In furtherance of the crusade against “junk fees,” the CFPB proposed a new rule on non-sufficient funds (NSF) fees shortly after releasing their overdraft fee proposal last month. As you know, NSF fees are typically charged when items submitted for payment against a consumer’s account are returned unpaid due to insufficient funds. The CFPB’s proposal flexes the agency’s authority to prohibit unfair, deceptive, and abusive acts and practices to forbid NSF fees on debit card transactions and some person-to-person (P2P) payments that are declined instantaneously or “near-instantaneously.” While the CFPB freely admits that this “junk fee” is “rarely charged,” it believes this is a proactive step to head off, in CFPB Director Rohit Chopras’s words, “large banks and their consultants [who] have concocted new junk fees for fake services that cost almost nothing to deliver.”
The CFPB’s position is that charging fees for transactions declined in real-time is an abusive practice. A year ago, the CFPB issued a policy statement defining abusive acts or practices that indicated two categories of conduct it generally considers abusive: (1) actions that obscure important features of a product or service and (2) actions taking unreasonable advantage of consumers in certain circumstances. For instantaneous transactions, the CFPB finds that a consumer who would be charged an NSF fee would lack awareness of their available account balance and lack understanding of their account’s risk and condition when the transaction is initiated.
Instead of amending a current regulation to add the proposed rule, if finalized, the CFPB is proposing to create a new regulation (12 CFR Part 1042) while borrowing specific definitions, like “account” and “covered financial institution,” from Regulation E. The proposed rule would ban any fees charged on a “covered transaction,” defined as “an attempt 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.” A “covered financial institution” would be defined as “a bank, savings association, credit union, or any other person that directly or indirectly holds an account belonging to a consumer, or that issues an access device and agrees with a consumer to provide electronic fund transfer services ….” NSF fees charged for check and ACH transactions are not covered by the rule. Therefore, the proposed rule intends to cover ATM and one-time debit card transactions for which an opt-in is required to charge an overdraft fee. The NSF fee prohibition would apply regardless of the label used by the financial institution to charge the fee.
As the CFPB readily admits, it expects this proposed rule will have a limited impact on current practices as these fees are not routinely charged and, more than likely, few, if any, banks are considering charging new NSF fees in this regulatory environment. However, despite its current limited application, banks should likely still be cautious. The argument for these NSF fees being abusive could act as a precedent to expand the rule in future enforcement actions or rulemaking. Comments are due by March 25, 2024.