On January 24, 2024, a week after issuing its proposed rulemaking for overdraft services, the Consumer Financial Protection Bureau (“CFPB”) issued its proposed rulemaking on non-sufficient funds (NSF) fees.

NSF Fee Proposal

Banks typically charge NSF fees when an item is submitted for payment against a consumer’s account and returned unpaid due to insufficient funds. The CFPB is seeking to prohibit NSF fees on debit card transactions and some person-to-person (P2P) payments that are declined instantaneously or near-instantaneously. In doing so, the CFPB is attacking a “junk fee” that, by its own admission, is “rarely charged.”

The CFPB states that it is only aware of very limited situations where NSF fees have been charged for declining debit card authorizations and ATM withdrawals or P2P payments and gives prepaid accounts as an example. While the CFPB recognizes that banks routinely only charge NSF fees for returned check and ACH payments, CFPB Director Rohit Chopra states that the CFPB’s proactive approach is necessary because “large banks and their consultants have concocted new junk fees for fake services that cost almost nothing to deliver.” Director Chopra provides no examples of this. As we have previously blogged, the CFPB’s own data shows that many banks have proactively stopped charging any NSF fees and indicates an overall decline in NSF fees charged since 2019.

In proposing the NSF fee rule, the CFPB is using its authority under the Consumer Financial Protection Act to prohibit unfair, deceptive or abusive acts and practices. The CFPB states that charging fees for transactions declined in real time is an abusive practice but as we discuss below its analysis is weak at best given the standards it has adopted for determining when conduct is abusive. In April 2023, the CFPB issued a policy statement defining abusive acts or practices, indicating that it finds two categories of conduct generally abusive: (1) actions that obscure important features of a product or service, and (2) actions taking unreasonable advantage of consumers in certain circumstances. The CFPB preliminarily finds that a consumer who would be charged an NSF fee on a transaction subject to the rule would lack awareness of their available account balance and lack understanding of their account’s material risks, costs, or conditions at the time they initiated that transaction.

The CFPB is not attempting to shoehorn the NSF fee prohibition into an existing regulation as it is attempting to do with overdraft services through amendments to Regulation Z. Instead, the CFPB is proposing to create a new regulation (12 CFR Part 1042) while borrowing the definitions of “account,” “prepaid account,” and “covered financial institution” from Regulation E. The proposed rule seeks to ban any fees charged on a “covered transaction,” which would be defined as “an attempt by a consumer to withdraw, debit, pay, or transfer funds from their account that is declined instantaneously or near-instantaneously by a covered financial institution due to insufficient funds.” A “covered financial institution” would be defined as “a bank, savings association, credit union, or any other person that directly or indirectly holds an account belonging to a consumer, or that issues an access device and agrees with a consumer to provide electronic fund transfer services, other than a person excluded from coverage of this part by section 1029 of the Consumer Financial Protection Act of 2010, title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376.” NSF fees charged for check and ACH transaction would not be covered by the rule. Therefore, the proposed rule is attempting to cover ATM and one-time debit card transactions for which an opt-in is required to charge an overdraft fee. The NSF fee prohibition applies regardless of the label used by the financial institution to charge the fee.

The CFPB solicits comment on the proposed definition of covered transaction, including whether: (1) the timing component is sufficiently clear to determine coverage; (2) the proposed definition appropriately accounts for emerging payment networks and technology innovations; and (3) the proposed definition captures the scope of relevant transactions where “potential” abusive practices are occurring in the market or are at risk of occurring in the future.

This proposed rule is expected to have limited impact on banks’ current practices as these fee are not routinely charged and we are unware of any bank considering the initiation of new NSF fees in this regulatory environment. Nonetheless, this is a gateway rule and the arguments made for calling these types of NSF fees abusive could be used as precedent and applied to all NSF fees in future enforcement actions or rulemaking. Comments are due by March 25, 2024.

The CFPB did not conduct a Small Business Regulatory Enforcement Fairness Act review for this rulemaking as urged by the financial trade groups, summarily stating that the proposed rule should not have a significant impact on a substantial number of small entities.

The Consumer Bankers Association (“CBA”) issued the following statement:

The CFPB’s proposed rule is a marked departure from the agency’s previous disclosures about the rulemaking, in that the proposal would only impact transactions that are declined “instantaneously or near-instantaneously.” It would explicitly not cover check and ACH transactions. Accordingly, we will work with our members to understand what, if any, business practices would actually be impacted by the Bureau’s rulemaking.

In particular, although the rulemaking acknowledges that ‘many financial institutions in recent years have stopped charging NSF fees,’ the agency relies heavily on ten-year-old data to justify the creation of yet another rule. CBA looks forward to working constructively with our regulators, beyond what appears to be its recent clamoring for headlines, to seek solutions to problems that American consumers are actually facing as they try to make ends meet.

CFPB Formulation of UDAAP Abusive Prong

We agree with the CBA. Moreover, we have significant concerns about the incredibly broad approach set forth by the CFPB in the preamble to the proposal regarding the abusive prong of UDAAP.

Pursuant to the Dodd-Frank Act, the CFPB may not find an act or practice to be abusive unless the act or practice:

(1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or (2) takes unreasonable advantage of—(A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; (B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or (C) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

The proposal reflects a preliminary determination by the CFPB that the imposition of an NSF fee for a covered transaction takes unreasonable advantage of a lack of understanding on the part of the consumer of the material risk, costs, or conditions of the product or service. Even though the CFPB acknowledges that many consumers can instantly access their existing account balances, without an adequate explanation, “the CFPB preliminarily concludes that consumers initiating covered transactions that incur NSF fees would generally lack awareness of their available account balance.” The CFPB also preliminarily concludes, again, without an adequate explanation, that such consumers “would generally lack awareness of . . . other information about the material risks, costs, or conditions regarding their account,” regardless of whether the consumer knew that an NSF would be imposed for a declined covered transaction based on a prior declination of a covered transaction or a disclosure provided to the consumer.

The incredibly broad interpretation that the CFPB seeks to apply to aspects of the abusive concept is reflected in the following statement by the CFPB in the preamble to the proposal:

“At the time a consumer considers initiating a request to withdraw, debit, pay, or transfer funds from their account, the relevant risks to the consumer would include the possibility the transaction will be declined and result in an NSF fee. Furthermore, once a consumer actually initiates a covered transaction, it is certain that the transaction will be instantaneously declined and they will be charged a fee; therefore, the likelihood of harm at that time is 100 percent. This is because no chance occurrence, consumer choice, or other intervening event can happen between the transaction’s initiation and the instantaneous decline that could change the harmful outcome (i.e., the assessment of the fee). In other words, for covered transactions that are initiated, the risk of harm is a certainty. Therefore, a consumer who initiates such a transaction believing the transaction nevertheless might go through would lack understanding of the likelihood of harm. Given the tangible and negative consequences of both a transaction decline and the imposition of a fee, the CFPB interprets this risk, if and when present, to be material.”

Essentially, the CFPB is taking the position that a consumer can be blissfully ignorant of something within their control, such as their account balance, and the disclosures and account agreements that have been provided to them. How far might the CFPB go? Might it take the position that even though a credit card late fee was disclosed to and agreed to by the consumer, and that making the monthly payment on time is within the control of the consumer, gee the consumer would have to read the disclosure and account agreement, and then remember and have the funds to make an on-time payment, so actually imposing a late fee for a late payment, even at a significantly reduced amount based on an upcoming CFPB rulemaking, takes unreasonable advantage of a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service.

Take the example of a consumer who knew an NSF would be imposed for a declined covered transaction. The consumer is considering attempting a covered transaction and realizes that, based on their account balance, the transaction may not go through. The consumer nonetheless decides to take the risk and attempts the transaction, the transaction is declined and an NSF fee is imposed. In the view of the CFPB, in this example the consumer lacked the understanding of the material risk, costs, or conditions of the product or service. That’s absurd. Even if a consumer does not keep their own accounting of their balance, consumers can easily access their balances through phone banking, online banking, mobile banking or at an in-network ATM. The consumer is in the best position to know their account balance and the checks they wrote and electronic payment authorizations they made. If the CFPB takes such broad a view of this aspect of the abusive concept, it could find that most any act or practice that it dislikes is abusive. The “bottom line” is that Director Chopra does not subscribe to the well-accepted adage: “If it ain’t broke, don’t fix it!”