CFPB Issues New Guidance on Overdraft and Depositor Fees as Part of “Junk Fee” Initiative

On October 26, 2022, the Bureau of Consumer Financial Protection (CFPB) issued supervisory guidance which warned financial institutions that levying overdraft fees to consumers who would not reasonably anticipate the fees may constitute an unfair act or practice under the Consumer Financial Protection Act of 2010 (CFPA). In addition, the CFPB issued a compliance bulletin warning that certain depositor fees may similarly violate the CFPA. This guidance comes as a next step in the CFPB’s “junk fee” initiative, launched in January 2022, through which the CFPB has endeavored to identify and take certain steps to curb potentially exploitative fees charged by banks and other financial institutions. This client Advisory provides an overview of the CFPB’s guidance, describes the regulatory context surrounding the CFPB’s actions and outlines key takeaways for financial institutions.

Background

The issuance by the CFPB of the guidance introduced above demonstrates the agency’s acute focus on the issue of consumer “junk fees.” In connection with the CFPB’s announcement, President Biden himself voiced his support for the CFPB’s actions, which are consistent with the President’s broader ongoing initiative to reduce or eliminate certain fees and charges relating to banking and other consumer services. The CFPB’s guidance is published in the wake of a consent order entered into by the CFPB and Regions Bank in September 2022 concerning Regions Bank allegedly charging unlawful overdraft fees. According to the consent order, Regions Bank had charged so-called “surprise” overdraft fees, known as “authorized-positive” fees, on certain ATM withdrawals and debit card purchases even after informing consumers they had sufficient funds at the time of their transactions. The CFPB found Regions Bank’s practices to be in violation of the CFPA’s prohibition against unfair, deceptive, or abusive acts or practices (UDAAPs). The order required Regions Bank to pay a civil penalty amounting to $50,000,000, as well as $141,000,000 in redress, to consumers who were harmed by the bank’s use of “surprise” overdraft fees. The CFPB’s enforcement policy regarding unlawful overdraft fee practices is made evident through this enforcement action and is further clarified through the issuance of the guidance discussed below.

Understanding the CFPB’s Guidance on Depositor Fees

Under the CFPA, the CFPB may take action to prevent financial service providers from engaging in unfair acts or practices. An act or practice is “unfair” under the CFPA when it causes, or is likely to cause, substantial injury to consumers that is not reasonably avoidable and where the injury is not outweighed by countervailing benefits to consumers or to competition. According to the CFPB’s compliance bulletin addressing returned deposit item fee assessment practices, the CFPB has determined that blanket policies of charging depositor fees to consumers for all bounced checks, regardless of the circumstances involved with a particular check bouncing, are likely “unfair” under the CFPA, as they would often result in substantial, unavoidable injury to consumers and would not be outweighed by countervailing benefits. As stated by the CFPB in its compliance bulletin, often a depositor has no way to know nor any meaningful control over if and how a check will clear, as most bounced checks result from the check originator not having enough money available in their account to clear the check. Moreover, as stated in the compliance bulletin, the CFPB views the policy interests promoted by imposing “surprise” depositor fees as being weak and likely outweighed by countervailing interests in consumer protection and the promotion of competition by eliminating back-end fees.

The CFPB advises banks that it may be difficult to demonstrate that consumer injury stemming from blanket returned deposit item fee practices are outweighed by countervailing benefits. Accordingly, by implication, banks may reduce their potential UDAAP liability by tailoring their policies such that returned deposit item fees are levied against a consumer only when the consumer is reasonably aware of the risk that a check might bounce and has practical means to avoid the associated fee. For example, the CFPB’s guidance states that a bank likely would not be in violation of the UDAAP prohibition where the bank charges a consumer a fee after the consumer has repeatedly deposited bad checks from the same originator or only assesses a fee when checks are unsigned. In these instances, a reasonable consumer should be aware of the risk that the check may not clear, and therefore the incurrence of fees by such consumers would be reasonably avoidable.

Understanding the CFPB’s Guidance on Overdraft Fees

The CFPB’s guidance on “surprise” overdraft fees notes that overdraft fee assessment practices must comply with applicable consumer financial laws, including the Truth in Lending Act and the Electronic Fund Transfer Act and their implementing regulations, but focuses principally on potential UDAAPs associated with overdraft fees that consumers cannot reasonably avoid. In the guidance, the CFPB notes that “surprise” overdraft fees may arise in a variety of contexts but highlights overdraft fees that result from “authorize positive, settle negative” (APSN) transactions—which have long been the source of supervisory scrutiny.

An APSN transaction occurs in cases where a consumer has an account balance that displays sufficient available funds to pay for a given transaction, yet due to intervening authorizations, settlement of other transactions or other factors, there are insufficient funds to cover the transaction at the time the debit settles, resulting in the assessment of an overdraft fee. According to the CFPB’s guidance, the disparity between an individual’s account balance at the time of a transaction and their balance at the time the debit settles often is the result of complex banking processes, inscrutable even to a prudent consumer diligently watching their account balance. As such, the CFPB states that unanticipated overdraft fees resulting from APSN transactions impose substantial injuries on consumers that they cannot avoid and that are not outweighed by countervailing benefits to consumers. Accordingly, the CFPB concludes that levying surprise overdraft fees following APSN transactions likely constitutes an unfair business practice in violation of the CFPA.

Takeaways for Financial Institutions

As part of the CFPB’s increase in supervisory focus of “junk fees,” the CFPB continues to scrutinize back-end fees that could be considered unfair to consumers. The CFPB’s actions are the latest in a series of regulatory developments regarding overdraft fees that could further impact the extent to which financial institutions choose to engage in overdraft fee assessment practices.  In recent months, several prominent financial institutions have announced their plans to eliminate overdraft fees entirely, or to curtail their practices in ways that mitigate the likelihood of supervisory scrutiny and/or reputational damage. Although it remains unclear if the federal banking agencies will adjust their examination and enforcement policies in light of the CFPB’s scrutiny of consumer “junk fees,” the CFPB’s actions alone may contribute to a continuation of these industry trends.

Further, the CFPB’s guidance also provides another example of the agency’s willingness to use less formal channels, such as guidance in the form of non-binding policy statements, to further interpret and enforce consumer financial laws. Another recent example of this approach is the CFPB’s updating of its Supervision and Examination Manual to explicitly incorporate anti-discrimination considerations as part of an evaluation of a potential UDAAP. For further reading, please refer to our March 28, 2022 client Advisory.

The CFPB’s continued use of informal guidance, public statements, and reports to articulate its interpretations of consumer financial laws and regulations, as well as the agency’s enforcement policies, have been criticized by industry participants. Of note, the American Bankers Association and six other trade associations sued the CFPB in response to the actions taken by the agency to target discrimination through the UDAAP examination process as described above, arguing in part that the CFPB’s procedural updates do not represent mere administrative guidance, but rather constitute the enactment of an agency rule that the CFPB has failed to subject to the full notice-and-comment rulemaking process required by the federal Administrative Procedure Act. Here, although the CFPB has initiated formal rulemaking proceedings in support of its “junk fee” initiative, it has elected not to do so with respect to financial institutions’ overdraft and returned deposit item fee assessment practices. Financial institutions may view this approach as troubling, as it may be difficult to ascertain whether, or to what extent, the CFPB may elect to enforce its guidance through the examination process.

Financial institutions interested in how the CFPB’s recent actions may impact their businesses may contact any of the authors of this Advisory or their usual Arnold & Porter contact. The firm's Financial Services team would be pleased to assist with any questions about CFPB supervision or consumer finance more broadly.

*George Eichelberger contributed to this Advisory. George Eichelberger is a graduate of University of Pennsylvania Law School and is employed at Arnold & Porter's Washington, DC office. He is not admitted to the practice of law in Washington, DC.

© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.