Unfairly Reopening Accounts

The CFPB (Consumer Financial Protection Bureau) recently issued Consumer Financial Protection Circular 2023-02 addressing reopening deposit accounts that consumers have previously closed. In this circular, the CFPB evaluates the following question: if a financial institution unilaterally reopens a deposit account closed by a consumer in order to process a debit or deposit, could it constitute an unfair act or practice?  According to the CFPB the answer is yes.

Account agreements often give the bank the option to honor or return any debits or deposits to the account after closure. Sometimes after a consumer goes through the somewhat time-consuming process to close an account, a financial institution will unilaterally reopen the closed account if it receives a debit or deposit. The CFPB seems to be particularly critical of reopening an account when doing so overdraws the account, which then causes the imposition of overdraft and NSF fees. Some financial institutions have also been noted to charge maintenance fees after reopening, even in instances where the customer’s account previously had such fees waived.

The CFPB has recently brought an enforcement against a financial institution engaged in an unfair practice by reopening consumer-closed deposit accounts without seeking prior authorization or providing timely notice. These practices resulted in hundreds of thousands of dollars in fees charged to consumers. The CFPB concluded that the institution’s practice of reopening consumer accounts without obtaining consumers’ prior authorization and providing timely notice caused substantial injury to consumers that was not reasonably avoidable or outweighed by any countervailing benefit to consumers or to competition.

In their analysis section of the circular, the CFPB breaks down the three elements of unfair acts or practices: 1) it causes or is likely to cause consumers substantial injury, 2) that is not reasonably avoidable, and 3) the injury is not outweighed by countervailing benefits to consumers or to competition.

1) Substantial injury. This includes monetary harm, such as fees paid by consumers. Actual injury is not required, and the significant risk of harm is sufficient. Substantial injury can also happen when a small harm is imposed on a significant number of consumers, similar to how class-action lawsuits can bring relief to a class of consumers who all received some small injury.

A financial institution’s act of unilaterally reopening an account may cause monetary harm to the consumer. Further, if the account is overdrawn and not repaid timely, the institution may furnish negative information to consumer reporting companies, which may make it harder for the consumer to obtain a deposit account in the future. In addition to fees, reopening an account may increase the risk of unauthorized access to the account and fraud.

2) Consumers likely cannot reasonably avoid this injury. An injury is not reasonably avoidable when consumers cannot make informed decisions or take action to avoid the injury. Injury that occurs without a consumer’s knowledge or consent, when the injury cannot be anticipated or avoided, is not reasonably avoidable.

Consumers often cannot control third party attempts to debit or deposit money, for example, a consumer’s employer may accidentally send their paycheck to the closed account, even if instructed otherwise. Consumers also normally do not control the process and timing of account closures, and with the multiple steps involved a consumer cannot reasonably know how long it will take to fully close out the account, making it more difficult to prevent debits and credits that will reopen the account. Additionally, consumers generally do not have the ability to negotiate the terms of account agreements, and according to the CFPB even if these agreements reference these practices, consumers can be harmed by the lack of control they have in these circumstances.

  1. This injury is likely not outweighed by countervailing benefits to consumers or competition. As the CFPB puts it, reopening a closed account does not appear to provide any meaningful benefits to consumers or competition, as banks may have alternatives that could minimize any expenses incurred by not reopening these accounts.

Based on the CFPB’s own words, institutions would be best to avoid reopening accounts closed by consumers without the consumer’s knowledge and consent. What if an account is reopened without knowledge or consent, but there is no monetary harm to the consumer? This still isn’t recommended because the CFPB states that actual harm is not required and only a significant risk of harm is sufficient for it to be considered an unfair act or practice.

What then of accounts closed by consumers that are reopened with the consumer’s knowledge and consent? At present reopening with a consumer’s knowledge and consent seems acceptable. With this circular the CFPB has signaled a shift in how they’re viewing unfair acts and practices, so should you have any questions about this circular, the effects of account closings and reopenings, or anything else, feel free to reach out to us on the hotline.