Banks Should Prepare for CFPB Inquiries in Regards to Overdraft Practices and Fees
CFPB Says Such Fees, When Unanticipated by Consumers, May Be Abusive and Unfair in Violation of the Consumer Financial Protection Act
- The Consumer Financial Protection Bureau (CFPB) in September 2022 entered into a consent order against a large national bank, finding the bank's overdraft fees practices to be unfair and abusive in violation of the Consumer Financial Protection Act (CFPA).
- The CFPB subsequently issued Consumer Financial Protection Circular 2022-06 addressing "unanticipated" overdraft fee assessment practices and how such practices may violate the CFPA’s prohibitions against unfair, deceptive or abusive acts and practices.
- The CFPB has issued letters to banks demanding they eliminate such practices or anticipate the commencement of actions to enforce compliance with the CFPA.
- Banks should examine their policies, procedures and adequacy of disclosures regarding the imposition of overdraft fees, take measures to ensure that consumers fully understand and agree to these policies and practices, or consider eliminating overdraft fees altogether.
In September 2022, the Consumer Financial Protection Bureau (CFPB) entered into a consent order against a large national bank for charging unfair and abusive overdraft fees. In support of its action, the Bureau noted that many of the bank’s customers did not understand the bank’s overdraft practices or how to reasonably avoid incurring overdraft fees. Specifically, the Bureau took issue with overdraft fees charged to customers on certain transactions (ATM withdrawals and debit card purchases) that had sufficient account balances at the times the transactions were initiated by the customer and authorized by the bank but were insufficient at the time of settlement (often known as "authorize positive, settle negative" or "APSN" transactions).
Then, in October 2022, the Bureau issued Consumer Financial Protection Circular 2022-06 to provide formal guidance on the matter, announcing that "financial institutions have created serious obstacles to consumers making informed decisions about their use of overdraft services." As a result, and as part of the CFPB's "junk fee initiative," the Bureau concluded that overdraft fees occurring on APSN (and other transactions that consumers would not reasonably expect to give rise to such fees) are likely unfair and abusive in violation of the consumer protection laws. 1
This position was likely premised upon a CFPB study showing that overdraft and non-sufficient funds (NSF) revenue was estimated to be $15.47 billion in 2019. Three large national banks brought in 44 percent of the total revenue among banks with assets over $1 billion. The CFPB found that although regional and smaller banks received lower total revenues from overdraft charges, consumers were similarly impacted. In addition, the CFPB condemned many banks’ practice of charging overdraft fees during the COVID-19 pandemic.
In light of the CFPB's position and the unpopularity of overdraft fees among consumers, certain banks — large and small — have recently decided to eliminate overdraft fees altogether. Nevertheless, it is important to note that the courts have held that overdraft fees, when accompanied by clear and complete disclosures and knowingly agreed to by the customers, are legal and may be collected.2 As we have seen under the CFPB’s current leadership, however, the Bureau continues to take aggressive positions in the name of consumer protection despite conflicting legislative and judicial authorities.
The CFPB recently has tended to regulate through enforcement rather than rulemaking, and, as evidenced in recent consent orders, the Bureau expects all industry players to be aware of and comply with the agency’s underlying legal basis for the orders and any related guidance issued. Following entry of the September Consent Order, multiple banks have received letters from the CFPB inquiring into overdraft fees policies and practices. Notably, the CFPB is focusing on an "unfair and abusive" argument, rather than a deception theory. In these letters, the CFPB takes an aggressive and antagonistic position toward overdraft fees and makes clear that the Bureau expects banks to either 1) eliminate overdraft fees or 2) be able to demonstrate customer knowledge, understanding and acceptance of any overdraft protection policy and accompanying fees.
Due to the current philosophy of the CFPB and its stance toward overdraft policies and fees, notwithstanding the apparent judicial conflicts, banks should consider taking steps from a risk management perspective to implement sound policies and procedures regarding their overdraft practices. Banks should also expect inquiries from the CFPB during supervisory exams regarding these policies and practices. If these policies and practices are determined by the CFPB to be inadequate, banks should be prepared to implement a remediation plan for consumers affected by overdraft fees in the past.
How We Can Help
Holland & Knight's Consumer Protection Defense and Compliance Team includes a robust CFPB and Federal Trade Commission practice, with experienced attorneys who are recognized as thought leaders in the field. The firm has represented dozens of companies and individuals in federal and state investigations concerning advertising, marketing practices, privacy and data security, consumer credit, telemarketing and debt collection, saving clients from significant financial loss, public scrutiny and having to make changes to their core business operations.
For more information or questions about the specific impact of the CFPB's consent order, contact the authors.
1 CFPB, Consumer Financial Protection Circular 2022-06, "Unanticipated overdraft fee assessment practices," Oct. 26, 2022.
2 See Video Trax, Inc. v. NationsBank, N.A., 33 F. Supp. 2d 1041, 1054 (S.D. Fla. 1998), aff'd, 205 F.3d 1358 (11th Cir. 2000) (holding that an overdraft fee "is not rendered usurious by a depositor's agreement to pay the fee contingent upon his delinquency, because the payment or non-payment of that fee is completely within the depositor's control."); see also Hernandez v. Wells Fargo Bank New Mexico, N.A., 2006-NMCA-018, 139 N.M. 68, 128 P.3d 496 (holding that an overdraft fee is not per se illegal under the Unfair Practices Act; instead, the consumer plaintiff must show that the fee is "unconscionable" based on the consumer's lack of knowledge about the fee or a gross disparity between the value received by the consumer and the price paid for the fee).
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.