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CFPB Highlights Focus on Surprise Overdraft Fees

The CFPB has offered guidance on unanticipated overdraft fee assessment practices that it considers likely unfair and illegal. Read on for details.
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On October 26, 2022, the Consumer Financial Protection Bureau (CFPB) released Circular 2022-06 offering guidance on unanticipated overdraft fee assessment practices.1 In a press release issued on the same day, the CFPB highlighted its focus on two “junk fee practices” that the Bureau considers likely unfair and illegal under existing law.2

In its press release, the CFPB focused on the assessment of (1) surprise depositor fees and (2) surprise overdraft fees, including fees charged for transactions authorized when an account has a positive balance. Per the CFPB, these fees “likely violate the Consumer Financial Protection Act prohibition on unfair practices when consumers cannot reasonably avoid them.”3

Circular 2022-06 considers the question of whether the assessment of overdraft fees may constitute an unfair act or practice under the Consumer Financial Protection Act (CFPA), even when the financial institution complies with its obligations under the Truth in Lending Act/Regulation Z and the Electronic Fund Transfer Act/Regulation E. According to the CFPB, overdraft fee practices must comply with Regulation Z and Regulation E, as well as the unfair, deceptive, and abusive acts or practices prohibitions of the CFPA. Overdraft fees assessed on transactions that the consumer would not “reasonably anticipate” are likely unfair under the CFPA. Per the Circular 2022-06, unanticipated overdraft fees “are likely to impose substantial injury on consumers that they cannot reasonably avoid and that is not outweighed by countervailing benefits to consumers or competition.”4

Under the CFPA, an act or practice is unfair when “(1) It causes or is likely to cause substantial injury to consumers that is not reasonably avoidable by consumers; and (2) The injury is not outweighed by countervailing benefits to consumers or competition.”5 Circular 2022-06 states that an unanticipated overdraft fee “occurs when financial institutions assess overdraft fees on transactions that a consumer would not reasonably expect would give rise to such fees.”6 Per the CFPB, financial institutions have complex and differing overdraft practices, and even when a consumer closely monitors their account activity to avoid overdraft fees, the processes used by financial institutions are “unintelligible for many consumers and that consumers cannot control.”7 Even when a financial institution provides disclosures that explain their transaction processing and assessment of fees, a financial institution’s processes may be so complex that despite the provision of disclosures, consumers still face uncertainty regarding when transactions will post to their accounts and when overdraft fees may be incurred. Therefore, even detailed disclosures may not protect the institution from unfair practices.

The CFPB states that a “‘substantial injury’ typically takes the form of monetary harm, such as fees or costs … because of the unfair act or practice” and that “overdraft fees inflict a substantial injury on consumers” when consumers are charged unexpected overdraft fees.8 Though consumers may make use of overdraft programs, because of the uncertainty consumers face when determining whether they will be charged an overdraft fee, “the injury from unanticipated overdraft fees likely is not outweighed by countervailing benefits to consumers or competition.”9

Circular 2022-06 provides examples of potentially unfair acts or practices for overdraft fees that would not be reasonably anticipated by consumers, including “authorize positive, settle negative” or APSN transactions.10 APSN transactions are those where when the transaction is authorized, the consumer has a sufficient available balance, but due to intervening authorizations and settlement of other transactions, by the time the originally authorized transaction settles, the available account balance is negative, and an overdraft fee is assessed. Per the CFPB, these unanticipated overdraft fees are charged to consumers who are opted into overdraft coverage for one-time point-of-sale and ATM transactions, but the consumer would not have anticipated the overdraft fee for the transaction since at the time the transaction was initiated, the account had a sufficient available balance. The CFPB’s October 26, 2022 press release cautioned financial institutions against charging certain types of overdraft fees, including certain types of authorized positive fees, and reiterated the Bureau’s initiative focused on scrutiny of “back-end junk fees.”11

The CFPB is not alone in its focus on potentially unfair acts or practices related to overdraft fees. The FDIC addressed using the available balance method when assessing overdraft fees in its June 2019 Consumer Compliance Supervisory Highlights (Highlights).12 Per the FDIC’s Highlights, certain overdraft fees, specifically those assessed when a transaction is authorized based on a sufficient available balance at the time of the transaction but settles negative, are unfair under the Federal Trade Commission Act.13

President Joe Biden even communicated the current administration’s focus on “junk fees” in the State of the Union Address on February 7, 2023 and touted a new bill called the “Junk Fee Prevention Act.”14 Per the president, the White House is focused on taking on these fees, including what he referred to as “exorbitant bank overdraft fees.”

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