Rule2022-23933
Bulletin 2022-06: Unfair Returned Deposited Item Fee Assessment Practices
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
November 7, 2022
Issuing agencies
Consumer Financial Protection Bureau
Abstract
A Returned Deposited Item is a check that a consumer deposits into their checking account that is returned to the consumer because the check could not be processed against the check originator's account. Blanket policies of charging Returned Deposited Item fees to consumers for all returned transactions irrespective of the circumstances or patterns of behavior on the account are likely unfair under the Consumer Financial Protection Act (CFPA). The Consumer Financial Protection Bureau (Bureau or CFPB) is issuing this bulletin to notify regulated entities how the Bureau intends to exercise its enforcement and supervisory authorities on this issue.
Full Text
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<title>Federal Register, Volume 87 Issue 214 (Monday, November 7, 2022)</title>
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[Federal Register Volume 87, Number 214 (Monday, November 7, 2022)]
[Rules and Regulations]
[Pages 66940-66942]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-23933]
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BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Chapter X
Bulletin 2022-06: Unfair Returned Deposited Item Fee Assessment
Practices
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Compliance bulletin.
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SUMMARY: A Returned Deposited Item is a check that a consumer deposits
into their checking account that is returned to the consumer because
the check could not be processed against the check originator's
account. Blanket policies of charging Returned Deposited Item fees to
consumers for all returned transactions irrespective of the
circumstances or patterns of behavior on the account are likely unfair
under the Consumer Financial Protection Act (CFPA). The Consumer
Financial Protection Bureau (Bureau or CFPB) is issuing this bulletin
to notify regulated entities how the Bureau intends to exercise its
enforcement and supervisory authorities on this issue.
DATES: This bulletin is applicable as of November 7, 2022.
FOR FURTHER INFORMATION CONTACT: Sonya Pass, Senior Legal Counsel,
Legal Division, at 202-435-7700. If you require this document in an
alternative electronic format, please contact
<a href="/cdn-cgi/l/email-protection#c4878294869b85a7a7a1b7b7ada6ada8adb0bd84a7a2b4a6eaa3abb2"><span class="__cf_email__" data-cfemail="1754514755485674747264647e757e7b7e636e577471677539707861">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
I. Background
A Returned Deposited Item is a check that a consumer deposits into
their checking account that is returned to the consumer because the
check could not be processed against the check originator's account.
There are many reasons deposited items can be returned unprocessed. For
example, the check originator may not have sufficient funds available
in their account to pay the amount stated on the check; the check
originator may have directed the issuing depository institution to stop
payment; the account referenced on the check may be closed or located
in a foreign country; or there may be questionable, erroneous, or
missing information on the check, including with respect to the
signature, date, account number, or payee name.
Consumers often rely on payments made by check for personal,
family, or household purposes. The check may be from another consumer
or from a business or entity and may represent a gift, a refund, a
payment, or a public benefit. In many circumstances, as discussed
below, the check depositor has no control over whether, and likely no
reason to anticipate that, the deposited check would be returned. Nor
as a general matter can the check depositor verify with the check
originator's depository institution prior to depositing a check whether
there are sufficient funds in the issuer's account for the check to
clear. Yet, many depository institutions have blanket policies of
charging fees to the check depositor for Returned Deposited Items for
every Returned Deposited Item, irrespective of the circumstances of the
particular transaction or patterns of behavior on the account. While
certain entities, such as lenders and landlords, may be able to recoup
such fees from the check originator, consumers generally cannot.
Under the blanket policies of depository institutions, Returned
Deposited Item fees are often in the range of $10-$19. The fees are
typically charged in a flat amount on a per-transaction basis. Notably,
in the case of checks that are returned for insufficient funds,
Returned Deposited Item fees are charged in addition to any non-
sufficient funds fees charged by the originating bank to the check
originator. Assuming a typical Returned Deposited Item fee of $12 and a
non-sufficient funds fee of $35, when the depositor's bank charges a
Returned Deposited Item fee to the depositor consumer, and the check
originator's bank charges a non-sufficient funds fee to the check
originator for the same check, those banks collectively generate $47 in
fees from each returned check--$12 to the depositor's bank, $35 to the
originator's bank.
II. Violations of the Consumer Financial Protection Act \1\
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\1\ As a matter of prosecutorial discretion, the CFPB does not
intend to seek monetary relief for potential unfair practices
regarding Returned Deposited Item fees assessed prior to November 1,
2023.
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The Consumer Financial Protection Act (CFPA) prohibits covered
persons from engaging in unfair acts or practices.\2\ Congress defined
an unfair act or practice as one that (A) ``causes or is likely to
cause substantial injury to consumers which is not reasonably
avoidable,'' and (B) ``such substantial injury is not outweighed by
countervailing benefits to consumers or to competition.'' \3\
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\2\ 12 U.S.C. 5536(a)(1)(B).
\3\ 12 U.S.C. 5531(c)(1).
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Blanket policies of charging Returned Deposited Item fees to
consumers for all returned transactions irrespective of the
circumstances of the transaction or patterns of behavior on the account
are likely unfair.
Fees charged for Returned Deposited Items cause substantial injury
to consumers. Under the blanket policies of many depository
institutions, Returned Deposited Item fees cause monetary injury, in
the range of $10-19 for each returned item. Depository institutions
that charge Returned Deposited Item fees for returned checks impose
concrete monetary harm on a large number of customers.
In many of the instances in which Returned Deposited Item fees are
charged, consumers would not be able to reasonably avoid the
substantial monetary injury imposed by the fees. An injury is not
reasonably avoidable unless consumers are fully informed of the risk
and have practical means to avoid it.\4\ Under blanket policies of many
depository institutions, Returned Deposited Item fees are charged
whenever a check is returned because the check originator has
insufficient available funds in their account, the check originator
instructs the originating depository institution to stop payment, or
the check is written against a closed account. But a consumer
depositing a check would normally be unaware of and have little to no
control over whether a check originator has
[[Page 66941]]
funds in their account, will issue a stop payment instruction, or has
closed the account. Nor would a consumer normally be able to verify
whether a check will clear with the check originator's depository
institution before depositing the check or be able to pass along the
cost of the fee to the check originator.
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\4\ See F.T.C. v. Neovi, Inc., 604 F.3d 1150, 1158 (9th Cir.
2010).
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Liability under the prohibition on unfair acts or practices depends
on the particular facts and circumstances. The CFPB notes that it is
unlikely that an institution will violate the prohibition if the method
in which fees are imposed are tailored to only charge consumers who
could reasonably avoid the injury. For example, if a depository
institution only charges consumers a fee if they repeatedly deposit bad
checks from the same originator, or only charges consumers a fee when
checks are unsigned, those fees would likely be reasonably avoidable.
Regulation DD, which applies in relevant part to depository
institutions except for credit unions,\5\ requires depository
institutions to disclose fee information on depository accounts to
consumers before an account is opened or a service is provided.\6\ The
returned item fee is among the fees required to be disclosed in the fee
schedule when the consumer first opens the account.\7\ In applying the
CFPA's unfairness prohibition, the Bureau finds persuasive the
reasoning of the D.C. Circuit and the Federal Trade Commission (FTC) in
American Financial Services Ass'n v. F.T.C. (AFSA).\8\ The FTC issued
the Credit Practices Rule, which determined that creditor remedies of
certain irrevocable wage assignments and non-purchase, non-possessory
security interests in household goods are unfair acts or practices.
Although the creditor remedies were disclosed and agreed upon in credit
contracts, the FTC determined, and the D.C. Circuit upheld, that the
provisions were not reasonably avoidable because ``(1) consumers are
not, as a practical matter, able to shop and bargain over alternative
remedial provisions; and (2) default is ordinarily the product of
forces beyond a debtor's control.'' \9\ Similar unfairness principles
likely apply to account opening disclosures of blanket policies of
imposing fees for Returned Deposited Items because, similarly,
consumers have limited ability to bargain over specific fee terms in
selecting deposit accounts, and consumers are charged these fees in
circumstances beyond their control.
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\5\ The National Credit Union Administration has rules governing
disclosures for credit unions at 12 CFR 707 et seq.
\6\ 12 CFR 1030.4.
\7\ See comment 4(b)(4)-1.iv (listing ``fees associated with
checks returned unpaid'' as a type of fee that must be disclosed);
Reg DD Sample Form B-4 (describing a fee of $5 for ``Deposited
checks returned'').
\8\ 767 F.2d 957, 972 (D.C. Cir. 1985).
\9\ Id. at 976.
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The CFPB advises institutions that it may be difficult to show that
the injury from blanket policies of charging Returned Deposited Item
fees is outweighed by countervailing benefits to consumers or
competition. Check processing is a service made broadly available to
all depositors of checks, and there is no separate benefit to consumers
from having a deposited check returned, as opposed to paid. Benefits to
the depository institutions themselves are not necessarily benefits to
consumers or competition. Even if they were, the costs to the
depository institution of developing and maintaining a reliable check
processing system for account holders likely is not attributable to
Returned Deposited Item transactions, as those costs are necessary to
provide payment services to all check users. Returned Deposited Item
fees are also not well-tailored to recoup costs from the consumers
actually responsible for the costs to depository institutions of
expected losses for the limited circumstances in which the institution
cannot recoup funds made available to the depositor on a check that is
later returned. Instead, the fee is charged to depositors even where
the depository institution incurs no such loss from the returned
transaction, and institutions usually do not collect the fee in those
limited circumstances where they actually incur a loss (entities only
incur a loss because they cannot collect). Depository institutions may
argue that consumers may also receive a benefit from a fee to the
extent that the fee leads to a decrease in front-end or other costs to
the consumer for the product or an increase in the availability or
quality of services. However, to the extent the revenue generated by
Returned Deposited Item fees charged pursuant to blanket policies
causes any discernable consumer benefits in terms of lower front-end
costs or better quality or more available services, it is unlikely that
a financial institution would be able to show that any such benefits
would outweigh the substantial injury to the consumer even in terms of
the total amount of such fees paid by the consumer. Indeed, even
assuming a 100% pass through of the fee to lower front-end costs for
consumers charged the fee, that pass through would not be greater than
the total cost of the fees to those consumers.
Deterring consumers from depositing checks in instances where the
checks will be returned may benefit consumers and the public interest
if the institution's policy and practice are well-tailored to address
the issue, do not harm consumers in some other way, minimize losses to
the depository institution that would be passed through to consumers,
bolster the integrity of the banking system through loss avoidance,
and, in the case of fraud, prevent conduct that offends public policy
as embodied in statutes and common law. However, deterrence can only be
accomplished through the collection of fees in circumstances where the
consumer anticipates that a check will be returned but deposits it
anyway, such as where a consumer knowingly deposits a counterfeit
check. As noted, however, this bulletin is focused on Returned
Deposited Item policies that indiscriminately impose fees in
circumstances where the consumer does not know the check would be
returned. In other words, blanket Returned Deposited Item polices are
not targeted to address patterns of behavior indicative of fraud or
other circumstances where the consumer reasonably should have
anticipated that the check would be returned.\10\ With respect to
fraud, it is also not apparent that the nature or amount of the fees
would result in deterrence beyond other available mechanisms, such as
reviewing depositors' accounts, criminal penalties, or more tailored
Returned Deposited Item fee policies aimed at consumers who deposit bad
checks intentionally or negligently.\11\
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\10\ As noted above, policies that are tailored to only charge
consumers who could reasonably avoid the injury likely would not
violate the prohibition on unfairness.
\11\ See F.T.C. v. <a href="http://Amazon.com">Amazon.com</a>, No. C14-1038-JCC, 2016 WL
10654030, at *10-11 (W.D. Wash. July 22, 2016) (finding no
countervailing benefits where the purported benefits could be
achieved without engaging in the conduct that caused substantial
injury).
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As to benefits to competition, economic research suggests that add-
on fees may have a distortionary market effect by making it more
difficult to compete on transparent front-end prices and reducing the
portion of the overall cost that is subject to competitive price
shopping.\12\ The concern is especially
[[Page 66942]]
heightened for back-end penalty fees which are often not subject to the
competitive process: firms typically have not competed for customers
based on penalty fee pricing and consumers do not shop on the basis of
fees they do not intend to incur. Indeed, economic research suggests
that consumer decision making is impaired by hidden or shrouded pricing
regimes.\13\ Given these harms to competition, the CFPB advises
institutions that there is a substantial risk of violating the
prohibition on unfair acts or practices with respect to this practice.
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\12\ See Xavier Gabaix & David Laibson, Shrouded Attributes,
Consumer Myopia, and Information Suppression in Competitive Markets,
Quarterly Journal of Economics, Vol. 121, Issue 2 (May 2006),
pp.505-40, available at https://pages.stern.nyu.edu/~xgabaix/papers/
shrouded.pdf; see also Steffen Huck & Brian Wallace, The impact of
price frames on consumer decision making: Experimental evidence
(2015), available at https://www.ucl.ac.uk/~uctpbwa/papers/price-
framing.pdf; Sumit Agarwal, Souphala Chomsisengphet, Neale Mahoney,
& Johannes Stroebel, Regulating Consumer Financial Products:
Evidence from Credit Cards, Quarterly Journal of Economics, Vol.
130, Issue 1 (Feb. 2015), pp. 111-64, at p.5 & 42-43, available at
<a href="https://academic.oup.com/qje/article/130/1/111/2338025?login=true">https://academic.oup.com/qje/article/130/1/111/2338025?login=true</a>;
Sumit Agarwal, Souphala Chomsisengphet, Neale Mahoney, & Johannes
Stroebel, A Simple Framework for Establishing Consumer Benefits from
Regulating Hidden Fees, Journal of Legal Studies, Vol. 43, Issue S2
(June 2014), pp.S239-52, available at <a href="https://nmahoney.people.stanford.edu/sites/g/files/sbiybj23976/files/media/file/mahoney_hidden_fees_jls.pdf">https://nmahoney.people.stanford.edu/sites/g/files/sbiybj23976/files/media/file/mahoney_hidden_fees_jls.pdf</a>; Glenn Ellison, A Model of Add-On
Pricing, Quarterly Journal of Economics, Vol. 120, Issue 2 (May
2005), pp.585-637, available at <a href="https://economics.mit.edu/files/7605">https://economics.mit.edu/files/7605</a>.
\13\ See Gabaix & Laibson, supra note 12; Huck & Wallace, supra
note 12; Agarwal et al., Regulating Consumer Financial Products,
supra note 12; Agarwal et al., A Simple Framework, supra note 12;
Ellison, supra note 12.
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III. Regulatory Matters
This is a general statement of policy under the Administrative
Procedure Act. It provides background information about applicable law
and articulates considerations relevant to the Bureau's exercise of its
authorities. It does not confer any rights of any kind. The Regulatory
Flexibility Act does not require an initial or final regulatory
flexibility analysis for general statements of policy.\14\ It also does
not impose any new or revise any existing recordkeeping, reporting, or
disclosure requirements on covered entities or members of the public
that would be collections of information requiring approval by the
Office of Management and Budget under the Paperwork Reduction Act of
1995.\15\
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\14\ 5 U.S.C. 603(a), 604(a).
\15\ 44 U.S.C. 3501-3521.
Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2022-23933 Filed 11-4-22; 8:45 am]
BILLING CODE 4810-AM-P
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