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CFPB says overdraft/NSF revenue has been cut in half
On May 23, the CFPB published another data spotlight reporting on overdraft/non-sufficient fund (NSF) fee trends. Earlier in the month, the Bureau examined low- and moderate-income consumers’ experiences with overdraft programs, finding, among other things, that many consumers were not aware of their financial institution’s overdraft policies and thought protection automatically came with their account, while others were unaware that they could end overdraft protection. (Covered by InfoBytes here.) The newest data spotlight reported that overdraft/NSF revenue for Q4 2022 was down nearly 50 percent as compared to pre-pandemic levels, “suggesting an annual reduction of over $5.5 billion going forward.” According to the Bureau, this translates to average annual savings of more than $150 for households that incur overdraft/NSF fees (with many households being able to save a lot more). Still, even with the noticeable reduction, consumers paid more than $7.7 billion in overdraft/NSF fees in 2022. However, the Bureau noted that combined account maintenance and ATM fees remained flat from 2019 to 2022, suggesting that reporting financial institutions are not increasing other fees to compensate for the reduced revenue.
CFPB examines consumer overdraft experiences
On May 18, the CFPB published a data spotlight reporting on consumers’ experiences with overdraft programs. The Bureau conducted interviews and focus groups with low- and moderate-income consumers last summer where participants were asked about their use of deposit accounts and debit cards, their understanding of overdraft fees and non-sufficient funds (NSF) fees, and their perceptions of ways to avoid these fees. The Bureau found that, among other things, many consumers were not aware of their financial institution’s overdraft policies and thought protection automatically came with their account, while others were unaware that they could end overdraft protection. Others expressed concerns about fees, payment timing, and notifications, with some consumers saying that the typical $35 overdraft fee was “excessive” and “not necessarily proportional to the covered transaction.” Additional concerns flagged by consumers included: (i) financial hardships and fee waivers due to cascading overdraft fees; (ii) negative balances due to delayed merchant holds or delayed deposits; (iii) account closures because of overdraft fees, leading to difficulties when opening new accounts for some consumers; and (iv) limited awareness of various account options, including deposit accounts without overdraft fees and second-chance accounts. The Bureau reported that while some financial institutions have reduced or eliminated overdraft and NSF fees, implementation is “uneven and impermanent,” so consumers may not yet have benefited from the changes.
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.”
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.
District Court sends overdraft fee suit to arbitration
The court disagreed, ruling that the plaintiff had notice of and agreed to terms and conditions that included an arbitration clause and class action waiver. According to the court, the defendant adequately showed that the checkbox button was part of the process when the plaintiff signed up and that the defendant obtained his affirmative asset to the agreement. Further, the plaintiff failed to support his claim with any specific evidence that the checkbox button may not have been there during the sign-up process, the court maintained.
7th Circuit affirms dismissal of NSF fees action
On October 25, the U.S. Court of Appeals for the Seventh Circuit affirmed a district court’s ruling dismissing a putative class action alleging an internet credit union improperly charged account holders non-sufficient funds (NSF) fees. Plaintiff claimed she signed an account agreement with the credit union, which required the use of a ledger-balance method when assessing NSF fees, and that only one NSF fee is permitted per transaction. According to the plaintiff, the credit union breached its contract by charging her a $25 NSF fee when she attempted to pay a $6,000 bill, even though her account’s ledger balance was $6,670.94 at the time. She further claimed the credit union charged multiple NSF fees for the same item. The credit union maintained, however, that the contract allowed it to use the “available-balance method” to assess such fees instead. The opinion explained that the ledger-balance method calculates a balance based on posted debits and deposits (and does not incorporate transactions until they are settled), whereas the available-balance method considers holds on deposits and transactions that have been authorized but not yet settled when calculating a customer’s balance. The district court granted the credit union’s motion to dismiss, rejecting the plaintiff's account balance theory by “explaining that ‘the plain, unambiguous language states that a member needs sufficient available funds’ and reasoning that [plaintiff’s] proposed reading would render [the contract’s] use of the word ‘available’ meaningless.” The district court also maintained that the plural use of the word “fees” permitted the credit union to charge multiple fees when a merchant presented the same transaction more than once.
On appeal, the 7th Circuit agreed with the district court that the agreement did not prohibit the credit union from “charging multiple NSF fees for a transaction that is presented and rejected several times.” While recognizing that the credit union “could have drafted the [a]greement more clearly than it did,” the appellate court determined that the credit union never promised “not to use the available-balance method to assess NSF fees or not to charge multiple fees when a transaction is presented to it multiple times,” and upheld the dismissal of plaintiff’s breach-of-contract claim.
FDIC warns financial institutions about NSF fees
On August 18, the FDIC issued FIL-40-2022 along with supervisory guidance to warn supervised financial institutions that charging customers multiple non-sufficient funds (NSF) fees on re-presented unpaid transactions may increase regulatory scrutiny and litigation risk. According to the FDIC, some institutions’ disclosures did not fully or clearly describe their re-presentment practices and failed to explain that the same unpaid transaction may result in multiple NSF fees if presented more than once. Failing to disclose “material information to customers about re-presentment and fee practices has the potential to mislead reasonable customers,” the agency said, noting that the material omission of this information is considered to be deceptive pursuant to Section 5 of the FTC Act. Additionally, “there are situations that may also present risk of unfairness if the customer is unable to avoid fees related to re-presented transactions,” the FDIC said.
The supervisory guidance also discussed the agency’s approach for addressing violations of law, noting that it will focus on identifying re-presentment-related issues to ensure correction of deficiencies and remediation to harmed customers. The agency stated that examiners “will generally not cite UDAP violations that have been self-identified and fully corrected prior to the start of a consumer compliance examination,” and noted that it “will consider an institution’s record keeping practices and any challenges an institution may have with retrieving, reviewing, and analyzing re-presentment data, on a case-by-case basis, when evaluating the time period institutions utilized for customer remediation.” However, the FDIC warned that “[f]ailing to provide restitution for harmed customers when data on re-presentments is reasonably available will not be considered full corrective action.” Financial institutions are encouraged to review practices and disclosures related to the charging of NSF fees for re-presented transactions and should consider FDIC risk-mitigation practices to reduce the risk of customer harm and potential violations.