The CFPB has issued a circular that addresses the reopening of closed deposit accounts (Circular 2023-02).  Specifically, the circular warns that it can constitute an unfair act or practice for a financial institution to unilaterally reopen closed accounts to process debits or deposits.

By way of background, the CFPB describes a scenario in which, after a consumer has completed all of the steps required by the financial institution to close a deposit account and the financial institution has closed the account, the financial institution unilaterally reopens the account after receiving a debit or deposit to the account.  According to the CFPB, financial institutions sometimes reopen an account even if doing so would overdraw the account, and then may impose overdraft and non-sufficient funds (NSF) fees.  Financial institutions may also charge account maintenance fees upon reopening an account even if the consumer was not required to pay such fees prior to account closure (e.g., because the account previously qualified to have the fees waived).  The CFPB indicates that in addition to subjecting the consumer to fees, when a financial institution processes a credit through a reopened account, the consumer’s funds could become available to third parties, including third parties that do not have permission to access the funds.

In the Circular, the CFPB sets forth the basis for its conclusion that a financial institution’s unilateral reopening of a deposit account that a consumer previously closed can constitute an unfair act or practice.  Under the CFPA, an act or practice is unfair when it causes or is likely to cause consumers substantial injury that is not reasonably avoidable by consumers and the injury is not outweighed by countervailing benefits to consumers or to competition.  The CFPB’s analysis is as follows:

• Unilaterally reopening a closed deposit account to process a debit or deposit can cause substantial injury to consumers in the form of fees charged after the account is reopened.  According to the CFPB, when an account is reopened to accept a deposit, there is an increased risk that an unauthorized third party could gain access to the consumer’s funds.  Also, if the reopening overdraws the account and the consumer does not quickly repay the overdraft, the financial institution might furnish negative information to consumer reporting companies, thereby possibly making it harder for the consumer to obtain another deposit account.
• Consumers likely cannot reasonably avoid substantial injury when an account is unilaterally reopened because they cannot control one or more of the following circumstances: a third party’s attempt to debit or deposit money, the process and timing of account closure as it relates to their ability to prevent debits and credits that will reopen the account, or the terms of the deposit account agreement.  As to account agreement terms, the CFPB indicates that consumers may not have a reasonable alternative to financial institutions that permit the unilateral reopening of closed accounts because most agreements either permit or are silent on the practice.  And even if a deposit account agreement allows or discloses the practice, the CFPB views such agreements as take-or-leave-it contracts that consumers have no ability to negotiate.  Also, according to the CFPB, a financial institution can still engage in an unfair act or practice if it informs the consumer at the time that the account is closed that the account agreement allows it to reopen the account because consumers “will still generally lack the practical ability to control whether the account will be reopened and to avoid fees and other monetary harms.”
• The injury to consumers is likely not outweighed by countervailing benefits to consumers or competition because reopening a closed account does not appear to provide any meaningful benefits to consumers or competition.  According to the CFPB, if financial institutions are concerned about controlling their costs, they have alternatives to reopening a closed account upon receiving a debit or deposit that could minimize their expenses and liability such as declining any transactions that they receive for closed accounts.  Since financial institutions typically require consumers to bring the account balance to zero before closing an account, reopening an account in response to a debit will likely result in penalty fees rather than payment of an amount owed by the consumer.  The CFPB concludes that even if there are instances when a consumer could potentially benefit from having funds available if an account is reopened to receive deposits, that benefit does not outweigh the injuries that can be caused by unilateral account reopening.  In the CFPB’s view, the benefits are unlikely to be significant because consumers can generally receive the same deposits in another way that they would prefer (such as through a new account opened to replace the closed account) and are outweighed by the risk that deposited funds will be depleted before the consumer can access (or is even aware of) the funds.  Such depletion can result from fees assessed by the financial institution on the reopened account or from third party debits from the reopened account.  The CFPB also notes that consumers may benefit in certain circumstances if accounts are not reopened, such as by alerting the sender of a declined deposit that it has incorrect account information and needs to contact the consumer to obtain updated account information.

We disagree with the notion that consumers cannot reasonably avoid injury here.  There is an FAQ by the CFPB and there are websites online that explain to consumers the steps they should take before they close an account.  Moreover, before deposit accounts are closed, financial institutions routinely advise consumers to inform any direct depositors and any billers authorized to make automated payments to make alternative arrangements for these debits and credits.  Consumers absolutely have control over third parties’ direct deposits and automatic withdrawals from their accounts.  In each instance, the consumer must inform the depositors and billers that the prior authorization is revoked and set up deposits to and payments from the new designated account.

As a further rebuttal, we would note that when the U.S. Treasury wanted to disburse the Economic Impact Payments (EIP) mandated by the CARES Act, the COVID-Related Tax Relief Act of 2020, and the American Rescue Plan Act of 2021, they simply attempted an ACH credit to the individual taxpayer’s deposit account listed in prior year’s tax filings without seeking consumer consent for the automated deposit or confirming that the account was open.  In this instance, many consumers were harmed by the delays in receiving their EIP funds where the financial intuitions did not reopen the accounts for the government’s direct deposits and the Treasury did not allow the consumer to designate an alternative account for direct deposit.

Instead, these consumers waited several weeks for a mailed check with the rest of the unbanked taxpayers.  As the financial institutions, who had no control over the government’s actions, received numerous complaints for returning the ACH credits that were attempted on closed accounts, we can expect the Treasury has similar complaint data that could have been analyzed by the CFPB prior to publishing this circular.  The complaint data would have shown the harm suffered by the consumers when accounts were not reopened.  In light of this circular, the CFPB should work with the Treasury on providing consumers a direct deposit authorization process for sending similar types of direct deposits in the future so consumer are not harmed by the Treasury sending deposits to closed accounts.