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CFPB issues guidance to help banks avoid charging illegal junk fees on deposit accounts

Written on Nov 10, 2022

The Consumer Financial Protection Bureau (CFPB) has issued guidance about two junk fee practices that are likely unfair and unlawful under existing law.  

The first, surprise overdraft fees, includes overdraft fees charged when consumers had enough money in their account to cover a debit charge at the time the bank authorizes it. The second is the practice of indiscriminately charging depositor fees to every person who deposits a check that bounces. The penalty is an unexpected shock to depositors who thought they were increasing their funds. 

Overdraft and depositor fees likely violate the Consumer Financial Protection Act prohibition on unfair practices when consumers cannot reasonably avoid them. The Consumer Financial Protection Circular on surprise overdraft fees and the CFPB’s compliance bulletin on surprise depositor fees lay out when a financial institution’s back-end penalties likely break the law. 

Surprise Depositor Fees 

When a consumer deposits a check that bounces, banks sometimes charge a fee to the depositor, usually in the range of $10 to $19. However, a person trying to deposit a check has no idea or control over whether the check will clear, and sometimes, that person is the victim of check fraud. In fact, there are many reasons deposited checks can bounce, and the most common reason is that the check originator does not have enough money available in their account. Charging a fee to the depositor penalizes the person who could not anticipate the check would bounce, while doing nothing to deter the originator from writing bad checks. 

The bulletin explains that indiscriminately charging these depositor fees, regardless of circumstances, likely violates the Consumer Financial Protection Act. Financial institutions can generally stay on the right side of the law when they employ more tailored fee policies that charge depositor fees only in situations where a depositor could have avoided the fee, such as when a depositor repeatedly deposits bad checks from the same originator. 

Surprise Overdraft Fees 

An overdraft fee can become a surprise fee when the customer doesn’t reasonably expect their actions to incur an overdraft fee. For instance, even if a person closely monitors their account balances and carefully manages their spending to avoid overdraft fees, they can easily incur penalties when financial institutions employ processes that are unintelligible or manipulative. 

The Consumer Financial Protection Circular explains that when financial institutions charge surprise overdraft fees, sometimes as much as $36, they may be breaking the law. The circular provides some examples of potentially unlawful surprise overdraft fees, including charging penalties on purchases made with a positive balance. These overdraft fees occur when a bank displays that a customer has sufficient available funds to complete a debit card purchase at the time of the transaction, but the consumer is later charged an overdraft fee. Often, the financial institution relies on complex back-office practices to justify charging the fee. For instance, after the bank allows one debit card transaction when there is sufficient money in the account, it nonetheless charges a fee on that transaction later because of intervening transactions. 

In September 2022, the CFPB took action against Regions Bank for charging surprise overdraft fees known as authorized positive fees. As early as 2015 the CFPB, as well as other federal regulators, including the Federal Reserve, began cautioning financial institutions against charging certain types of authorized positive fees, such as the ones used by Regions to unlawfully penalize customers. Regions is required to, among other consequences, reimburse consumers all the funds it unlawfully charged since August 2018 and pay a $50 million penalty. 

FDIC adopts final rule on assessments, revised deposit insurance assessment rates and maintains the designated reserve ratio for 2023 

The Federal Deposit Insurance Corporation (FDIC) adopted a final rule to increase initial base deposit insurance assessment rate schedules uniformly by 2 basis points beginning in the first quarterly assessment period of 2023. After careful consideration of comments received and updated analysis and projections, the FDIC adopted as final and without change, the increase in assessment rates as proposed on June 21, 2022. 

“The increased assessment revenue will strengthen the DIF at a time of significant downside risk to the economy and financial system, increasing the likelihood that the reserve ratio will reach the statutory minimum of 1.35% while reducing the likelihood of a pro-cyclical increase in the future, and promoting public confidence in federal deposit insurance,” said Acting Chairman Martin Gruenberg. 

The final rule is intended to increase the likelihood that the reserve ratio of the Deposit Insurance Fund (DIF) reaches the statutory minimum of 1.35% by the statutory deadline of September 30, 2028, consistent with the Amended Restoration Plan. The final rule also reduces the likelihood that the FDIC would need to consider a potentially pro-cyclical assessment rate increase (i.e., raise assessments when banking and economic conditions may be less favorable). 

The increase in assessment rates is projected to have an insignificant effect on institutions’ capital levels, is estimated to reduce income slightly by annual average of 1.2% and should not impact lending or credit availability in any meaningful way. 

The FDIC also concurrently maintained the Designated Reserve Ratio (DRR) for the DIF at 2% for 2023. The increase in assessment rate schedules is also intended to support growth in the DIF in progressing toward the FDIC’s long-term goal of a 2% DRR. Growing the DIF increases the likelihood of the DIF remaining positive throughout periods of significant losses due to bank failures, consistent with the FDIC’s long-term fund management plan. Therefore, the new assessment rate schedules will remain in effect unless and until the reserve ratio meets or exceeds 2%, absent further Board action. Progressively lower assessment rate schedules will take effect when the reserve ratio reaches 2%, and again when it reaches 2.5%. 

Revised rate schedules will be effective on Jan. 1, 2023, and applicable to the first quarterly assessment period of 2023 (i.e., Jan. 1 through March 31, 2023, with an invoice payment date of June 30, 2023). The revised rate schedules are applicable to all insured depository institutions.