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FINRA fines firm $2.3 million for misusing customer funds and charging unreasonable fees
On March 22, a decision was entered in a disciplinary proceeding between FINRA’s Department of Enforcement and a securities firm over whether the firm engaged in unauthorized trading and misused customer funds in response to mounting financial challenges in 2018. FINRA’s extended hearing panel alleged that the firm, in light of declining profits, informed customers that it would stop carrying retail accounts and levied “unreasonable and unnecessary” fees in a discriminatory manner on retail customers who did not close their accounts—including a $5,000 monthly account fee—without providing proper notice. According to the panel, the monthly fee was applied in a discriminatory manner, wherein the fee was waived for profitable accounts and certain customers. Other customers were required to pay a portion or all of the monthly fee in order to regain possession of other holdings. Moreover, the panel claimed that in most instances, “customers were not even aware of the $5,000 monthly account fee, let alone that the firm was taking their cash and securities to cover it.”
The firm argued that the monthly fee should be considered reasonable because it resulted from an “arm’s-length agreement” between the firm and its customers, but the panel rejected the firm’s defense, pointing out that customers did not agree to the fee “as part of a contract freely negotiated at arm’s length between sophisticated parties with equal bargaining power.” The panel further asserted that, among other things, the firm also allegedly charged customers unfair prices in securities transactions, moved securities from customer accounts to firm accounts without authorization, and executed an unauthorized capital withdrawal disguised as a payment.
In issuing its decision, the panel found no mitigating factors but identified several aggravating factors, including that the firm “continued a disturbing pattern of misconduct” after a temporary cease and desist order was issued. The firm is ordered to pay more than $2.3 million in restitution and must permanently cease and desist from converting or misusing customer funds or securities, effecting unauthorized transactions in customer accounts, charging unreasonable or discriminatory fees, or causing harm to investors, among others. The panel cautioned that it was “highly likely” that the firm’s misconduct would recur if it remained a FINRA member firm and stressed that expulsion was “the only alternative for protecting the investing public.” The firm denied all allegations.
CFPB releases report on credit card late fees
On March 29, the CFPB released a report analyzing credit card late fees. Using three data sources to study the consumer impact of and industry reliance on late fees, the report found that credit card issuers charged approximately $12 billion in 2020. The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) requires that late fees be “reasonable and proportional,” and its implementing regulation (Regulation Z) sets a “safe harbor” for certain fee amounts, which are adjusted by the CFPB annually for inflation. The report described that these limits have increased to $30 for the first late payment and $41 for a subsequent late payment within 6 billing cycles. The Bureau noted that Congress transferred provisional authority to the CFPB, who “expects many major card issuers to hike fees further, based on inflation, given the existing reliance on the immunity provisions in the marketplace.” Other significant findings of the report include, among other things, that: (i) the average deep subprime account was charged $138 in late fees in 2019, compared with $11 for the average superprime account; (ii) credit card accounts held by consumers living in the United States’ poorest neighborhoods paid approximately twice as much on average in total late fees than those living in the richest areas in 2019; (iii) late fee volume decreased when stimulus checks arrived in 2020 and 2021, particularly in households with lower credit scores; and (iv) “[l]ate fees account for a greater share of charges for issuers who service a higher percentage of subprime accounts at almost 20 percent of total interest and fees.”
CFPB compares banks’ overdraft practices
On February 10, the CFPB published a blog post providing research on banks’ overdraft fees, which highlighted the Bureau’s “ongoing and growing concern about the impact of bank overdraft fees on families.” The Bureau noted that in 2019, overdraft and non-sufficient fund fees (NSF) fees cost Americans approximately $15.5 billion, and though these fees decreased during the Covid-19 pandemic, “they’ve still cost people billions during this crisis—and were climbing through the third quarter of 2021.” According to the blog post, banks have been announcing changes to their overdraft programs, which include, among other things: (i) eliminating NSF fees charged when transactions bounce; (ii) decreasing overdraft fees; (iii) reducing the daily number of overdraft/NSF fees the bank can charge; (iv) providing or increasing the amount that an account can go negative prior to charging an overdraft fee; and (v) providing a grace period for bringing an account back to positive prior to charging an overdraft fee. The Bureau noted in an earlier blog post that “these changes represent an encouraging step by some banks in the right direction.” Additionally, the Bureau released a table giving a “snapshot” of large banks’ overdraft and NSF practices. The Bureau’s work on overdraft/NSF fees is part of a CFPB initiative, in which the Bureau says it “will strive to strengthen competition in consumer finance by using its authorities to reduce these kinds of junk fees.” The Bureau has issued a request for comment 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, which the Bureau has characterized as being “exploitative” and not being subject to competitive processes that ensure fair pricing. Bureau research found that certain fees often hide a product’s true cost and can undermine a competitive market. (Covered by InfoBytes here). The comment period opened February 4 and closes on March 31.
NYDFS locks maximum check-cashing fee at 2.27 percent
On February 14, NYDFS issued an emergency regulation halting annual increases on check-cashing fees and locking the current maximum fee set last February at 2.27 percent. “As our world evolves, so must our approach to regulation, which is why for the first time in Department history, we are reexamining the methodology used to determine the maximum check cashing fee,” Superintendent Adrienne A. Harris stated. “[NYDFS] has a responsibility to take a hard look at the impacts of financial products and services on New Yorkers, especially members of underserved communities.” NYDFS noted that the emergency regulation underscores its concerns over the fixed methodology used to determine annual check-cashing fees, which is based on the Consumer Price Index and is not, according to the Department, “necessarily a reliable or accurate indicator of the costs of operating within a specific sector of business, such as financial services.” NYDFS stated that it intends to promulgate a proposed regulation for a new fee methodology and will seek public comments before a final regulation is issued. The emergency regulation will remain in effect until a final regulation is adopted.
Chopra highlights consumer protection topics
On February 10, CFPB Director Rohit Chopra answered questions during a Washington Post Live session on several consumer protection topics. Citing auto lending as a top concern for the Bureau, Chopra noted that it is important for consumers to be able to shop around, refinance loans, and navigate a competitive market. He also discussed recent Bureau initiatives related to junk fees and overdraft/insufficient funds fees, and said the Bureau intends to sharpen its supervisory scrutiny in these spaces. Chopra stated that, as part of a fair and competitive market consumers want to know when they are being charged these fees, noting that financial institutions have started to transition away from dependency on these types of fees and instead implement programs that will allow a bank to determine what shortfall they will allow on an individual consumer basis. He added that the Bureau may eventually see if rulemaking will increase competition and upfront pricing.
Chopra also discussed the role agencies play in the future regulation of cryptocurrency. He noted that while most of the cryptocurrency market is currently related to speculative trading, this could change if one of the big tech payment platforms decides to expand its services to cryptocurrency. Chopra highlighted several concerns, including how payment data from these systems will be used, how money will be transacted, and how consumers will report fraud. He stated that the Bureau is closely monitoring this space and any regulation will be an interagency effort. While Chopra also discussed the need for transparency with respect to how big tech companies are tracking, monetizing, and harvesting consumer data, he stated it is too early to tell whether there is a need for rulemaking in this area. Chopra also discussed topics related to the buy-now-pay-later industry and student lending, and stated that the Bureau is monitoring both areas carefully.
CFPB seeks input on “junk fees”
On January 26, the CFPB announced an initiative requesting 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 and that are allegedly not subject to competitive processes that ensure fair pricing. Bureau research found that back-end fees often hide a product’s true cost and can undermine a competitive market. The agency cited statistics showing that in 2019, major credit card companies charged more than $14 billion annually in punitive late fees, and that banks’ revenue from overdraft and non-sufficient funds fees exceeded $15 billion during this same time period. In a measure to reduce these “junk fees” the Bureau’s request for information (RFI) seeks input on (i) fees charged to consumers that they believed were covered by a product or service’s baseline price; (ii) unexpected fees charged for a product or service; (iii) fees that seemed high for the purported service; and (iv) fees that were unclear. The RFI also asks for examples of companies or markets that obtain significant revenue from these types of fees and seeks to explore, among other things, whether consumers understand fee structures disclosures and what “oversight and/or policy tools should be used to address the escalation of excessive fees or fees that shift revenue away from the front-end price[.]” The Bureau also asks small businesses, non-profit organizations, legal aid attorneys, academics and researchers, state and local government officials, and financial institutions, including small banks and credit unions, to submit feedback as well. The comment period opened February 4 and closes on March 31.
CFPB Director Rohit Chopra added that information gathered from the RFI will be used to (i) “issue new rules and guidance to spur competition and transparency” (the Bureau also intends to review some of the rules inherited from the Federal Reserve Board); (ii) identify reasons why financial institutions allegedly do not compete on certain types of fees and features; and (iii) create new rules to provide consumers more control over their data and more opportunities to move their money.
CFPB examines credit card rates and fees
On January 19, the CFPB released a blog on credit card interest and fees. The Bureau noted that credit card debt is rising, and that “from 2015 to 2019, the average assessed interest rate on credit cards increased by more than 20%.” The blog pointed out that the Bureau is examining ways to ensure that there is robust and fair competition in the credit card market. According to the blog, the Bureau “will focus on ensuring a more fair, transparent, and competitive credit card market” by (i) uncovering unfair, anticompetitive practices; (ii) making it easier for consumers to compare, switch, or refinance credit cards; and (iii) scrutinizing junk fees. The Bureau also noted that it is “looking to use a long-dormant authority to help spur better credit card shopping and switching by proposing rules that give consumers more control of their financial data,” and “considering options that will help Americans with credit cards escape high rates and lousy service.”
Agencies adjust civil penalties to account for inflation
Recently, the CFPB, CFTC, FDIC, FinCen, FHFA, and OCC provided notice in the Federal Register regarding adjustments to the maximum civil money penalties due to inflation pursuant to the Federal Civil Penalties Inflation Adjustment Act of 1990, as amended by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015. Each notice or final rule (see CFPB here, CFTC here, FDIC here, FinCen here, FHFA here, and OCC here) adjusts the maximum amounts of civil money penalties and provides a chart reflecting the inflation-adjusted maximum amounts associated with the penalty tiers for particular types of violations within each regulator’s jurisdiction. The OCC’s adjusted civil money penalty amounts are applicable to penalties assessed on or after January 12. The new CFPB, CFTC, FDIC, and FHFA civil money penalty amounts are applicable to penalties assessed on or after January 15. FinCEN's adjusted civil money penalty amounts are effective January 24.
OCC releases 2022 fees and assessments schedule
On December 1, the OCC issued Bulletin 2021-58, which informs all national banks, federal savings associations, and federal branches and agencies of foreign banks of the agency’s 2022 fees and assessment rates. The OCC noted that for the 2022 assessment year, among other things, (i) there will be no inflation adjustment to assessment rates; (ii) new entrants to the federal banking system will be assessed on a prorated basis using call report information as of December 31 or June 30, depending on the entrance date; and (iii) the hourly fee for special examinations and investigations will increase from $150 to $155. The bulletin takes effect January 1, 2022.
District Court denies EFTA safe harbor in overdraft class action
On November 8, the U.S. District Court for the District of New Hampshire denied a credit union’s motion to dismiss claims concerning its overdraft fees and policies. Plaintiffs filed a putative class action alleging that the defendant failed to properly disclose how it assessed overdrafts in violation of EFTA and implementing Regulation E. According to the plaintiffs, the defendant’s overdraft fee opt-in disclosure did not provide a “clear and readily understandable” explanation of the meaning of “enough money,” nor did it specify whether overdrafts are calculated based on the actual balance or the available balance. The defendant moved to dismiss, arguing that the opt-in disclosure should be read in conjunction with a separate membership agreement that outlines the account terms and discloses the defendant’s use of the “available balance” method to determine when an account is overdrawn. The defendant further contended that it did not violate Regulation E and that it qualifies for EFTA’s safe harbor provision. The court disagreed, ruling that the plaintiffs had plausibly alleged a violation of Regulation E, as it requires the opt-in disclosure to be “segregated from all other information.” Among other things, the court stated that “[c]ountless courts examining virtually identical language have agreed” that language similar to the phrase “enough money” can plausibly amount to a violation of Regulation E’s “clear and readily understandable” explanation of overdraft fees.
With respect to defendant’s safe harbor claim, the court observed that EFTA may provide safe harbor to banks using an appropriate CFPB model clause (15 U.S.C. § 1693m(d)(2)) or a disclosure form “substantially similar” to the Bureau’s Model Form A-9, which states “[a]n overdraft occurs when you do not have enough money in your account to cover a transaction, but we pay it anyway.” The court agreed, however, with the reasoning of several courts that using language identical to that in the A-9 does not necessarily provide safe harbor defeating plaintiffs’ claims where, as here, the plaintiffs “have plausibly stated a claim that the clause from Model Form A-9 was not ‘appropriate’ because the language did not describe [defendant’s] overdraft policy in a ‘clear and readily understandable’ way.”