Executive Summary
In late October, the Consumer Financial Protection Bureau (CFPB), in conjunction with the White House, announced more actions in regard to limiting what they have collectively negatively labeled as “junk fees” as well as associated practices, including advertising and certain disclosures. Overdraft products, as well as fees for bounced checks, were highlighted in this most recent announcement. Specifically, the CFPB has issued guidance setting forth its reasoning why (a) assessments of overdraft fees may constitute unfair acts or practices under the Consumer Financial Protection Act and (b) blanket policies of charging consumers returned deposited item fees (i.e., surprise depositor fees, more commonly known as bounced checks) for returned transactions irrespective of each situation’s specific circumstances may also constitute statutorily unfair practices.
In addition, the Federal Trade Commission (FTC) similarly announced an Advanced Notice of Proposed Rulemaking (ANPR) seeking public comment regarding “potential harms to consumers stemming from junk fees” and associated practices, including consideration of a new rule in this area. The FTC seeks to ultimately promulgate regulatory actions that would impact numerous sectors in the economy, including, but not limited to, hotel resorts, event ticketing, funeral homes and other industries that impose certain mandatory fees on consumers. The reasoning behind the ANPR is to promulgate a rule that would ultimately result in statutorily empowering the FTC to seek remedies it cannot apply in the absence of a formal rule, such as seeking penalties against first-time violators, among other actions.
These actions reflect the Biden administration’s continued focus on curbing “junk fees” and associated practices across a wide array of industries. Financial institutions and impacted businesses should be closely following and engaging with policymakers, both to ensure they are familiar with new compliance expectations and to shape additional activity in other areas such as credit card late fees, which is also expected over the next year.
The below outline provides further details regarding the Biden administration’s focus on “junk fees,” including the CFPB and FTC’s regulatory actions in this space.
White House Focus on Categories of “Junk Fees”
In its recent press release, the White House highlighted the following fees that could fall into this categorization, arguing that research and agency experience support these claims:
- Mandatory fees that often hide the full price. Some sellers publish a low price and then add mandatory fees later, at the “back-end” of the buying process or when a consumer tries to terminate the service.
- Surprise fees that consumers learn about after purchase. Surprise fees that consumers do not expect—and which may not be mandatory—similarly make it hard to comparison shop and can burden household finances. Surprise hospital bills from out-of-network doctors at in-network hospitals and airline “family seating fees” are prominent examples.
- Fees that target consumers who have limited alternative options—because they are locked into a product or service or are otherwise economically vulnerable—can likewise impose a financial burden. As the CFPB explains, a sign of exploitative fees is that they “far exceed the marginal cost of the service they purport to cover.” Bank overdraft fees, which greatly exceed the bank’s cost of credit, and surprise “termination fees” are leading examples.
- Fraudulent fees. Some fees involve outright fraud or misrepresentations on the part of the seller. An example is advertising a “no fee” bank account that in practice carries significant fees.
CFPB Focus on Overdraft in Circular
The CFPB’s most recent actions, as well as previous work in this area, serve as a harbinger for financial institutions, including banks and credit unions, that the bureau plans to use its Unfair, Deceptive or Abusive Acts and Practices Authority (UDAAP) to crack down on overdraft products. As part of its most recent announcement, the CFPB issued a circular outlining why it believes an assessment of overdraft fees can constitute an unfair act or practice under the Consumer Financial Protection Act, even if the entity complies with the Truth in Lending Act and Regulation Z, and the Electronic Fund Transfer Act and Regulation E.
The circular further argues that overdraft fees assessed by financial institutions on transactions that a consumer would not reasonably anticipate are likely unfair. It adds that if a consumer cannot reasonably avoid the fee that is not outweighed by countervailing benefits to consumers or competition, it is likely to be considered a UDAAP.
An example the CFPB discusses in the circular is when there is a discrepancy between the actual balance vs. what consumers see as the available ledger balance. The circular posits that since consumers can easily access their available balance via mobile application, online, at an ATM or by phone, they reasonably may not expect to incur an overdraft fee on a debit card transaction when their balance showed there were sufficient available funds in the account to pay the transaction at the time they initiated it.
Thus, it argues that an “authorize positive, settle negative” or APSN transaction might constitute a UDAAP violation. Over the past few years, financial institutions and other entities in the private sector, including many credit unions, have also faced a wave of litigation in this area. In its circular, the CFPB provides a table with examples of unanticipated overdraft fees involving a debit card transaction with an intervening debit transaction where a consumer is charged an overdraft fee even though the consumer’s available balance was positive at the time the consumer entered into the debit card transaction.
Bounced Checks
The other area of focus from the CFPB’s most recent announcement was a compliance bulletin related to surprise depositor fees, more commonly known as bounced checks. It argues that 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 under the CFPB’s UDAAP authority. The CFPB does, however, note that it is unlikely that an institution will violate the prohibition if the methods in which fees are imposed are tailored to only charge consumers who could reasonably avoid the injury. It gives the example that 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; thus, they would arguably not be considered a UDAAP violation.
FTC’S ANPR
As noted above, the FTC’s ANPR seeks public comment regarding future promulgation of a rule to reduce junk fee practices across various sectors of the economy. Notably, the scope of the FTC’s ANPR expands beyond the scope of the CFPB’s regulatory actions and guidance outlined above in that the ANPR references deceptive junk fee practices across numerous industries in addition to the financial services industry, including live entertainment, hotel and travel, higher education, auto lending, payday lending, telecommunications and telemarketing, among others.
The ANPR generally defines “junk fees” to include “hidden fees, which are fees for goods or services that are deceptive or unfair, including because they are disclosed only at a later stage in the consumer’s purchasing process or not at all, whether or not the fees are described as corresponding to goods or services that have independent value to the consumer” as well as “unfair or deceptive fees that are charged for goods or services that have little or no added value to the consumer, including goods or services that consumers would reasonably assume to be included within the overall advertised price.” Accordingly, the ANPR specifically addresses business practices including, but not limited to, charging consumers fees for which they have not expressly consented and/or charging mandatory fees with little, or, in certain cases, no perceived value. This action builds upon the FTC’s prior enforcement and regulatory actions addressing certain junk fees, including its Notice of Proposed Rulemaking (NPRM) “Banning Junk Fee Tactics Plaguing Car Buyers” released in June 2022. Brownstein’s client alert with respect to this NPRM can be accessed here.
Generally, the FTC’s prior regulatory actions with respect to junk fee practices consisted of FTC-led investigations, enforcement actions, consumer and business education outreach, research and workshops. However, it lacked the statutory authority to seek penalties against first-time violators or the ability to obtain relief for consumers in situations where such junk fees-related practices would violate the FTC’s prohibition on unfair or deceptive practices. Typically, the FTC is empowered to seek such remedies when a business has violated an express rule promulgated by the commission. Accordingly, the primary purpose behind the FTC’s ANPR is to expand what has typically been considered within their statutory authority in this area and ultimately promulgate a broad rule with respect to “junk fee” practices.
The FTC’s ANPR proposes addressing the following specific practices:
- misrepresenting or failing to disclose clearly and conspicuously, on any advertisement or in any marketing, the total cost of any good or service for sale;
- misrepresenting or failing to disclose clearly and conspicuously, on any advertisement or in any marketing, the existence of any fees, interest, charges or other costs that are not reasonably avoidable for any good or service;
- misrepresenting or failing to disclose clearly and conspicuously whether fees, interest, charges, products or services are optional or required;
- misrepresenting or failing to disclose clearly and conspicuously any material restriction, limitation or condition concerning any good or service that may result in a mandatory charge in addition to the cost of the good or service or that may diminish the consumer’s use of the good or service, including the amount the consumer receives;
- misrepresenting that a consumer owes payments for any product or service the consumer did not agree to purchase;
- billing or charging consumers for fees, interest, goods, services or programs without express and informed consent;
- billing or charging consumers for fees, interest, goods, services or programs that have little or no added value to the consumer or that consumers would reasonably assume to be included within the overall advertised price; and
- misrepresenting or failing to disclose clearly and conspicuously on an advertisement or in marketing the nature or purpose of any fees, interest, charges or other costs.
Brownstein’s Take
These actions by the CFPB and FTC respectively reflect the Biden administration’s continued focus on curbing fees and associated practices across a number of industries. In addition to the above proposals, the Biden administration has also taken the following regulatory actions related to “junk fees,” among others:
- Airline Fees: In September 2022, the Department of Transportation (DOT) proposed a rule that would require airlines and related online search sites to disclose certain fees upfront to consumers, including fees related to checked-in baggage, sitting next to a child, and fees for changes or cancellations, among others. This proposed rule comes on top of DOT’s previous regulatory actions, including (i) issuing proposed rules that require airlines to provide refunds to consumers for checked bags subject to significant delay or for services not adequately provided to consumers (e.g., broken WiFi, etc.) and (ii) requiring airlines to provide refunds to consumers for certain delayed and canceled flights.
- Broadband Nutrition Labels: In January 2022, the Federal Communications Commission (FCC) issued proposed rules that would require internet companies to display standardized Broadband Nutrition Labels, which must disclose certain information to consumers, including, but not limited to, pricing and internet speeds, among other sets of information.
- Junk Fees in the Auto Industry: In June 2022, the FTC issued a NPRM that would (a) ban bait-and-switch claims by prohibiting dealers from making certain deceptive advertising claims to prospective car buyers; (b) prohibit fraudulent add-on products; (c) prohibit dealers from charging consumers certain add-on fees without their written consent; and (d) mandate disclosure of certain costs upfront to consumers by providing the basis for a “true offering price” of a vehicle. As noted above, Brownstein’s client alert with respect to this NPRM can be accessed here.
Specifically with respect to overdraft fees, as Brownstein predicted several months ago, the CFPB seems determined to change, and arguably limit, financial institutions’ ability to charge fees. As changes continue to be made outside the rulemaking process or through public pressure campaigns, the CFPB is leaving room for ambiguity about what is required by financial institutions. This could lead to litigation or unexpected enforcement activity for banks and credit unions with overdraft products. In addition, the broad scope of the FTC’s ANPR has the potential to implicate overdraft and other fees at certain covered entities such as state-chartered credit unions..
Trade groups in the banking and credit union industry have pushed back on sweeping legislation and regulatory actions limiting overdraft products, including by arguing why consumers often want and elect to take advantage of such products. As the administration, the CFPB and FTC, among other agencies, continue to examine so-called “junk fees” and associated practices, particularly in the overdraft space, it is critical for financial institutions to be part of the discussion so that they can provide policymakers with an objective overview of overdraft products, including, but not limited to, details regarding their customers’ uses of and preferences for these products.
