, installment, title, and line-of-credit loans, would split and re-present missed payments without authorization, thus causing consumers to incur multiple overdraft fees and loss of funds. Some short-term, high-cost payday and title loan lenders also charged borrowers repossession-related fees and property retrieval fees that were not authorized in a borrower’s title loan contract. The Bureau noted that in some instances, lenders failed to timely stop repossessions and charged fees and forced consumers to refinance their debts despite prior payment arrangements.
- Student loan servicing. Examiners found that servicers sometimes charged borrowers late fees and interest despite payments being made on time. According to the Bureau, if a servicer’s policy did not allow loan payments to be made by credit card and a customer representative accidentally accepted a credit card payment, the servicer, in certain instances, would manually reverse the payment, not provide the borrower another opportunity for paying, and charge late fees and additional interest.
CFPB Deputy Director Zixta Martinez recently spoke at the Consumer Law Scholars Conference, where she focused on the Bureau’s goal of reigning in junk fees. She highlighted guidance issued by the Bureau last October concerning banks’ overdraft fee practices, (covered by InfoBytes here), and commented that, in addition to enforcement actions taken against two banks related to their overdraft practices, the Bureau intends to continue to monitor how overdrafts are used and enforce against certain practices. The Bureau noted that currently 20 of the largest banks in the country no longer charge surprise overdraft fees. Martinez also discussed a notice of proposed rulemaking issued last month related to credit card late fees (covered by InfoBytes here), in which the Bureau is proposing to adjust the safe harbor dollar amount for late fees to $8 for any missed payment—issuers are currently able to charge late fees of up to $41—and eliminate a higher safe harbor dollar amount for late fees for subsequent violations of the same type. Martinez further described supervision and enforcement efforts to identify junk fee practices and commented that the Bureau will continue to target egregious and unlawful activities or practices.
CFPB reports drop in overdraft/NSF revenue from pre-pandemic levels
On February 7, the CFPB published a “Data Spotlight” reporting that bank overdraft/non-sufficient fund (NSF) fee revenue has declined significantly compared to pre-pandemic levels. According to the Bureau, recent analysis found that overdraft/NSF fee revenue (i) was 43 percent lower in the third quarter of 2022 than in the third quarter of 2019 (representing a suggested decrease of $5.1 billion in fees on an annualized basis); (ii) was 33 percent lower over the first three quarters of 2022 when compared to the same period in 2019; and (iii) has declined each quarter since the fourth quarter of 2021. The report presented snapshots of overdraft/NSF fee revenue by quarter between Q1 2019 and Q3 2022, and discussed changes in banks’ consumer deposit account revenue from other listed fees. The Bureau observed that there has been a lack of correlating increases in other listed checking account fees, which may suggest that banks are not replacing overdraft/NSF fee revenue with other checking account fees such as periodic maintenance fees and ATM fees. The Bureau noted that it will continue to monitor overdraft/NSF fees and said it is considering related rulemaking activities. The agency announced it also intends to track other listed account fees to determine whether and to what extent these fees may be creating barriers to account access.
New York FY 2024 budget proposes to end unfair overdraft practices
On February 1, the New York governor released the state’s FY 2024 budget proposal, which includes measures for ending certain bank overdraft and insufficient fee practices. Specifically, the proposed legislation would amend section 9-y of the banking law to grant authority to the NYDFS superintendent to promulgate regulations related to (i) supervised banking organizations’ transaction processing practices; (ii) the charges (including overdraft and insufficient funds fees) that banks may impose in connection with dishonored transactions; and (iii) associated disclosures provided to consumers regarding how transactions are processed and any associated fees. In an accompanying budget briefing book, the governor said the proposed measures are part of “nation-leading legislation that comprehensively addresses abusive bank fee practices, which tend to disproportionally harm low- and moderate-income New Yorkers.” Proposed actions include “stopping the opportunistic sequencing of transactions in a way designed to maximize fees charged to consumers, ending other unfair overdraft and non-sufficient funds fee practices, and ensuring clear disclosures and alerts of any permissible bank processing charges.”
CFPB releases regulatory agenda
Recently, the Office of Information and Regulatory Affairs released the CFPB’s fall 2022 regulatory agenda. Key rulemaking initiatives that the agency expects to initiate or continue include:
- Overdraft and NSF fees. The Bureau is considering whether to engage in pre-rulemaking activity in November to amend Regulation Z with respect to special rules for determining whether overdraft fees are considered finance charges. According to the Bureau, the rules, which were created when Regulation Z was adopted in 1969, have remained largely unchanged despite the fact that the nature of overdraft services has significantly changed over the years. The Bureau is also considering whether to engage in pre-rulemaking activity in November regarding non-sufficient fund (NSF) fees. The Bureau commented that while NSF fees have been a significant source of fee revenue for depository institutions, recently some institutions have voluntarily stopped charging such fees.
- FCRA rulemaking. The Bureau is considering whether to engage in pre-rulemaking activity in November to amend Regulation V, which implements the FCRA. As previously covered by InfoBytes, on January 3, the Bureau issued its annual report covering information gathered by the Bureau regarding certain consumer complaints on the three largest nationwide consumer reporting agencies (CRAs). CFPB Director Rohit Chopra noted that the Bureau “will be exploring new rules to ensure that [the CRAs] are following the law, rather than cutting corners to fuel their profit model.”
- Section 1033 rulemaking. Section 1033 of Dodd-Frank provides that covered entities, such as banks, must make available to consumers, upon request, transaction data and other information concerning consumer financial products or services that the consumer obtains from the covered entity. Over the past several years, the Bureau has engaged in a series of rulemaking steps to prescribe standards for this requirement, including the release of a 71-page outline of proposals and alternatives in advance of convening a panel under the Small Business Regulatory Enforcement Fairness Act (SBREFA). The outline presents items under consideration that “would specify rules requiring certain covered persons that are data providers to make consumer financial information available to a consumer directly and to those third parties the consumer authorizes to access such information on the consumer’s behalf, such as a data aggregator or data recipient (authorized third parties).” (Covered by InfoBytes here.) The Bureau anticipates issuing a SBREFA report in February.
- Amendments to FIRREA concerning automated valuation models. The Bureau is participating in interagency rulemaking with the Fed, OCC, FDIC, NCUA, and FHFA to develop regulations to implement the amendments made by Dodd-Frank to FIRREA concerning appraisal automated valuation models (AVMs). The FIRREA amendments require implementing regulations for quality control standards for AVMs. The Bureau released a SBREFA outline and report in February and May 2022 respectively (covered by InfoBytes here), and estimates that the agencies will issue a notice of proposed rulemaking (NPRM) in March.
- Property Assessed Clean Energy (PACE) financing. The Bureau issued an advance notice of proposed rulemaking (ANPRM) in March 2019 to extend TILA’s ability-to-repay requirements to PACE transactions. (Covered by InfoBytes here.) The Bureau is working to develop a proposed rule to implement Economic Growth, Regulatory Relief, and Consumer Protection Act Section 307 in April.
- Nonbank registration. The Bureau issued an NPRM in December to enhance market monitoring and risk-based supervision efforts by including all final public written orders and judgments (including any consent and stipulated orders and judgments) obtained or issued by any federal, state, or local government agency for violation of certain consumer protection laws related to unfair, deceptive, or abusive acts or practices in a database of enforcement actions taken against certain nonbank covered entities. (Covered by InfoBytes here.) In a separate agenda item, the Bureau states that the NPRM would also require supervised nonbanks to register with the Bureau and provide information about their use of certain terms and conditions in standard-form contracts. The Bureau proposes “to collect information on standard terms used in contracts that are not subject to negotiating or that are not prominently advertised in marketing.”
- Credit card penalty fees. The Bureau issued an ANPRM last June to solicit information from credit card issuers, consumer groups, and the public regarding credit card late fees and late payments, and card issuers’ revenue and expenses. (Covered by InfoBytes here.) Under the CARD Act rules inherited by the Bureau from the Fed, credit card late fees must be “reasonable and proportional” to the costs incurred by the issuer as a result of a late payment. Calling the current credit card late fees “excessive,” the Bureau stated it intends to review the “immunity provision” to understand how banks that rely on this safe harbor set their fees and to examine whether banks are escaping enforcement scrutiny “if they set fees at a particular level, even if the fees were not necessary to deter a late payment and generated excess profits.” The Bureau is considering comments received on the ANPRM as it develops an NPRM that may be released this month.
- Small business rulemaking. Section 1071 of Dodd-Frank amended ECOA to require financial institutions to report information concerning credit applications made by women-owned, minority-owned, and small businesses, and directed the Bureau to promulgate rules for this reporting. An NPRM was issued in August 2021 (covered by InfoBytes here). The Bureau anticipates issuing a final rule later this month.
CFPB fines bank over auto loan, mortgage, and deposit account allegations
On December 20, the CFPB announced a consent order against a national bank for allegedly mismanaging auto loans, mortgages, and deposit accounts. According to the Bureau, the bank allegedly engaged in deceptive or unfair acts or practices in violation of the CFPA by, among other things: (i) incorrectly processing auto-loan payments; (ii) assessing borrowers erroneous fees and interest due to technology, audit, and compliance failures; (iii) incorrectly denying mortgage loan modification applications; (iv) failing to ensure that unearned Guaranteed Asset Protection fees were refunded to borrowers who paid off their loans; (v) incorrectly denying mortgage loan modification applications and miscalculated fees; and (vi) charging “surprise” overdraft fees on debit card transactions and ATM withdrawals because, according to the Bureau, consumers “believed that if they had enough money to cover the relevant transaction when it was authorized they would not incur an [o]verdraft fee.”
Under the terms of the consent order, the bank is required to pay redress totaling more than $2 billion to allegedly harmed customers. Specifically, the bank is ordered to pay approximately: (i) $1.3 billion in consumer redress for affected auto lending accounts; (ii) $500 million in consumer redress for affected deposit accounts, including $205 million for illegal surprise overdraft fees; and (iii) nearly $200 million in consumer redress for affected mortgage servicing accounts. Among other things, the bank is prohibited from charging overdraft fees for deposit accounts when the consumer had available funds at the time of a purchase or other debit transaction, but then subsequently had a negative balance once the transaction settled. The bank is also ordered to pay a $1.7 billion civil penalty to the Bureau. CFPB Director Rohit Chopra released a statement following the announcement saying the order does not provide immunity for any individuals nor does it release claims for any ongoing illegal acts or practices.
The bank issued a press release stating that “[c]urrent leadership has made significant progress to transform the bank,” and noting that “the CFPB recognized that since 2020, the company has accelerated corrective actions and remediation, including to address the matters covered by today’s settlement.”
Chopra testifies at congressional hearings
On December 14, CFPB Director Rohit Chopra testified at a hearing titled Consumers First: Semi-Annual Report of the Consumer Financial Protection Bureau held by the House Financial Services Committee on the CFPB’s most recent semi-annual report to Congress (covered by InfoBytes here). Chopra’s prepared statement focused on: (i) the current state of the economy and household finance; (ii) promoting an open, competitive, and a decentralized market; and (iii) actions by Congress where bipartisan support is expected. Chopra also cited concerns regarding the accuracy of medical debt credit reporting and noted that the CFPB is continuing “to examine how medical debt burdens are impacting household balance sheets.”
House Financial Services Chairwoman Maxine Waters (D-CA) praised Chopra’s leadership in her opening statement, stating that the Bureau has combated “redlining, housing discrimination, illegal evictions, and foreclosures, and has worked tirelessly to root out appraisal bias.” However, Ranking Member Patrick McHenry (R-PA) argued that the Bureau’s “lack of transparency is of grave concern.” McHenry discussed the CFPB’s six compliance bulletins, five advisory opinions, five interpretive rules, and seven circulars published this year, which he considers to have fostered “uncertainty” within the financial services industry. McHenry also warned Chopra that he can expect “much more thorough” oversight next year when Republicans take control of the House and when McHenry becomes the chair of the House Financial Services Committee.
During the hearing, Chopra acknowledged that the Bureau's Section 1071 Rulemaking “is on track to issue a final rule by March 31, 2023”—a deadline established by court order in July as a result of a stipulated settlement reached in February 2020 with a group of plaintiffs, including the California Reinvestment Coalition, related to the collection of small business lending data (covered by InfoBytes here). Chopra added that the Bureau wants to ensure it has “an implementation period that gives the smaller firms more time, and the ability to make sure it’s not duplicative with existing requirements under the Community Reinvestment Act.”
During the hearing, Republican committee members inquired about the agency’s creation and use of the term “junk fees” to describe, among other things, legal fees that banks charge for financial products and services. According to Rep. Blaine Luetkemeyer (R-MO) “there is no such word in financial services lexicon,” and the Bureau is “making up a word and then using it to go out and enforce something that doesn’t exist.” Republican committee members also inquired about the Bureau’s recent updates to its UDAAP exam manual. As previously covered by a Buckley Special Alert, in March, the CFPB announced significant revisions to its UDAAP exam manual, in particular highlighting the CFPB’s view that its broad authority under UDAAP allows it to address discriminatory conduct in the offering of any financial product or service. Rep. Andy Barr (R-KY) commented that “this is not interpretive guidance,” and said Chopra is “trying to change the law.”
Chopra reiterated the Bureau’s priorities in his December 15 testimony before the Senate Banking Committee. During the hearing, Ranking Member Sherrod Brown (D-OH) noted that Republican lawmakers proposed legislation to subject the CFPB to appropriations and to change the CFPB's single-director structure to a commission. Chopra was also questioned by Ranking Member Patrick Toomey (R-PA) who raised concerns regarding the Bureau’s “overreach and pursuit of a politicized agenda.” He further argued that “the Dodd-Frank Act exempted the CFPB from appropriations,” and “empowers the CFPB to simply take funds from the Fed, which is itself also not subject to appropriation, thereby doubly insulating the CFPB from any congressional control.” Other topics discussed during the hearing included, among other things, military lending, credit cards, and overdraft fees.