The CFPB’s “Junk Fees” Initiative: Recent Developments and Trends

In January 2022, the Consumer Financial Protection Bureau (CFPB) announced an initiative to “Save Americans Billions in Junk Fees.” Since then, the CFPB and other regulatory agencies have expended significant effort, through new rulemaking and increased regulatory scrutiny, on discouraging these types of fees. In this edition of Fintech Flash, we examine two new rules recently proposed by the CFPB that are aimed at curbing types of junk fees that banks and other depository institutions may levy on consumers; we also evaluate their impact on covered institutions.

What Is a Junk Fee?

The term “junk fee” is not defined under federal law, but the CFPB has focused on factors such as whether the fee would be unexpected to or take advantage of a reasonable consumer, the amount of the fee compared to the cost of providing the associated service, and a lack of clarity about the fee.

In its fall 2023 “Special Edition” Supervisory Highlights focused on junk fees, the CFPB drew attention to two types of fees that it considers to be junk fees: overdraft and non-sufficient fund (NSF) fees. To address these junk fees, which the CFPB views as excessive and penalty-based in nature, the CFPB has proposed two rules.

1. Proposed Rule on Overdraft Fees

On January 17, 2024, the CFPB proposed a rule to remove an exemption in Regulation Z (12 CFR 1026), which implements the Truth in Lending Act (TILA), that excludes from coverage “discretionary” overdraft fees where banks did not commit in writing to offering overdrafts to consumers. In practice, banks have routinely allowed such discretionary overdrafts, therefore avoiding Regulation Z coverage of their overdraft practices.

Without this exemption, most overdraft fees will fall under Regulation Z’s definition of “finance charge” (i.e., “any charge payable … by the consumer and imposed … by the creditor as an incident to or a condition of the extension of credit”)¹ and be subject to TILA’s disclosure requirements.

As proposed, the rule would apply only to banks, savings associations, and credit unions with more than $10 billion in assets (“large institutions”). Still, the market implications of the rule will be vast. The CFPB estimates that large institutions accounted for 68% of overdraft fees charged to consumers in 2021, that consumers paid nearly $6 billion to large institutions in 2022, and that overdraft fees are incurred by 17% of households annually.

a. The proposal would blur the distinction between credit and debit cards.

The proposed rule would apply only to large institutions that charge overdraft fees above the “break-even point,” when they begin to earn a profit on them. Large institutions that charge fees above the break-even point would be subject to the full requirements of TILA and Regulation Z for open-end credit, including the obligation to disclose their annual percentage rate. These institutions would be required to create “covered overdraft credit accounts,” separate from a consumer’s main checking or savings account, akin to an open-end line of credit. The CFPB would expect providers of these accounts to treat them like credit products, including by providing periodic account statements to consumers.

Under the proposed rule, debit cards that allow overdrafts would be considered “hybrid debit-credit cards.” Large institutions that issue such cards would be required to comply with additional requirements imposed by the 2009 CARD Act, such as allowing for manual, rather than automatic, repayment upon consumer request and limiting the amount of NSF fees that can be charged in the first year.

b. Covered institutions may take advantage of a safe-harbor provision

Large institutions may avoid their overdraft fees being subject to Regulation Z if they comply with a safe-harbor provision that allows the bank to charge only break-even fees. Such fees may be calculated in one of two ways:

• Directly, by adding together the total costs of overdraft services provided over the past year and dividing that figure by the total number of overdrafts in that year
• By charging a “benchmark fee” set by the CFPB² 

2. Proposed Rule on NSF Fees

A week later, on January 24, 2024, the CFPB proposed another rule that would prohibit the imposition of NSF fees on instantaneous or near-instantaneous transactions. NSF fees are usually charged when a payment by a consumer is declined due to insufficient  funds in the consumer’s account. The CFPB noted that this proposed rule came about in part from the expectation that NSF fees could become increasingly appealing as a revenue source once the proposed rule on overdraft fees takes effect.

a. The proposed rule targets a fee that financial institutions rarely charge.

The proposed rule would apply to all businesses defined as a “financial institution” under Regulation E (12 CFR 1005) and would prohibit such institutions from charging NSF fees on “covered transactions,” which include any attempt by a consumer to “withdraw, debit, pay, or transfer funds from their account that is declined instantaneously or near-instantaneously” due to insufficient funds in a consumer’s account. Transactions falling under this definition include debit card transactions, ATM withdrawals, and peer-to-peer payments.
The CFPB noted that financial institutions “rarely charge” such fees on these types of transactions in practice, suggesting that the proposed rule may not impose significant compliance costs on many covered financial institutions.

b. The proposed rule would deem certain NSF fees “abusive.”

Dodd-Frank grants the CFPB the authority to issue rules prohibiting entities that it regulates from engaging in unlawful, unfair, deceptive, or abusive acts or practices (UDAAP). In its proposed rule on NSF fees, the CFPB relies on UDAAP’s “abusive” prong, concluding that a transaction that entails material risks or costs to consumers, for which they would derive minimal or no benefit, shows a per se lack of understanding on the part of the consumer and constitutes an abusive financial practice. As the CFPB continues to expand its regulatory reach through its junk fee initiative, industry leaders should remain vigilant about other consumer financial services and revenue streams that the CFPB could consider to be junk fees.

3. Future of Junk Fees Under the CFPB

These actions on overdraft and NSF fees proposed by the CFPB are still only proposed rules and are not yet in effect. Comments on the proposed rule on NSF fees are due by March 25, 2024; comments on the proposed rule on overdraft fees are due by April 1, 2024. Due to TILA requirements, the proposed rule on overdraft fees would not go into effect until at least six months after it is published in the Federal Register, and the CFPB anticipates that a final rule would not go into effect until October 2025.

In the meantime, all financial institutions should monitor both rules as they progress through the comment stage, because the CFPB specifically noted that it may amend the $10 billion asset coverage threshold for the proposed rule on overdraft fees.

The CFPB has also previously warned that it will be on the lookout for junk fees in consumer financial products and services, including prepaid or credit card accounts, mortgages, loans, and payment transfers. In considering future revenue streams, financial institutions offering any of these products should remain cognizant of how the CFPB might leverage its authority to continue expanding its junk fees initiative.

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Goodwin’s Fintech Team
We practice in every fintech vertical, including lending, alternative finance (e.g., merchant cash advances, earned wage access, and factoring), payments, deposits, insurance, broker-dealers, and investment advisors. In addition to doing product and service development regulatory work, we assist our fintech clients that choose to deliver their solutions through banks in entering into bank partnership and platform agreements.

^[1] 12 CFR 1026.4(a).
^[2] The CFPB is considering setting the amount at either $3, $6, $7, or $14 and is seeking public comment on the final number.

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