At first glance, the Consumer Financial Protection Bureau’s proposed non-sufficient funds (NSF) fee regulation would not seem to merit bankers’ serious attention.
By the CFPB’s own admission, the NSF fees the proposal would prohibit are “rarely charged.” However, the proposal deserves bankers’ serious attention.
Simply stated, the CFPB’s incredibly broad approach to unfair, deceptive or abusive acts or practices (UDAAP) in the proposal could readily be expanded to attack other lawful bank fees.
NSF fees are typically charged when a check or ACH debit is submitted for payment against a consumer’s account and returned unpaid due to insufficient funds. The CFPB’s proposal would bar NSF fees on “attempt[s] by a consumer to withdraw, debit, pay, or transfer funds from their account that is declined instantaneously or near-instantaneously by a covered financial institution due to insufficient funds.”
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Understanding the CFPB’s View on ‘UDAAP’
In issuing the proposal, the CFPB is using its authority under the Consumer Financial Protection Act (CFPA) to prohibit UDAAPs. The CFPA defines “abusive” acts or practices as conduct that:
1. materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or
2. takes unreasonable advantage of—
- a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
- the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or
- the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.
In April 2023, the CFPB issued a policy statement defining abusive acts or practices, indicating that it finds two categories of conduct to generally be abusive.
The first category of abusive conduct arises in situations where an entity “materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service.” Behaviors would include buried disclosures, physical or digital interference, or overshadowing.
With respect to physical and digital interference, such conduct includes hiding or withholding notices or creating digital interfaces using pop-up or drop-down boxes, including multiple click-throughs, or using dark patterns. Overshadowing includes placing content prominently in a way that interferes with the comprehension of other content.
The second category of abusive conduct involves circumstances in which an entity takes unreasonable advantage of the consumer. This would apply even if the entity did not create the circumstances, and generally includes a consumer’s gap in understanding the terms of the product or service, unequal bargaining power, or a consumer’s reliance on the entity to act in the consumer’s best interest.
In the proposal, the CFPB applies the second category of abusive conduct and concludes that charging fees for transactions declined in real time is an abusive practice.
As we explain below, the CFPB’s analysis is weak at best — even under the CFPB’s own standards for determining when conduct is abusive.
Digging into the CFPB’s NSF Proposal
The proposal is based on the CFPB’s preliminary determination that the imposition of an NSF fee for a covered transaction takes unreasonable advantage of a lack of understanding on the part of the consumer of the material risks, costs or conditions of the product or service.
Despite acknowledging that many consumers can instantly access their current account balances, the CFPB, without an adequate explanation, “preliminarily concludes that consumers initiating covered transactions that incur NSF fees would generally lack awareness of their available account balance.”
The CFPB also preliminarily concludes, again without an adequate explanation, that such consumers “would generally lack awareness of … other information about the material risks, costs, or conditions regarding their account.” This would be regardless of whether the consumer knew that an NSF would be imposed for a declined covered transaction based on a prior declination of a covered transaction or a disclosure provided to the consumer.
In the preamble to the proposal, the CFPB provides the following explanation for its incredibly broad interpretation of abusive conduct: [This section is broken into smaller paragraphs for ease of reading.]
“At the time a consumer considers initiating a request to withdraw, debit, pay, or transfer funds from their account, the relevant risks to the consumer would include the possibility the transaction will be declined and result in an NSF fee.
“Furthermore, once a consumer actually initiates a covered transaction, it is certain that the transaction will be instantaneously declined and they will be charged a fee; therefore, the likelihood of harm at that time is 100 percent. This is because no chance occurrence, consumer choice, or other intervening event can happen between the transaction’s initiation and the instantaneous decline that could change the harmful outcome (i.e., the assessment of the fee). In other words, for covered transactions that are initiated, the risk of harm is a certainty.
“Therefore, a consumer who initiates such a transaction believing the transaction nevertheless might go through would lack understanding of the likelihood of harm. Given the tangible and negative consequences of both a transaction decline and the imposition of a fee, the CFPB interprets this risk, if and when present, to be material.”
Essentially, the CFPB takes the position that consumers should be considered ignorant of information readily available to them and which is completely within their control, such as their account balance and the disclosures they received and terms to which they agreed at account opening.
The CFPB could easily apply a similar abusive analysis to other lawful bank fees.
Looking at an Example of How the CFPB Proposal Would Work
Take the example of a consumer who knew an NSF would be imposed for a declined covered transaction.
The consumer is considering attempting a covered transaction and realizes that, based on their account balance, the transaction may be declined or paid into overdraft.
The consumer accepts the risk and attempts the transaction.
If the transaction is paid, an overdraft fee may apply. If the transaction is declined, an NSF fee may apply.
The consumer previously received the model form created by the regulators to inform consumers about overdrafts and declined transactions, called What You Need to Know About Overdraft and Overdraft Fees. (We assume the CFPB finds the document informative.)
Applying the CFPB’s absurd reasoning to this example, if the consumer was charged an NSF or overdraft fee, the consumer would have lacked an understanding of the material risks, costs or conditions of the product or service. This would be despite the disclosures the consumer previously received and the fact that even if the consumer did not keep an accounting of their balance, the consumer could have easily accessed their account balance through phone banking, online banking, mobile banking or at an in-network ATM.
CFPB Sees Consumers as Ignorant:
Simply stated, the CFPB would consider consumers to be ignorant of their account balance, the checks they wrote, and the electronic payments they authorized. The bureau would say consumers have no ability or responsibility for tracking that information despite the easy access consumers have to it.
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An Example of Where This Thinking Can Go
Now, let’s extrapolate this abusive analysis to credit card late fees.
Let’s say a credit card late fee was disclosed and agreed to by the consumer when the card was issued. In addition, let’s say it is also disclosed in each periodic statement, and making timely monthly payments is completely within the consumer’s control. The consumer would have to read the account-opening disclosures, account agreement and periodic statement, and then remember to pay on time to avoid a late fee.
Therefore, the CFPB would argue imposing a fee for a late payment takes unreasonable advantage of a lack of understanding on the part of the consumer of the material risks, costs or conditions of the product or service.
The bottom line is that under the broad interpretation of abusive conduct advanced in the CFPB’s proposed rule, the bureau could find most any act or practice that it disfavors to be abusive.
A Bizarre Twist that Defies Reality
There is at least one additional reason why the proposed regulation is invalid: It is “arbitrary and capricious” under the Administrative Procedure Act because no large banks are assessing NSF fees anymore.
The CFPB acknowledges that fact. However, it argues that banks might reinstitute NSF fees in order to recover the reduction in overdraft fees that they might experience if the bureau’s proposed overdraft fees regulation becomes final.
There are a lot of “mights” and “ifs” in the bureau’s rationale. Even the CFPB would probably admit that its rationale is based on pure conjecture. That is the textbook example of an “arbitrary and capricious” regulation and, as such, an invalid regulation.
Bankers should comment on this proposal by March 25, 2024, to prevent this dangerous expansion of abusive conduct.
Alan S. Kaplinsky is senior counsel at Ballard Spahr LLP and the former longtime practice leader of the firm’s Consumer Financial Services Group. Kristen E. Larson is of counsel at the firm. She served as in-house counsel at national banks for nearly two decades.