Junk Fees

“Junk Fees” seems to be the catchphrase of the year.

In his State of the Union address on February 7, 2023, President Biden urged Congress to enact legislation eliminating junk fees. As a result, Senators Blumenthal (CT) and Whitehouse (RI) have introduced the Junk Free Prevention Act. The introduced legislation specifically targets excessive online ticket fees, airline family seating fees, exorbitant early termination fees, and surprise resort or destination fees. While these won’t affect financial institutions too much (hopefully), there is the ongoing focus on junk fees in the banking marketplace being led by the CFPB.

The White House published How Junk Fees Distort Competition on March 21, 2023. Among concert tickets, hotel resort fees, and food delivery fees, the report included a section on bank wire transfer fees. The report defines wire transfers as “simply electronic transfers of money between two customers of different banks.” The report states that the actual transfer is almost surely processed by FedWire, whose fees cannot exceed $0.92 per transaction, and can be as low as $0.036 per transaction. Yet, banks still charge $15 or more. “Why would a bank charge such a customer such a high fee? Partially, the simple answer is because it can.”

In a June 15, 2023, speech, President Biden stated that “my administration has also taken a number of steps to crack down on junk fees by reducing overdrafts by $5.5 billion a year and bounced checks cost by another $2 billion a year.  That’s real money.”

The CFPB has been throwing the term junk fees around for a while. The Bureau has a dedicated page on its website just for junk fees. Included in the CFPB’s aims are the following:

Bulletin 2022-06: Unfair Returned Deposited Item Fee Assessment Practices

Blanket policies of charging Returned Deposited Item fees to consumers for all returned transactions irrespective of the circumstances of the transaction or patterns of behavior on the account are likely unfair. The CFPB notes that it is unlikely that an institution will violate the prohibition if the method in which fees are imposed are tailored to only charge consumers who could reasonably avoid the injury. For example, if a depository institution only charges consumers a fee if they repeatedly deposit bad checks from the same originator, or only charges consumers a fee when checks are unsigned, those fees would likely be reasonably avoidable.

Within the Bulletin, a footnote states, “As a matter of prosecutorial discretion, the CFPB does not intend to seek monetary relief for potential unfair practices regarding Returned Deposited Item fees assessed prior to November 1, 2023.” In other words, they will start charging penalties for blanket returned deposited item fees by the end of the year.

Recommendation: Review your practices on charging returned deposited item fees. Implement a process to only charge returned deposited items fees on “avoidable” deposits.

Consumer Financial Protection Circular 2022-06 Unanticipated Overdraft Fee Assessment Practices

Can the assessment of overdraft fees constitute an unfair act or practice under the Consumer Financial Protection Act (CFPA), even if the financial institution complies with Regulations E & Z? The Bureau answers “yes” in this Circular “Overdraft fees assessed by financial institutions on transactions that a consumer would not reasonably anticipate are likely unfair” under the CFPA.

For example, if a consumer initiates a transaction with reasonable belief, based on their viewable account balance, that their account has sufficient funds, they would be surprised to see an overdraft fee incurred. This can happen to consumers who choose to spend while they have pending transactions that have yet to settle; (APSN – Authorize Positive, Settle Negative). Even if you disclose that the authorize positive, settle negative transactions may occur, the practice may be found unfair.

Even if a consumer closely monitors their account balances and carefully calibrates their spending in accordance with the balances shown, they can easily incur an overdraft fee they could not reasonably anticipate because financial institutions use processes that are unintelligible for many consumers and that consumers cannot control. Though financial institutions may provide disclosures related to their transaction processing and overdraft assessment policies, these processes are extraordinarily complex, and evidence strongly suggests that, despite such disclosures, consumers face significant uncertainty about when transactions will be posted to their account and whether or not they will incur overdraft fees.

Recommendation: Review your system to determine whether you assess fees on APSN transactions, and if so, STOP. Consider a look-back to provide restitution/reimbursements for APSN transactions that were charged.

Credit Card Late Fees (proposal)

On February 1, 2023, the CFPB proposed to reduce credit card late fees to be “reasonable and proportional” to the costs incurred by issuers. This would reduce the safe harbor late fee to no more than the lessor of $8 or 25% of the required payment. It would also remove the annual inflation adjustment of the penalty amount. Comments of the proposal closed on May 3, 2023. Over 56,000 comments were received.

We will continue to monitor what other fees and practices the regulators consider as junk.

Please be advised that CSG provides financial services compliance audit and consulting services to our clients.  The services that we provide include certain tasks that may be characterized as “law-related services” under Rule 5.7 of the Rules of Professional Conduct governing lawyers.  Since some of our employees are lawyers with an active bar license but are NOT engaged in the private practice of law, that Rule requires us to make disclosures clarifying that the services we perform may be law-related services, but they are not legal services.  Because they are not legal services, those services and our relationship will not be governed by the Rules of Professional Conduct that guide the client-lawyer relationship, such as rules applicable to privileged communications and prohibitions of conflicts of interest.  Notwithstanding this disclaimer, we will continue to govern our relationship with you using reasonable ethical and professional standards that are expected to meet your expectations.


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