CFPB Targets Fees: Overdrafts & Returned Deposited Items

There’s a reason why people keep talking about banking fees: the Consumer Financial Protection Bureau (CFPB) keeps bringing it up. Most recently, the CFPB issued guidance on Overdraft fees and Returned Check Fees. The implications of the recently published guidance is significant enough to warrant another newsletter in which we address banking fees.

Regarding overdraft fees, the CFPB recently published Circular 2022-06 titled “Unanticipated overdraft fee assessment practices.” An overdraft occurs when consumers do not have enough in their account to cover a transaction, but the bank pays it anyway. Unlike non-sufficient funds (NSF) fees where a bank does not incur a credit risk when returning a transaction unpaid, clearing an overdraft transaction is extending credit that creates risk for the bank. Most institutions charge a flat fee for overdraft transactions regardless of the amount.

In this Circular, the CFPB indicates that overdraft fees which the consumer cannot reasonably anticipate could violate UDAAP provisions in the Consumer Financial Protection Act (CFPA). Even if these overdraft fees comply with regulatory requirements, they would still likely be considered unfair under the CFPA. The standard for UDAAP unfairness is that these fees cause substantial injury to consumers that the consumer cannot reasonably avoid, and the injury is not outweighed by offsetting benefits to consumers or competition.

As the guidance indicates, this can happen several ways including what’s referred to as “Authorize Positive, Settle Negative” (APSN). For example, ASPN occurs when a customer has enough in their available balance when the transaction was authorized but did not have enough in their available balance when the transaction settled. This commonly happens at gas stations, and banks often cover the transaction (for a fee) when there isn’t enough in the account at the time of settlement.  According to CFPB, this practice is likely a UDAAP: “…consumers generally cannot reasonably be expected to understand and thereby conduct their transactions to account for the delay between authorization and settlement…” In the view of the CFPB, mobile banking could create a consumer expectation that account balances can be monitored closely enough to avoid fees, and it is reasonable that consumers would not expect that a transaction that is authorized at the point of sale with sufficient funds would later incur overdraft fees.

Regarding returned deposited item fees, the CFPB recently published Bulletin 2022-06 titled “Unfair Returned Deposited Item Fee Assessment Practices.” There are many reasons deposited items are returned. For example, the maker may not have sufficient funds in their account, or the maker may have stopped payment of the check, or the account may be closed, or various other reasons. In this bulletin the CFPB indicates that when a bank charges fees for returned deposited items without taking into consideration the circumstances or patterns of behavior on the account, these fees are likely unfair under the UDAAP provisions in the CFPA. The depositor normally has no reason to anticipate that there’s anything wrong with the check, and it is no longer a common practice for banks to verify whether or not an account has sufficient funds to cover the check deposited, and it could then be considered unfair to impose a fee in that situation, as the consumer could be caused substantial injury that they could not reasonably avoid and the injury is not outweighed by any offsetting benefits. The bulletin provides two examples of when a blanket policy such as charging returned deposited item fees might not be unfair under the CFPA: 1) if an institution only charges a fee if they repeatedly deposit bad checks from the same maker, and 2) if an institution only charges a fee when checks are unsigned.

As we move forward, should you have any questions about overdrafts and returned deposit items, you can always reach C/A on the Hotline.