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Chopra testifies at congressional hearings
On April 26, CFPB Director Rohit Chopra testified at a hearing held by the Senate Banking Committee on the CFPB’s most recent semi-annual report to Congress (covered by InfoBytes here). Chopra’s opening remarks focused on key efforts the agency is taking to meet objectives established by Congress, including (i) shifting enforcement resources away from investigating small firms and focusing instead on repeat offenders and large players engaged in large-scale harm; (ii) increasing transparency through the issuance of guidance documents, such as advisory opinions, compliance bulletins, policy statements, and other publications to help entities comply with federal consumer financial laws; (iii) rethinking its approach to regulations, including its work to develop several rules authorized in the CFPA, and placing “a higher premium on simplicity and ‘bright lines’ whenever possible”; (iv) engaging with the business community and meeting with state-based associations to speak directly with community banks and credit unions and engaging with a broad range of other businesses and associations that may be affected by the laws the Bureau administers; (v) promoting greater competition by “lowering barriers to entry and increasing the pool of firms competing for customers based on quality, price, and service”; and (vi) researching issues related to big tech’s influence on consumer payments.
In his opening statement, Senate Banking Committee Chair Sherrod Brown (D-OH) praised Chopra’s recent efforts related to “junk fees” such as overdraft fees and non-sufficient fund fees, discrimination and bias in the appraisal process, reporting of medical collection debt by the credit reporting agencies, examination authority over non-banks and fintech companies, and crack-down on repeat offenders. However, Ranking Member Patrick Toomey (R-PA) criticized Chopra’s actions and alleged “overreach.” Among other things, Toomey characterized the Bureau’s attempts “to supervise for disparate impact not only in lending, but in all consumer financial services and products” as “unauthorized stealth rulemaking” that “will create tremendous uncertainty among regulated entities.” Toomey also took issue with recent changes to the Bureau’s rules of adjudication, claiming it will “make it easier to engage in regulation by enforcement.”
During the hearing, committee members discussed topics related to collecting small business lending data, rural banking access, student loan servicing, and whether the Bureau should be subject to the congressional appropriations process. Republican committee members raised concerns over several issues, including significant revisions recently made to the Bureau’s unfair, deceptive, or abusive acts or practices (UDAAP) examination manual that state that any type of discrimination in connection with a consumer financial product or service could be an “unfair” practice (i.e., the CFPB can now bring “unfair” discrimination claims related to non-credit financial products). (Covered by a Buckley Special Alert.) Senator Thom Tillis (R-NC) characterized the new policy as a “wholesale rewrite” of the examination manual that will improperly expand the reach of disparate impact liability and challenged the lack of notice-and-comment for the changes to the UDAAP manual.
Conversely, Democratic committee members praised Chopra’s actions and encouraged him to continue pressuring banks to cut excessive overdraft fees and other “junk fees,” as well as strengthen enforcement against repeat offenders. Senator Elizabeth Warren (D-MA) stressed that imposing fines that are less than the profits made from the misconduct will not be enough to persuade large banks to follow the law and asked Chopra to think about other steps regulators might consider to hold large repeat offenders accountable. She referenced her bill, the Corporate Executive Accountability Act, which is designed to hold big bank executives personally liable for the bank’s repeat violations of the law.
Chopra reiterated the Bureau’s priorities in his April 27 testimony before the House Financial Services Committee. At the hearing, House committee members questioned Chopra on the Bureau’s plans to collect data on small business loans pursuant to Section 1071 of the Dodd-Frank Act, crack down on “junk fees,” and address fair lending concerns with automated valuation models and fraud in payment networks. During the hearing, Chopra told committee members that the Bureau plans to revisit and update older regulations such as the CARD Act to lower credit card fees. “We want to make sure that credit cards are a competitive market . . . [so] I am asking the staff to look at whether we should reopen the Card Act rules that were promulgated by the Federal Reserve Board over 10 years ago . . . to be able to look at some of these older rules we inherited, to determine whether there needs to be any changes,” Chopra said, adding that “late fees are an area that I expect to be one of the questions we solicit input on.”
District Court granted final approval of a $5.7 million class action overdraft fee settlement
On April 22, the U.S. District Court for the Northern District of New York granted final approval of a $5.7 million class action settlement resolving allegations related to overdraft fees applied to certain bank account transactions. According to plaintiffs’ unopposed motion for preliminary approval, the bank was sued in 2020 for allegedly unfairly assessing and collecting overdraft fees on “Authorize Positive, Purportedly Settle Negative Transactions” (APPSN fees) as well as NSF fees. The bank denied the allegations and moved to dismiss, contending that the relevant account agreements are unambiguous, and that even if there were, “extrinsic evidence resolves the ambiguity in its favor on the whether the fees at issue are permitted.” In August 2021, the parties notified the court that they had reached an agreement. Under the terms of the preliminarily approved settlement, the bank will make a $4.25 million cash payment and will “forgive, waive, and agree not to collect an additional” $1.5 million in uncollected overdraft fees. Class members, defined as all current and former bank customers with consumer checking accounts who were charged a relevant fee between December 4, 2013, and November 30, 2021, will automatically receive their pro rata share of the settlement fund without having to prove they were harmed from the bank’s practices. There are no claim forms, and class members will be determined through the bank’s checking account data. A formula will be used to calculate each class member’s distribution. Under the terms of the settlement approximately $2.9 million will go towards customers who were charged APPSN fees, while roughly $1.3 million will be allocated for customers who were charged retry NSF fees.
NYDFS encourages banks to expand access to low-cost banking services
On April 15, NYDFS issued guidance determining that offering a “Bank On” certified deposit accounts would satisfy a New York Basic Banking services law that requires institutions to offer low-cost banking services to consumers. According to NYDFS, Bank On accounts (which offer services that eliminate several fees, including overdraft, account activation, closure, dormancy, inactivity, and low balance fees) may be offered as an alternative to existing basic banking accounts. Following an assessment of the New York banking industry to determine the receptiveness and operational viability of offering Bank On accounts, NYDFS concluded that “all New York State regulated banking institutions, as defined under Section 14-f.9(a) of the New York Banking Law . . ., will be deemed to satisfy the Basic Banking requirements under the New York Banking Law and the General Regulations of the Superintendent, by offering Bank On accounts as an alternative to Basic Banking accounts.” Banking institutions may offer Bank On accounts instead of Basic Banking accounts without the need to submit a separate application to the NYDFS for approval. However, because the national standards for Bank On accounts are subject to change without input from NYDFS, institutions that offer the accounts should keep up to date on the national standards.
The guidance follows an announcement from New York Governor Kathy Hochul stating that the “COVID-19 pandemic has shown how important it is for every New Yorker to have financial security.” Stressing that “access to low-cost banking services is critical to managing and securing their financial needs,” Hochul stated that “[t]hese new accounts will help hard working individuals in underserved communities get the affordable, accessible banking options they need and is a crucial step towards ensuring a more inclusive economy for all.”
NYDFS encourages banks to expand access to low-cost banking services
On April 15, NYDFS issued guidance determining that offering a “Bank On” certified deposit accounts would satisfy a New York Basic Banking services law that requires institutions to offer low-cost banking services to consumers. According to NYDFS, Bank On accounts (which offer services that eliminate several fees, including overdraft, account activation, closure, dormancy, inactivity, and low balance fees) may be offered as an alternative to existing basic banking accounts. Following an assessment of the New York banking industry to determine the receptiveness and operational viability of offering Bank On accounts, NYDFS concluded that “all New York State regulated banking institutions, as defined under Section 14-f.9(a) of the New York Banking Law . . ., will be deemed to satisfy the Basic Banking requirements under the New York Banking Law and the General Regulations of the Superintendent, by offering Bank On accounts as an alternative to Basic Banking accounts.” Banking institutions may offer Bank On accounts instead of Basic Banking accounts without the need to submit a separate application to the NYDFS for approval. However, because the national standards for Bank On accounts are subject to change without input from NYDFS, institutions that offer the accounts should keep up to date on the national standards.
The guidance follows an announcement from New York Governor Kathy Hochul stating that the “COVID-19 pandemic has shown how important it is for every New Yorker to have financial security.” Stressing that “access to low-cost banking services is critical to managing and securing their financial needs,” Hochul stated that “[t]hese new accounts will help hard working individuals in underserved communities get the affordable, accessible banking options they need and is a crucial step towards ensuring a more inclusive economy for all.”
District Court grants final approval of $10 million class action settlement
On April 11, the U.S. District Court for the Eastern District of New York granted final approval to a $10 million class action settlement resolving allegations that a defendant bank breached its payment card processing servicing contracts with merchants by imposing excessive fees without contractually required notice. Additionally, the plaintiffs alleged that the defendant was “unjustly enriched by imposing early termination fees that constituted unlawful penalties.” The settlement class includes over 200,000 merchants that entered into a payment card processing servicing contract with the defendant and who paid at least one of the fees underlying the litigation from October 2011 to the settlement date. Those fees include annual fees, early termination fees, and paper statement fees. According to the memorandum in support of the unopposed motion for preliminary approval of class settlement, the deal would provide $10 million in cash to the settlement class, and attorneys representing the class can seek up to one-third of that fund in attorneys’ fees. In addition, each of the three class representatives will be granted $10,000 service awards, per the motion.
States urge CFPB to prohibit mortgage servicers from charging convenience fees
On April 11, a coalition of state attorneys general, led by Illinois Attorney General Kwame Raoul, announced that they are urging the CFPB to prohibit mortgage servicers from charging convenience fees, which the AGs also referred to as “junk fees” or “pay-to-pay” fees. As previously covered by InfoBytes, the CFPB announced an initiative to reduce “exploitative” fees charged by banks and financial companies and requested comments from the public on fees that are associated with consumers’ bank accounts, prepaid or credit card accounts, mortgages, loans, payment transfers, and other financial products that are allegedly not subject to competitive processes that ensure fair pricing. In the letter, the AGs expressed their support for the Bureau’s request for information on the various fees imposed on consumers generally, but called attention to a specific type of fees imposed by mortgage servicers – the “pay-to-pay fees” – which, notwithstanding that consumers can pay using numerous free mechanisms, the AGs find to be “unfair and abusive” to consumers. The AGs called the fees “particularly insidious in the mortgage industry” because, unlike other markets in which such fees are imposed, “homeowners have no choice in their mortgage servicer.” Because of the nature of the secondary mortgage market, homeowners’ expectations of entering into a long-term relationship with their originating institution are misplaced and they cannot know in advance or determine which company will service their loans – even if they choose to refinance. The AGs also warned that the choice to make payments by an alternative method with no fee (such as online or by check instead of over the phone) may be illusory in the face of pending payment posting deadlines and threatened late fees. In such scenarios, the AGs asserted that the convenience fee operates as an alternative late fee “cheaper, but with a shorter grace period, and in contravention to the contractual terms in most mortgages that outline the specific amount and timing” of late fees. The AGs also took umbrage to mortgage servicers charging fees for the very service they are expected to perform, stating that “[t]he most basic function of a mortgage servicer is to accept payments. The concept that a servicer ought to be able to impose an additional charge for performing its core function is fundamentally flawed.”
Ultimately, the AGs suggested that the Bureau prohibit mortgage servicers from imposing convenience fees on consumers, but, alternatively, the AGs encouraged the Bureau to prohibit servicers from charging convenience fees that exceed the actual cost of processing a borrower’s payment. Furthermore, the AGs requested that the Bureau require servicers to fully document their costs supporting the imposition of convenience fees.
The same day, a group of AGs from 16 Republican-led states released a letter, arguing that more federal oversight would be “duplicative or unwarranted,” given that states already regulate many fees for consumer financial products and services. According to the letter, the AGs noted that “state legislatures and regulators have carefully weighed consumer protection interests and the open and transparent operation of markets in a manner intended to deliver the maximum benefit to the interests of their states,” and argued that they “are much better positioned to understand and assess the diverse interests of their states.” In addition, the letter argued that the Bureau has “limited authority to regulate” fees in consumer financial services markets. The AGs mentioned that the Bureau “may seek to use its authority to prohibit unfair, deceptive or abusive acts or practices to regulate fees,” but considered it “unclear” “that fees disclosed in accordance with state or federal law, in some cases authorized by state law, and agreed to by a consumer in writing constitute ‘unfair, deceptive or abusive’ fees, notwithstanding the CFPB’s characterization of some fees as ‘not meaningfully avoidable or negotiable” at the time they are assessed.’” The letter further characterized the Bureau’s approach as “uncooperative,” “top-down,” and “an unfounded expansion of its authority” that may infringe upon state law.
10th Circuit: Extended overdraft fees do not qualify as interest under the NBA
On April 8, the U.S. Court of Appeals for the Tenth Circuit concluded that extended overdraft fees do not legally qualify as interest under the National Bank Act (NBA). According to the opinion, after the plaintiff overdrew funds from his checking account, the bank covered the cost of the item and charged an initial overdraft fee. The bank later began imposing an extended overdraft fee each business day following the initial overdraft, ultimately assessing 36 separate overdraft fees. The plaintiff filed a putative class action, contending that the bank’s extended overdraft fees qualify as interest under the NBA, and that the amount charged (which he claimed translated to an effective annualized interest rate between 501 and 2,462 percent) violated the NBA’s anti-usury provisions because it exceeded Oklahoma’s maximum annualized interest rate of 6 percent. While the plaintiff recognized that the initial overdraft fee qualifies as a “deposit account service,” he argued that the extended overdraft fee “‘is an interest charge levied by [the bank] for the continued extension of credit made in covering a customer’s overdraft’ and therefore cannot be considered connected to the same banking services that [the bank] provides to its depositors.” The district court disagreed and dismissed the action for failure to state a claim after determining that the bank’s extended overdraft fees were fees for “deposit account services” and were not “interest” under the NBA.
In affirming the district court’s dismissal, the appellate majority (an issue of first impression in the 10th Circuit) agreed that the fees qualify as non-interest account fees rather than interest charges under the NBA. The majority deferred to the OCC’s 2007 Interpretive Letter, which addressed the legality of a similar overdraft program fee structure. The letter “represents OCC’s reasonable interpretation of genuinely ambiguous regulations, and OCC’s determination that fees like [the bank’s] extended overdraft fees are ‘non-interest charges’ is neither plainly erroneous nor inconsistent with the regulations it interprets,” the majority wrote. “As ‘non-interest charges’ under § 7.4002, [the bank’s] extended overdraft fees are not subject to the NBA’s usury limits, and [plaintiff] fails to state a claim,” the majority added.
The dissenting judge countered that extended overdraft fees are interest, and that the OCC’s interpretation did not deserve deference because these fees “unambiguously” meet the definition of interest under 12 C.F.R. § 7.4001(a). According to the dissenting judge, this regulation provides that “‘interest’ ... includes any payment compensating a creditor ... for an extension of credit,” and that as such, the “definition maps onto extended overdraft fees like [the bank’s]” and thus the plaintiff had stated a claim.
District Court dismisses bank from class action on out-of-network ATM fees
On April 4, the U.S. District Court for the Southern District of California granted a defendant bank’s motion for summary judgment and denied class certification in an action concerning out-of-network fees charged on purportedly invalid balance inquiries performed at out-of-network (OON) ATM machines. The defendant is a member of two cardholder networks, which permit account holders to access and use OON ATMs. In 2019, plaintiff account holders filed a lawsuit alleging the defendant violated several California state consumer protection laws and breached its deposit account agreements by systematically charging excessive fees. Plaintiffs further alleged the defendant assessed multiple fees if a consumer made a balance inquiry at the same time as a cash withdrawal. The defendant argued in its motion for summary judgment that the deposit agreement was unambiguous and that its assessment of the OON fees for balance inquiries is permitted under the agreement’s express terms. In agreeing with the defendant that no ambiguity existed in the language in the agreement regarding such fees, the court, among other things, also held that language in the agreement providing the defendant and ATM operators discretion to charge or waive fees for use of OON ATMs did not imply that the defendant relied on that contract term in bad faith. The court found that nothing about the use of the word “may” in the phrase “[w]e may also charge you a fee,” necessitates “the conclusion that the bank ‘abuses its power and takes advantage of contractual uncertainty by charging OON Fees when it knows, or should know, of the [alleged] systematic deception occurring at [OON] ATMs resulting in invalid balance inquiries.’”
In its motion, the defendant bank also maintained that the claims against it fail because the plaintiffs failed to follow express reporting and pre-dispute notification procedures outlined in their agreements, which require account holders to review their statements and notify the bank within 60 days of any problems or unauthorized transactions. The court declined to find that the pre-dispute procedures provided an alternative basis for summary judgment in favor of the defendant, finding that it was not clear that plaintiffs’ obligation to provide defendant with notice of unauthorized transactions covered disputed OON ATM fees. The court explained that such fees may not be apparent on the plaintiffs’ billing statements and that “the notice provisions seem to relate to major issues such as fraud and unauthorized or stolen checks” rather than problematic fees.
FTC imposes “record-setting” fine on auto dealer alleging discriminatory junk fees
On April 1, the FTC and the Illinois Attorney General announced a proposed settlement with an Illinois-based multistate auto dealer group for allegedly adding junk fees for unwanted “add-on” products to consumers’ bills and discriminating against Black consumers. Under the terms of the proposed settlement, the defendants are ordered to pay a $10 million penalty, of which $9.95 million will be used to provide monetary relief to consumers. According to the FTC, this is the highest penalty ever obtained against an auto dealer. The remaining balance of the penalty will be paid to the Illinois Attorney General Court Ordered and Voluntary Compliance Payment Projects Fund.
According to the complaint, which brings claims under the FTC Act, TILA, ECOA, and comparable Illinois laws, eight of the defendant’s dealerships, along with the general manager of two of the Illinois dealerships, allegedly tacked on junk fees for unwanted “add-on” products such as service contracts, GAP insurance, and paint protection to consumers’ purchase contracts at the end of the negotiation process, often without consumers’ consent. In other instances, consumers were told that the add-ons were free or were required to purchase or finance their vehicle. The complaint further alleges that defendants discriminated against Black consumers by charging them higher interest rates or more for add-on products than similarly situated non-Latino white consumers. As result, Black consumers allegedly paid, on average, $190 more in interest and $99 more for add-on products.
FTC Chair Lina M. Khan and Commissioner Rebecca Kelly Slaughter issued a joint statement noting that they “would have also supported a count alleging a violation of the FTC Act’s prohibition on unfair acts or practices.” Khan and Slaughter elaborated on reasons why the FTC “should evaluate under its unfairness authority any discrimination that is found to be based on disparate treatment or have a disparate impact,” pointing out that (i) discrimination based on protected status can cause substantial injury to consumers; (ii) “injuries stemming from disparate treatment or impact are unavoidable because affected consumers cannot change their status or otherwise influence the unfair practices”; and (iii) “injuries stemming from disparate treatment or impact are not outweighed by countervailing benefits to consumers or competition.”
House subcommittee discusses eliminating overdraft fees
On March 31, the House Financial Services Committee’s Subcommittee on Consumer Protection and Financial Institutions held a hearing titled, The End of Overdraft Fees? Examining the Movement to Eliminate the Fees Costing Consumers Billions, to discuss efforts to reduce or eliminate overdraft fees. Subcommittee Chair Ed Perlmutter (D-CO) opened the hearing by noting that “consumers in the United States pay around $10 to $12 billion in overdraft fees and nonsufficient fund fees,” with just 9 percent of consumers representing up to 80 percent of these fees. He also noted that these “types of fees impact people of color at a disproportionate rate,” and that “[s]tudies have found banks with branches in predominantly black neighborhoods charge more for overdraft on average, and black customers are overrepresented in those who report paying more than $100 in fees in the past year.” Some subcommittee Democrats appeared supportive of measures to address the alleged growing reliance by banks and credit unions on revenues from overdraft fees to make up for interest lost in the current low-rate environment. In contrast, certain subcommittee Republicans appeared skeptical of government efforts to limit financial institutions’ ability to provide overdraft services, questioning the impact such efforts would have on smaller financial institutions like community banks and credit unions. The committee memorandum and hearing focused on the evolving trends related to overdraft programs and fees and their impact on consumers, including the following:
- Overdraft and Non-Sufficient Funds (NSF) Fee Data and Trends. The subcommittee quoted a study that found that “federal regulators have required banks and credit unions with more than $1 billion in assets to report revenue collected specifically from overdraft and NSF fees, totaling between $11 billion and $12 billion annually,” since 2015. According to the subcommittee, “the true fee total is likely higher since smaller depository institutions are exempt from the reporting requirement.”
- Impact on Consumers. The subcommittee quoted a report that said “consumers face challenges with unclear or confusing overdraft policies or are charged fees simply because of a delay in when their paycheck deposits are made available or when other transactions are settled in their account.” According to the report, consumers “incur overdraft fees despite carefully attempting to avoid them and often believing they have. One practice, in particular, has garnered increased attention recently: charging overdraft fees on debit card transactions that were authorized when the consumer had sufficient funds in the account but then settled, often a few days later, when the account no longer had sufficient funds.”
- Proposals and Challenges to Improving Consumer Protections when Consumers Overdraft. The subcommittee pointed out that initiatives to improve overdraft fees and NSF fees would “focus on enhancing disclosures and information about overdraft provided to consumers; capping the number of fees a consumer may be charged in a defined period of time; reducing the cost of each fee, or encouraging or incentivizing financial institutions to offer small-dollar loans with streamlined underwriting and affordable interest rates or repayment plans to provide an alternative for consumers who typically rely on overdraft.” The subcommittee also said another possible improvement in the market would result from adopting a faster payments network, such as the FedNow Service. As previously covered by InfoBytes, the Fed announced in August 2020 its intention to implement the FedNow Service—a “round-the-clock real-time payment and settlement service”—through a phased approach with a target launch date sometime in 2023 or 2024.
One witness, a senior policy analyst from a Latino civil rights and advocacy organization, expressed his support for reducing or eliminating overdraft fees, stating that “[o]verdraft fees, by their nature, impact consumers when they can least afford an additional [c]ost.” The witness quoted a study that found “[l]ow- to moderate-income households are nearly twice as likely as higher-income households to overdraw an account.” Calling overdrafts “a penalty for being poor or financially insecure,” another witness, a consumer policy counsel at a civil rights nonprofit, expressed that “overdraft fees are a penalty for being poor or financially insecure.” Quoting a study finding that approximately “80 percent of overdraft fee revenue to banks comes from 9 percent of accounts,” the witness stated that the “median account balance of this group is less than $350.” In contrast, another witness, a law professor at George Mason University, stated in the hearing that “exasperation is not a substitute for sound economic analysis," He stressed that “this is an area in which unintended consequences of bans on overdraft protection, substantive limits, price controls and the like could have some serious unintended consequences.” He further warned of possible negative consequences should policymakers eliminate overdraft programs, cautioning that new restrictions on overdrafts may have many negative implications for consumers, including “higher bank fees, higher minimum monthly deposits . . . and a loss of access to free checking.”
Additionally, some House Republicans were critical of recent efforts taken by the CFPB in this space and the elimination of overdrafts by several banks. During the hearing, Rep. Blaine Luetkemeyer (R-MO) criticized the CFPB’s inquiry into junk fees (covered by InfoBytes here), arguing that, “t[h]ere is no legal authority for the CFPB to define the term ‘junk fee’ . . . and even less authority for the CFPB to act as a price setter in the consumer financial market.” Luetkemeyer added that “the CFPB is manufacturing a crisis about hidden fees for financial products and services when they are the very people that made up the disclosure regime,” and called the effort “another attempt by the CFPB to denigrate legally operating businesses by any means possible.”