CFPB Expands its Growing List of “Junk” Fees – Part 2
By Alex Wade
As discussed in a prior post, the CFPB expanded its growing list of “junk” fees per its “Supervisory Highlights Junk Fees Special Edition, Issue 29, Winter 2023” (“Supervisory Highlights”). This post will focus on another key area of junk fees related to deposits, Authorize-Positive, Settle-Negative Overdraft Fees” or “APSN Overdraft Fees”, as well as junk fees in general.
With that, one thing is clear, regulators are taking a hard stance on “junk” fees. As a result, financial institutions should expect more regulatory oversight and more litigation regarding junk fees as plaintiffs may seek to take advantage of the current environment surrounding these fees.
Notably, the recent Supervisory Highlights is in line with the CFPB’s initiative over a year ago in in January of 2022 to scrutinize back-end junk fees, which garnered a lot of interest and led to tens of thousands of people responding with stories about unnecessary fees from financial institutions. Since then, the CFPB has taken action to attempt to constrain these junk fees and, given the attention surrounding these fees, we anticipate that the CFPB and other regulators will continue their aggressive efforts, which is evident from the Supervisory Highlights.
The following is a breakdown and analysis of the various junk fees that were a point of emphasis in the Supervisory Highlights.
Junks Fees Generally Defined
Interestingly, the CFPB generally defined junk fees as “unnecessary charges that inflate costs while adding little to no value to the consumer. These unavoidable or surprise charges are often hidden or disclosed only at a later stage in the consumer’s purchasing process or sometimes not at all.” With that, our takeaways from this definition are as follows:
- Unnecessary charges that do not add value to the customer will be problematic. On the contrary, necessary fees that confer value to the customer would appear not to be considered junk fees. Based on the foregoing, institutions should analyze each fee to determine whether the charges are necessary and whether the fees and related service add value to the customer. Financial institutions should also document their fee analysis and justification for each fee, which will go a long way in preparing financial institutions in the face of regulatory scrutiny and/or potential litigation concerns.
- Unnecessary charges that are hidden, disclosed late, or never disclosed will be problematic. However, providing clear, conspicuous and upfront disclosure of fees will go a long away in mitigating the risk of being considered impermissible junk fees.
Unfair Authorize Positive, Settle Negative Overdraft Fees
The CFPB has deemed the practice of charging overdraft fees on debit-card purchases and ATM withdrawals even though consumers had sufficient funds when a financial institution authorized the transaction, but then the transaction later settled with an insufficient balance, i.e., APSN Overdraft Fees, to be an unfair practice.
Notably, the Supervisory Highlights did not mention any institution’s disclosures as to its practices related to charging APSN Overdraft Fees. Instead, the Supervisory Highlights focused on the practice of charging said fees as unfair, in-of-itself. In other words, it appears that even if a financial institution discloses its APSN Overdraft Fee practices, that will likely not be sufficient to avoid regulatory exposure. In fact, the CFPB in the Supervisory Highlights stated that the institutions that were the subject of its findings were directed to cease charging APSN Overdraft Fees and even noted that legal violations surrounding APSN Overdraft Fees both generally and in the context of specific public enforcement actions will result in hundreds of millions of dollars of redress to consumers.
In short, the CFPB has essentially banned the practice of charging APSN Overdraft Fees and financial institutions should take heed. Financial institutions that continue to charge APSN Overdraft Fees risk regulatory scrutiny and potential liability exposure for UDAAP violations, among other potential claims. As a result, financial institutions should revisit their overdraft practices and consider eliminating APSN Overdraft Fees, if applicable, in line with the CFPB’s recent guidance and enforcement actions.
Financial institutions should also alert their software vendors that provide overdraft services and ensure that these vendors are complying with the financial institution’s overdraft policies and procedures. This is important because the CFPB even noted that issues still arose when institutions had enacted policies intended to eliminate APSN Overdraft Fees, but APSN fees were still charged. In this regard, the CFPB found evidence of inadequate compliance management systems where institutions failed to maintain records of transactions sufficient to ensure overdraft fees would not be assessed, or failed to use some other solution to not charge APSN overdraft fees. Based on the foregoing, financial institutions must ensure that even when they eliminate APSN Overdraft Fees that they have the proper policies, procedures and systems in place to ensure that these fees are truly eliminated.
Additional Junk Fees Discussed by the CFPB in its Supervisory Highlights Include:
- Charging estimated repossession fees significantly higher than average repossession costs.
- Unfair and abusive payment fees. The CFPB found that auto servicers engaged in unfair and abusive acts or practices by charging and profiting from payment processing fees that far exceeded the servicers’ costs for processing payments, after the consumer was locked into a relationship with a servicer chosen by the dealer.
- The CFPB found that mortgage servicers engaged in unfair acts or practices by assessing late fees in excess of the amounts allowed by their loan agreements.
- The CFPB found that mortgage servicers were repeatedly charging consumers for unnecessary property inspections.
- The CFPB found that mortgage servicers engaged in deceptive acts or practices by sending monthly periodic statements and escrow disclosures that included monthly private mortgage insurance premiums (“PMI”) that consumers did not owe.
- The CFPB found that mortgage servicers violated the Homeowners Protection Act when they failed to terminate PMI on the date the principal balance of the mortgage was first scheduled to reach 78 percent loan-to-value on a mortgage loan that was current, resulting in consumers overpaying for PMI that should have been cancelled.
- The CFPB found that mortgage servicers engaged in unfair acts or practices when they failed to waive certain late charges, fees, and penalties accrued outside forbearance periods, where required by HUD, upon a consumer entering a permanent COVID-19 loss mitigation option.
- The CFPB found that mortgage servicers sent periodic statements to consumers in their last month of forbearance that incorrectly listed a $0 late fee amount for the subsequent payment, when a late fee was in fact charged if a payment was late.
- The CFPB found that lenders, in connection with payday, installment, title, and line-of-credit loans, after unsuccessful debit attempts, split missed payments into as many as four subpayments and simultaneously or near-simultaneously represented them to consumers’ banks for payment via debit card without authorization, a practice that was deemed unfair.
- Charging borrowers repossession-related fees not authorized in automobile title loan contracts. The CFPB found that lenders engaged in unfair acts or practices when they charged borrowers unexpected fees to retrieve personal property from repossessed vehicles and to cover servicer charges, and withheld the personal property and vehicles until borrowers paid the fees.
- The CFPB found that lenders engaged in unfair acts or practices by failing to stop vehicle repossessions before title loan payments were due as-agreed, and then withholding the vehicles until consumers paid repossession-related fees and refinanced their debts.
- The CFPB found that student loan servicers engaged in unfair acts or practices by initially processing payments but then later reversing those payments, leading to additional late fees and interest for consumers.
In sum, regulators are taking a hardline approach regarding junk fees. One of the takeaways that we are seeing in reviewing the bigger picture related to junk fee regulation is that regulators appear to be increasingly attempting to crack down on fees where financial institutions are profiting on arbitrary fees, as opposed to fees that bear a relationship and nexus to the actual cost of the service being provided. Based on the foregoing, we anticipate that there will be more legal and regulatory limitations that will attempt to place a framework around these backend fees in an effort to ensure that they are reasonable and proportional to the cost of processing the related transactions.
With that, we recommend that financial institutions assess their fees and related practices in light of the current regulatory environment and determine whether such fees and practices require change to avoid potential regulatory scrutiny or the unwanted attention of class action attorneys.
Of course, the experts at SW&M will continue to monitor the changing landscape regarding junk fees and are always happy to assist financial institutions in navigating through the uncertainty of charging potentially problematic fees.