How Far Could CFPB Take Its Crusade on Bank ‘Junk Fees’?

The Consumer Financial Protection Bureau is routinely regulating outside of traditional rulemaking channels. The agency's target most recently was overdraft fees, but much more is coming.

To most consumers, there are darn few — if any — bank fees that have the same appeal as paying more for extra toppings on your pizza.

Using this comparison is apt because a reference to tasty add-ons appears in a White House blog about a Biden administration effort, “The President’s Initiative on Junk Fees and Related Pricing Practices.” In recounting the administration’s government-wide campaign to kill such practices, the blog makes a regulatory poster child out of the Consumer Financial Protection Bureau.

The White House blog came out the same day that CFPB unveiled its latest attack on banking fees. Specifically, two common industry practices were in CFPB’s immediate sights:

• “Surprise overdraft fees”: These are overdraft charges made when consumers had enough money in their account to cover a debit transaction when authorized but have insufficient funds when the withdrawal actually hits the account.

In industry jargon, these are “authorized positive-settled negative fees.” These fees were behind the CFPB settlement with Regions Bank in September 2022, which included refunds of $141 million to affected consumers as well as a $50 million penalty.

• “Depositor fees”: This is CFPB’s term for charging fees when a deposited check bounces. These fees are typically assessed when a customer puts someone else’s check into their account in good faith and that check bounces and is returned for insufficient funds. In other words, the depositor gets hit for the sins of the payor.

“Americans are willing to pay for legitimate services at a competitive price, but are frustrated when they are hit with junk fees for unexpected or unwanted services that have no value to them,” said Rohit Chopra, Director of CFPB. He stated this when the bureau released a “consumer financial protection circular” on surprise overdraft fees and a “compliance bulletin” on surprise depositor fees.

“Overdraft and depositor fees likely violate the Consumer Financial Protection Act on unfair practices when consumers cannot reasonably avoid them,” CFPB said in announcing the policy move. (The act referred to, Title X of the 2010 Dodd-Frank Act, created the CFPB and many of the principles it operates under.)

The Bureau Is Playing By Obama-Era Thinking

CFPB issued this policy change outside of traditional regulatory rulemaking procedures that typically go through at least one public and industry comment period.

In its early years, under the Obama administration, CFPB frequently regulated by pronouncement in speeches, letters and other nontraditional measures that didn’t follow official rulemaking procedures.

Under Richard Cordray, the bureau’s first official Director, the bureau became notorious for holding institutions to requirements that weren’t officially in law or regulation and that could sometimes only be understood by reverse engineering from bureau legal settlements and other documentation.

After the interval of the Trump administration, which originally wanted to kill the bureau, Chopra, a CFPB staffer in its early days, has returned to the “old days,” according to some observers.

Read More: Overdraft Fees: Worth the Publicity Headaches and the Fines?

Junk Fee Effort Continues CFPB’s Tradition of ‘Fiat Regulation’

Today’s CFPB has an aggressive agenda. In the year or so that Chopra has been in power at the bureau it has kept rolling out pronouncements that the nation’s large banks must pay close attention to.

Alan Kaplinsky, Senior Counsel at Ballard Spahr LLP, has been working on CFPB matters since its debut and explains why the bureau keeps coming up with surprises and unexpected interpretations.

“Formal rulemaking takes a lot of time and it could get challenged in court,” explains the lawyer. “So he [Chopra] prefers to do things by issuing ‘guidance’ and such.” Even blog posts need to be examined for new wrinkles in consumer banking regulation, says Kaplinsky.

Chopra on Steroids:

Some believe CFPB Director Rohit Chopra is using guidance even more aggressively than Richard Cordray did.

Governing by fiat has marked a good deal of this White House’s history and Chopra is following suit.

“Just about anything he doesn’t like, he finds a way to go after it,” says Kaplinsky. Short of a lawsuit against the bureau, “there really is no check on what Chopra does,” Kaplinsky adds. If the Republicans regain Congress after the 2022 elections, he believes this will simply accelerate the current CFPB leadership’s agenda.

Read More: Why People Don’t Want Banks to Pull the Plug on Overdraft Services

Looking at the Impact of CFPB’s Fee Guidance

Kaplinsky says both practices attacked by CFPB are quite common in the industry and that for a long time the possibility of being charged fees in either situation has been handled by disclosures when accounts were opened.

For its part, the bureau maintains that simply disclosing the existence of the fees doesn’t help if the circumstances triggering them — such as receiving and depositing a bad check — are out of the depositor’s control.

In its compliance bulletin on fees for returned items deposited, CFPB states that:

“There are many reasons deposited items can be returned unprocessed. For example, the check originator may not have sufficient funds available in their account to pay the amount stated on the check; the check originator may have directed the issuing depository institution to stop payment; the account referenced on the check may be closed or located in a foreign country; or there may be questionable, erroneous, or missing information on the check, including with respect to the signature, date, account number, or payee name.”

In addition, the document notes, while some commercial parties, like lenders and landlords, can recoup fees from the person who bounced the check, typically consumers have no way to do so.

The American Bankers Association’s comments on the bureau’s move regarding depositor fees noted that the fees covered the cost of returning a bad check and the risk of loss to the bank. The group added that surprise overdraft fees were less common due to industry efforts to solve technological problems.

“It’s also important to note that a growing number of banks provide overdraft-free account options or no longer charge overdraft fees at all,” ABA said.

“The CFPB has clear authority to define prohibited fee practices through notice-and-comment rulemaking, but instead continues to rely on invective-filled guidance, which is legally non-binding but which the CFPB has a history of improperly enforcing through the non-public examination process and threats of enforcement action,” stated the Bank Policy Institute.

Read More: Strong Growth in Bank Digital Marketing Comes Under a CFPB Cloud

Time for an ‘Overdraft Holiday’?

Will the CFPB policy trickle down to cover small institutions? Kaplinsky says that’s unclear at present. He notes that Chopra has not indicated if he consulted with other banking regulators before publishing the documents.

Meanwhile, banking consultant Mike Moebs, in a bulletin prompted by the junk fee issuance, suggested that regulators take an “overdraft holiday” in order to have time to “correct government misdirected guidance of the marketplace.”

Moebs said that if institutions were to completely halt overdraft service, many debit card transactions wouldn’t be honored.

“Overdrafts are like seat belts,” Moebs wrote. “They are part of the transaction package. An overdrafter knows their bills will be paid even if their transaction account is overdrawn, so they feel safe from bill collectors.”

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