NEWS: Today, the Consumer Financial Protection Bureau (CFPB) issued guidance about two financial institution fees that it says are likely unfair and unlawful.
The first, surprise overdraft fees, includes overdraft fees charged when consumers had enough money in their account to cover a debit charge at the time the financial institution authorized it.
The second is the practice of charging depositor fees to every person who deposits a check that bounces. “The penalty is an unexpected shock to depositors who thought they were increasing their funds,” the CFPB said.
Overdraft and depositor fees likely violate the Consumer Financial Protection Act prohibition on unfair practices when consumers cannot reasonably avoid them. Today’s Consumer Financial Protection Circular on surprise overdraft fees and the CFPB’s compliance bulletin on surprise depositor fees lay out when a financial institution’s back-end penalties likely break the law.
Surprise depositor fees
When a consumer deposits a check that bounces, financial institutions sometimes charge a fee to the depositor, usually in the range of $10 to $19. However, a person trying to deposit a check has no idea or control over whether the check will clear, and sometimes, that person is the victim of check fraud. In fact, there are many reasons deposited checks can bounce, and the most common reason is that the check originator does not have enough money available in their account. Charging a fee to the depositor penalizes the person who could not anticipate the check would bounce, while doing nothing to deter the originator from writing bad checks.
The CFPB’s bulletin explains that indiscriminately charging these depositor fees, regardless of circumstances, likely violates the Consumer Financial Protection Act.
Financial institutions can generally stay on the right side of the law when they employ more tailored fee policies that charge depositor fees only in situations where a depositor could have avoided the fee, such as when a depositor repeatedly deposits bad checks from the same originator.
Surprise overdraft fees
An overdraft fee can become a surprise fee when the customer doesn’t reasonably expect their actions to incur an overdraft fee, the CFPB wrote. For instance, even if a person closely monitors their account balances and carefully manages their spending to avoid overdraft fees, they can easily incur penalties when financial institutions employ processes that are “unintelligible” or “manipulative.”
Today’s Consumer Financial Protection Circular explains that when financial institutions charge surprise overdraft fees, sometimes as much as $36, they may be breaking the law. The circular provides some examples of potentially unlawful surprise overdraft fees, including charging penalties on purchases made with a positive balance. These overdraft fees occur when a financial institution displays that a customer has sufficient available funds to complete a debit card purchase at the time of the transaction, but the consumer is later charged an overdraft fee.
“Often, the financial institution relies on complex back-office practices to justify charging the fee,” the CFPB wrote. “For instance, after the bank allows one debit card transaction when there is sufficient money in the account, it nonetheless charges a fee on that transaction later because of intervening transactions.”
In September 2022, the CFPB took action against Regions Bank for charging surprise overdraft fees, referring to this practice as “Authorized-Positive Overdraft Fees” (also referred to as “Authorize-Positive, Settle-Negative” or APSN).
As early as 2015 the CFPB, as well as other federal regulators, including the Federal Reserve, began cautioning financial institutions against charging certain types of authorized positive fees, such as the ones used by Regions to unlawfully penalize customers.
Regions is required to, among other consequences, reimburse consumers all the funds it unlawfully charged since August 2018 and pay a $50 million penalty.