I am very tired of the Biden Administration’s, most notably the CFPB’s, inflammatory rhetoric about “junk fees.” In its recent “Junk Fees Special Edition” of Supervisory Highlights, the CFPB defined “junk fees” as “unnecessary charges that inflate costs while adding little to no value to the consumer” and stated that “[t]hese unavoidable or surprise charges are often hidden or disclosed only at a later stage in the consumer’s purchasing process or sometimes not at all.” In other words, “junk fees” can include any and all fees charged after a transaction is entered into, regardless of whether such fees are lawful as a matter of federal or state law.
Let’s take the example of credit card late fees, which the CFPB has labeled a “junk fee.” Late fees are authorized under the federal CARD Act (and Regulation Z provides a safe harbor of $30 for the first default and $41 for subsequent defaults) and state law, and the Truth-in-Lending Act and Regulation Z require card issuers to disclose late fees in their credit card application and account-opening disclosures. As a result, there is no basis for cardholders to be surprised when late fees appear on their periodic statements. And, obviously, late charges can be avoided by making timely payments.
The CFPB’s continued indiscriminate use of the term “junk fees” has created a dire need for an analytical framework that the consumer financial services industry can use to identify which fees are likely to be considered “junk fees” by regulators. Since regulators have not provided any meaningful guidance, I wanted to share steps we take when clients have asked us to do a review of the fees charged for various loan, deposit, and other products. These steps have included the following:
- Confirmed that authority to charge the fee is provided in the client’s form of agreement. Such authority does not necessarily need to be in the original agreement. However, for fees that might be charged pursuant to an agreement entered into after the original agreement, it is preferable for the original agreement to disclose the current amount of such fees.
- Looked at whether there is express or implied authority under federal or state law to charge the fee, paying particular attention to state laws that provide that unless a fee is expressly authorized, it may not be charged and considering whether federal preemption may be available to provide authority for a fee that is not permitted by state law.
- Confirmed that the fee is clearly and conspicuously disclosed upfront, keeping in mind that a disclosure pursuant to the Truth-in-Lending Act may not be sufficient to avoid a claim that a fee was deceptively presented.
- Looked at the business rationale for charging the fee and whether it is sound.
- If the fee is one that the CFPB has found to be unfair or abusive, determined what changes, if any, can be made to avoid such a finding (such as changes to when the fee is charged or how it is disclosed).
We have conducted reviews of many clients’ fees, and there have been very few instances where we recommended that a fee be entirely eliminated. In some cases, particularly with respect to online disclosures, we have recommended changes to how fees were disclosed. Since “junk fees” can be expected to be a focus of CFPB examiners, it is very important for a company to conduct this review before its next CFPB examination.
On May 16, 2023, from 12:00 p.m. to 1:30 p.m. ET, Ballard Spahr’s Consumer Financial Services Group will hold a webinar, “What the Biden Administration’s “Junk Fees” Initiative Means for the Consumer Financial Services Industry: A Look at the Fees Under Attack.” For more information and to register, click here.