Notice2023-22869
Supervisory Highlights Junk Fees Update Special Edition, Issue 31, Fall 2023
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
October 17, 2023
Issuing agencies
Consumer Financial Protection Bureau
Abstract
The Consumer Financial Protection Bureau (CFPB or Bureau) is issuing its thirty first edition of Supervisory Highlights.
Full Text
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<title>Federal Register, Volume 88 Issue 199 (Tuesday, October 17, 2023)</title>
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[Federal Register Volume 88, Number 199 (Tuesday, October 17, 2023)]
[Notices]
[Pages 71534-71539]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-22869]
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CONSUMER FINANCIAL PROTECTION BUREAU
Supervisory Highlights Junk Fees Update Special Edition, Issue
31, Fall 2023
AGENCY: Consumer Financial Protection Bureau.
ACTION: Supervisory Highlights.
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SUMMARY: The Consumer Financial Protection Bureau (CFPB or Bureau) is
issuing its thirty first edition of Supervisory Highlights.
DATES: The findings included in this report cover examinations in the
areas of deposits, auto servicing, and remittances that generally were
completed between February 2023 and August 2023. The report also
describes risks identified in connection with payment platforms that
parents, guardians, and students use to pay for school lunches.
FOR FURTHER INFORMATION CONTACT: Jaclyn Sellers, Senior Counsel, at
(202) 435-7449. If you require this document in an alternative
electronic format, please contact <a href="/cdn-cgi/l/email-protection#2c6f6a7c6e736d4f4f495f5f454e45404558556c4f4a5c4e024b435a"><span class="__cf_email__" data-cfemail="581b1e081a07193b3b3d2b2b313a3134312c21183b3e283a763f372e">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
1. Introduction
As part of its emphasis on fair competition, the Consumer Financial
Protection Bureau (CFPB) has launched an initiative, consistent with
its legal authority, to scrutinize junk fees charged by banks and
financial companies. Junk fees are typically not subjected to the
normal forces of competition, leading to excessive costs for services
that a consumer may not even want. For example, certain banks and
financial companies might hide these unavoidable or surprise charges or
disclose them only at a later stage in the consumer's purchasing
process, if at all.
The CFPB has observed that supervised institutions have started to
compete more when it comes to fees. In recent years, multiple banks
have announced they were eliminating overdraft fees or otherwise
updating their policies to be more consumer friendly.\1\ And many have
announced that they are eliminating non-sufficient fund (NSF) fees on
consumer deposit accounts.\2\
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\1\ Banks' Overdraft/NSF Fee Revenues Evolve Along With Their
Policies, (July 20, 2023), available at: <a href="https://www.consumerfinance.gov/about-us/blog/banks-overdraft-nsf-fee-revenues-evolve-along-with-their-policies/">https://www.consumerfinance.gov/about-us/blog/banks-overdraft-nsf-fee-revenues-evolve-along-with-their-policies/</a>. Some banks have
announced significant changes while others have made smaller or no
changes.
\2\ Id.
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Supervision continues to focus significant resources on identifying
and eliminating junk fees charged by supervised institutions.
Significantly, financial institutions are refunding over $120 million
to consumers for unanticipated overdraft fees and unfair NSF fees. This
special edition of Supervisory Highlights updates the public on
supervisory work completed since the CFPB published the March 2023
Supervisory Highlights Junk Fees Special Edition. In total, for the
topics covered in this edition, Supervision's work has resulted in
institutions refunding over $140 million to consumers.
The findings included in this report cover examinations in the
areas of deposits, auto servicing, and remittances that generally were
completed between February 2023 and August 2023.\3\ The report also
describes risks identified in connection with payment platforms that
parents, guardians, and students use to pay for school lunches.
Additionally, consistent with the statutory requirement for Supervision
to identify and consider ``risks to consumers'' throughout its
supervisory program, Supervision has obtained data about certain
deposit account fee practices and is sharing key data points that shed
light on risks to consumers. To maintain the anonymity of the
supervised institutions discussed in Supervisory Highlights, references
to institutions generally are in the plural and related findings may
pertain to one or more institutions.
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\3\ If a supervisory matter is referred to the Office of
Enforcement, Enforcement may cite additional violations based on
these facts or uncover additional information that could impact the
conclusion as to what violations may exist.
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We invite readers with questions or comments about Supervisory
Highlights to contact us at <a href="/cdn-cgi/l/email-protection#c1828791839e92b4b1a4b3b7a8b2a8aeaf81a2a7b1a3efa6aeb7"><span class="__cf_email__" data-cfemail="14575244564b4761647166627d677d7b7a54777264763a737b62">[email protected]</span></a>.
2. Supervisory Observations
2.1 Deposits
In recent examinations of depository institutions and service
providers, Supervision has reviewed certain fees related to deposit
accounts to assess whether supervised entities have engaged in any
unfair, deceptive, or abusive acts or practices (UDAAPs) prohibited by
the Consumer Financial Protection Act of 2010 (CFPA).\4\ Examiners have
focused on NSF and overdraft fees in particular and have reviewed
statement fees and surprise depositor fees as well. Examiners also have
engaged in follow-up work regarding pandemic relief benefits.
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\4\ 12 U.S.C. 5531(c), 5536.
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2.1.1 Assessing Multiple NSF Fees for the Same Transaction
Supervision continued examinations of institutions to review for
UDAAPs in connection with charging consumers NSF fees, especially with
respect to ``re-presentments.'' \5\ A re-presentment occurs when, after
declining a transaction because of insufficient funds and assessing an
NSF fee for the transaction, the consumer's account-holding institution
returns the transaction to the merchant's depository institution, and
the merchant presents the same transaction to the consumer's account-
holding institution for payment again. In some instances, when the
consumer's account remains insufficient to pay for the transaction upon
re-presentment, the consumer's account-holding institution again
returns the transaction to the merchant and assesses another NSF fee
for the transaction, without providing consumers a reasonable
opportunity to prevent another fee after the first failed presentment
attempt. Absent restrictions on the assessment of NSF fees by the
consumer's account-holding institution, this cycle can occur multiple
times, and consumers may be charged multiple fees for a single
transaction.
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\5\ Some depository institutions charge a NSF fee when a
consumer pays for a transaction with a check or an ACH transfer and
the transaction is presented for payment, but there is not a
sufficient balance in the consumer's account to cover the
transaction.
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Core Processor Practices
Core processors provide critical deposit, payment, and data
processing services to many supervised institutions, and the system
functionality that these entities develop drives many fee practices,
including NSF fee practices. Supervision has examined core processors
in their capacity as service providers to covered persons providing
deposit services.
Examiners concluded that, in the offering and providing of core
service platforms, core processors engaged in an unfair act or practice
by contributing to the assessment of unfair NSF fees on re-presented
items. An act or practice is
[[Page 71535]]
unfair when: (1) it causes or is likely to cause substantial injury to
consumers; (2) the injury is not reasonably avoidable by consumers; and
(3) the injury is not outweighed by countervailing benefits to
consumers or to competition.\6\ Consumers incurred substantial injury
in the form of the relevant re-presentment NSF fees. Consumers were
also at increased risk of incurring additional fees on subsequent
transactions caused by the re-presentment NSF fees, which lowered
consumers' account balances. Injurious fees were foreseeable in light
of the system limitations, as the core processor platforms did not
allow financial institutions to refrain from charging more than one NSF
fee per item without discontinuing NSF fees altogether or manually
waiving individual fees. These fees were not reasonably avoidable by
consumers, where consumers did not have a meaningful opportunity to
prevent another fee after the first failed representment attempt. The
consumer injury at issue was not outweighed by countervailing benefits
to consumers or competition.
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\6\ 12 U.S.C. 5531(c), 5536.
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To address these findings, the core processors enhanced the systems
they provide to financial institutions to facilitate their
implementation of policies to eliminate NSF re-presentment fees.
Additionally, Supervision intends to review the practices of financial
institutions seeking payment from the consumer's financial institution,
often called Originating Depository Financial Institutions, to ensure
that represented transactions are coded properly to enable systems to
identify the relevant transactions efficiently as well as refrain from
charging NSF fees on those transactions.
Supervised Institutions' Practices
In other examinations, Supervision found that financial
institutions engaged in unfair acts or practices by charging consumers
re-presentment NSF fees without affording the consumer a meaningful
opportunity to prevent another fee after the first failed representment
attempt.\7\ The assessment of re-presentment NSF fees caused
substantial monetary injury to consumers, totaling tens of millions of
dollars that will be refunded to consumers because of examinations
during this time period. These injuries were not reasonably avoidable
by consumers, regardless of disclosures in account-opening documents,
because consumers did not have a reasonable opportunity to prevent
another fee after the first failed presentment attempt. And the
injuries were not outweighed by countervailing benefits to consumers or
competition.
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\7\ Supervision's work is consistent with the CFPB's public
action against Bank of America, N.A. See CFPB Consent Order 2023-
CFPB-0006, In the Matter of Bank of America, N.A. (July 11, 2023),
available at: <a href="https://www.consumerfinance.gov/enforcement/actions/bank-of-america-n-a-fees/">https://www.consumerfinance.gov/enforcement/actions/bank-of-america-n-a-fees/</a>.
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Consistent with the CFPB's longtime position regarding responsible
business conduct, institutions proactively developed plans to remediate
consumers for assessed re-presentment NSF fees.\8\ However, some
financial institutions used incomplete reports that only captured
certain re-presentment NSF fees charged to consumers. Examiners found
that these reports captured consumer accounts that were charged NSF
fees on checks only, or on both checks and ACH transactions. Yet they
omitted consumer accounts that were assessed NSF fees solely on ACH
transactions. After examiners identified this issue, institutions
reviewed their remediation methodologies to ensure coverage of both ACH
and check re-presentments.
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\8\ Responsible Business Conduct: Self-Assessing, Self-
Reporting, Remediating, and Cooperating, (March 6, 2020), available
at: https://<a href="http://www.consumerfinance.gov/compliance/supervisory-guidance/bulletin-responsible-business-conduct/">www.consumerfinance.gov/compliance/supervisory-guidance/bulletin-responsible-business-conduct/</a>.
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In total, institutions are refunding over $22 million to consumers
in response to Supervision directives since CFPB initiated this set of
work in 2022. Additionally, the vast majority of institutions reported
plans to stop charging NSF fees altogether.
2.1.2 Unfair Unanticipated Overdraft Fees
Supervision continued to cite unfair acts or practices at
institutions that charged consumers for unfair unanticipated overdraft
fees, such as Authorize-Positive Settle-Negative (APSN) overdraft fees,
during this time period. APSN overdraft fees occur when financial
institutions assess overdraft fees for debit card or ATM transactions
where the consumer had a sufficient available balance at the time the
consumer authorized the transaction, but given the delay between
authorization and settlement the consumer's account balance is
insufficient at the time of settlement. This change in balance can
occur for many reasons, such as intervening authorizations resulting in
holds, settlement of other transactions, timing of presentment of the
transaction for settlement, and other complex practices relating to
transaction processing order. Supervision's recent matters have built
on work described in Winter 2023 Supervisory Highlights, and the CFPB
previously discussed this practice in Consumer Financial Protection
Circular 2022-06, Unanticipated Overdraft Fee Assessment Practices.\9\
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\9\ Supervisory Highlights: Junk Fees Special Edition, Issue 29,
3-6 (March 2023) available at: <a href="https://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-junk-fees-special-edition-issue-29-winter-2023/">https://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-junk-fees-special-edition-issue-29-winter-2023/</a>; Consumer Financial Protection
Circular 2022-06, Unanticipated Overdraft Fee Assessment Practices,
at 8-12 (Oct. 26, 2022) available at: <a href="https://www.consumerfinance.gov/compliance/circulars/consumer-financial-protection-circular-2022-06-unanticipated-overdraft-fee-assessment-practices/">https://www.consumerfinance.gov/compliance/circulars/consumer-financial-protection-circular-2022-06-unanticipated-overdraft-fee-assessment-practices/</a>.
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Across its examinations, Supervision has identified tens of
millions of dollars in injury to thousands of consumers that occurred
whether supervised institutions used the consumer's available or ledger
balance for fee decisioning. Consumers could not reasonably avoid the
substantial injury, irrespective of account opening disclosures. The
consumer injury was not outweighed by countervailing benefits to
consumers or competition. To remedy the violation, these institutions
ceased charging APSN overdraft fees, and will conduct a lookback and
issue remediation to injured consumers.
In total, financial institutions are refunding over $98 million to
consumers since this work began in 2022. In recent examinations, and
consistent with Supervision's earlier work, supervised institutions
that had reported to examiners that they engaged in APSN overdraft fee
practices now report that they will stop doing so.
2.1.3 Supervisory Data Requests on Overdraft, NSF, and Other Overdraft-
Related Fees
As part of the CFPB's ongoing supervisory monitoring related to
overdraft practices, Supervision obtained data from several
institutions related to fees assessed over the course of 2022,
including per item overdraft and NSF fees, sustained overdraft fees,
and transfer fees (collectively, ``overdraft-related fees'').\10\
Supervision also obtained account-level and transaction-level data from
several institutions regarding overdraft fees assessed over a one-month
period on non-recurring debit card and ATM transactions.\11\ Some of
the key observations gleaned from the data are discussed below. Please
note that the
[[Page 71536]]
discussion below does not present all of the CFPB's observations or
data obtained and that the CFPB's analysis of data provided by
institutions is ongoing.
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\10\ See 12 U.S.C. 5515(b)(1).
\11\ Neither the account-level nor the transaction-level data
contain any directly-identifying personal information. Because the
data used in this analysis are Confidential Supervisory Information,
this discussion only presents results that are aggregated and does
not identify specific institutions.
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Overdraft Coverage and Fee Amounts per Overdraft Transaction
During the time periods reviewed, the relevant institutions charged
per-item overdraft fees that ranged from $15 per item to $36 per item.
The amount of overdraft coverage provided for consumer transactions on
which these fees were charged often was disproportionately small. For
example, in these data sets, the median amount of overdraft coverage
extended on one-time debit card and ATM transactions ranged from $14 to
$30. In fact, the percentage of transactions for which the amount of
overdraft coverage provided was less than the relevant per-item
overdraft fee ranged from 32% to 74% across institutions.
Incident and Distribution of Overdraft, NSF, and Other Overdraft-
Related Fees
Supervision obtained institution-level data segmented by certain
account characteristics, including: opt-in status,\12\ i.e. accounts
opted-in to overdraft services for one-time debit card and ATM
transactions (``opted-in accounts'') versus accounts not opted-in to
such overdraft services (``not opted-in accounts''), and average
account balance, i.e. accounts with an average balance at or less than
$500 (``lower balance accounts'') versus accounts with an average
balance greater than $500 (``higher balance accounts''). Across all
institutions monitored, most accountholders do not incur overdraft-
related fees. This data set also showed that overdraft-related fees
constituted the majority of the total deposit account fees that
consumers incurred and an even greater proportion of the total fees
assessed to lower balance accounts and opted-in accounts.
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\12\ Institutions are prohibited from charging a fee for paying
non-recurring debit card and ATM transactions into overdraft unless
a consumer affirmatively opts-in to overdraft coverage for these
transactions. See 12 CFR 1005.17(b)(1). Institutions are not
expressly prohibited from charging an NSF fee on such transactions,
however, the Federal Reserve Board signaled that such fees may
violate the FTC Act. See 74 FR 59033, 59041 (Nov. 17, 2009). This
opt-in requirement does not extend to other transaction types (e.g.,
ACH and check transactions) and thus non-opted in accounts may be
assessed overdraft fees for such transactions.
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In 2022, in this data set, overdraft and NSF fees comprised 53% of
all fees that the institutions charged to consumer checking accounts
and nearly three-quarters of all fees charged to lower balance accounts
and opted-in accounts. Not surprisingly then, while accountholders
overall each paid approximately $65 per year in overdraft and NSF fees
on average, opted-in accounts and lower balance accountholders paid
over $165 and $220 in overdraft and NSF fees on average per year,
respectively. A relatively small fraction of bank customers had a lower
average balance but paid the majority of overdraft and NSF fees which
is consistent with findings in prior research conducted by the CFPB.
Indeed, across all institutions in aggregate, one-fifth of accounts
were lower-balance accounts, but these accounts paid 68% of per-item
overdraft fees assessed and 77% of the per-item NSF fees assessed. In
fact, for at least one institution, over half of per-item overdraft
fees assessed and over one-third of per-item NSF fees assessed were
charged to lower balance, opted-in accounts even though only five
percent of the institution's accounts fell into this category.
Data on the frequency of overdraft transactions and fees showed
that the number of overdraft transactions and fees varies substantially
with opt-in status. Accounts that overdraft most frequently (12 or more
overdraft fees per year) were nearly five times as prevalent among
opted-in accounts compared to not opted-in accounts.
Account Closure and Charge-Offs Attributable to Overdraft Transactions
and Overdraft-Related Fees
Supervision also obtained data on account closure attributable to
unpaid negative balances and overdraft transactions and the amount of
charged-off negative balances attributable to overdraft transactions
(excluding fees). With respect to account closure, Supervision found
that, across all institutions, most accounts were closed involuntarily
and half of such accounts were closed due to an unpaid negative balance
attributable to overdraft transactions and overdraft-related fees.
In aggregate, losses to institutions in the form of charge-offs
were evenly split between opted in accounts and not opted in accounts.
Although overdraft transactions initiated by lower balance accounts
were more likely to be charged-off, the average amount charged-off per
lower balance account was roughly equal to the amount charged-off per
higher balance account and was actually lower at some institutions.
Notably, overdraft-related fees themselves generally constituted one-
third of the total amount of negative balances charged-off. In fact,
overdraft-related fees constituted as much as two-thirds of the total
amount of all overdraft charge-offs by at least one institution.
2.1.4 Unfair Statement Fees
When supervised institutions send account statements to customers
that provide information about their deposit accounts during the month,
they generally deliver these statements to consumers in paper form,
through the U.S. mail, unless consumers elect to receive the statements
in verified and secure electronic form, whether by email or through the
institution's website or its mobile application.
In recent examinations, Supervision observed that institutions
charged fees for the printing and delivery of paper statements,
including additional fees when they mailed a statement that was
returned undelivered. Supervision found that, in certain instances,
institutions did not print or attempt to deliver paper statements but
continued to assess paper statement fees and returned mail fees each
month.
Supervision found that institutions engaged in an unfair act or
practice by assessing paper statement fees and returned mail fees for
paper statements they did not attempt to print and deliver. Assessing
such delivery-related statement fees for undelivered statements caused
substantial injury to consumers. Indeed, in one instance, a senior
citizen discovered that her account was almost entirely depleted
because an account statement had been returned undelivered five years
prior and the institution had been assessing statement fees each month
since. Consumers could not reasonably avoid this injury because they
had no reason to anticipate that such fees would be assessed. The
injury was also not outweighed by countervailing benefits to consumers
or competition because assessing delivery-related fees for undelivered
statements provides no benefit to consumers and does not actually
compensate institutions for any costs incurred.
In response to these findings, the institutions stopped assessing
paper statements and returned mail fees for paper statements they did
not attempt to deliver and will refund the millions of dollars in such
fees that were charged to hundreds of thousands of consumers.
2.1.5 Surprise Depositor Fees
Surprise depositor fees, also known as returned deposit item fees,
are fees assessed to consumers when an institution returns as
unprocessed a check that the consumer attempted to deposit into his or
her checking account. An institution might return a check for several
reasons, including
[[Page 71537]]
insufficient funds in the originator's account, a stop payment order,
or problems with the information on the check.
In October 2022, the CFPB issued a compliance bulletin stating that
it is likely an unfair act or practice for an institution to have a
blanket policy of charging return deposit item fees anytime that a
check is returned unpaid, irrespective of the circumstances or patterns
of behavior on the account.\13\ The CFPB stated that these fees cause
substantial monetary injury for each returned item, which consumers
likely cannot reasonably avoid because they lack information about and
control over whether a check will clear.\14\ And it may be difficult to
show that this injury from blanket return deposit item policies is
outweighed by countervailing benefits to consumers or to
competition.\15\
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\13\ Consumer Financial Protection Bulletin 2022-06, Unfair
Returned Deposited Item Fee Assessment Practices (Oct. 26, 2022),
available at: <a href="https://www.consumerfinance.gov/compliance/supervisory-guidance/cfpb-bulletin-2022-06-unfair-returned-deposited-item-fee-assessment-practices/">https://www.consumerfinance.gov/compliance/supervisory-guidance/cfpb-bulletin-2022-06-unfair-returned-deposited-item-fee-assessment-practices/</a>.
\14\ Id. at 3-4.
\15\ Id. at 5-6.
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In recent examinations, Supervision has evaluated the returned
deposit item fee practices at a number of institutions. Most of the
examined institutions have advised the CFPB that they have eliminated
returned deposit item fees entirely. Others have stated that they are
in the process of doing so. As previewed in the October 2022 bulletin,
Supervision has not sought to obtain monetary relief for return deposit
item fees assessed prior to November 1, 2023. But Supervision will
continue to monitor the relevant practices for compliance with the law
and may direct remediation from institutions that continue charging
unfair returned deposit item fees.\16\
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\16\ Id. at 3 n.1.
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2.1.6 Treatment of Pandemic Relief Benefits
As described in past editions of Supervisory Highlights,
Supervision conducted examination work to evaluate how financial
institutions handled pandemic relief benefits deposited into consumer
accounts.\17\ Specifically, the CFPB performed a broad assessment
centered on whether consumers may have lost access to pandemic relief
benefits, namely Economic Impact Payments and unemployment insurance
benefits, as a result of financial institutions' garnishment or setoff
practices.\18\ Further follow-up reviews identified many supervised
institutions that risked committing an unfair act or practice in
violation of the CFPA in connection with their treatment of pandemic
relief benefits which resulted in consumers being charged improper
fees.\19\
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\17\ Supervisory Highlights, Issue 28 (Fall 2022), available at:
<a href="https://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-issue-28-fall-2022/">https://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-issue-28-fall-2022/</a>. Supervisory Highlights,
Issue 23 (Winter 2021), available at: cfpb_supervisory-
highlights_issue-23_2021-01.pdf (<a href="http://consumerfinance.gov">consumerfinance.gov</a>).
\18\ Supervisory Highlights, Issue 23 (Winter 2021), available
at: <a href="https://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-covid-19-prioritized-assessments-special-edition-issue-23/">https://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-covid-19-prioritized-assessments-special-edition-issue-23/</a>.
\19\ Supervisory Highlights, Issue 28 (Fall 2022), available at
<a href="https://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-issue-28-fall-2022/">https://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-issue-28-fall-2022/</a>.
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In response to these findings, the institutions (1) refunded
protected Economic Impact Payments improperly taken from consumers to
set off fees or amounts owed to the institution; (2) refunded
garnishment-related fees assessed to consumers for improper garnishment
of Economic Impact Payments; and (3) reviewed, updated, and implemented
policies and procedures to ensure the institution complies with
applicable State and territorial protections regarding its setoff and
garnishment practices.
To date, Supervision has identified over $1 million in consumer
injury in response to these examination findings, with institutions
providing redress to over 6,000 consumers. Thus far, supervised
institutions have provided redress of approximately $685,000 to
consumers for improper setoff of Economic Impact Payments and
approximately $315,000 for improper garnishment-related fees. Most
supervised institutions have reported making substantial changes to
their policies and procedures to prevent this type of consumer injury
in the future.
2.2 Auto Servicing
Examiners also reviewed fee practices in connection with auto
loans. Through this work, Supervision continues to identify unfair acts
or practices related to auto servicers' handling of refunds of add-on
products after loans terminate early. Specifically, some servicers
failed to ensure consumers received refunds, while others did so but
miscalculated the refund amounts.
When consumers purchase an automobile, auto dealers and finance
companies offer optional, add-on products that consumers can purchase.
Auto dealers and finance companies often charge consumers for the
entire cost of any add-on products at origination, adding the cost of
the add-on product as a lump sum to the total amount financed. As a
result, consumers typically make payments on these products throughout
the loan term, even if the product expires earlier.
2.2.1 Overcharging for Add-On Products After Early Loan Termination
Examiners have continued to review servicer practices related to
add-on product charges where loans terminated early through payoff or
repossession.\20\ When loans terminate early, certain products no
longer offer any possible benefit to consumers; whether a product
offers a benefit depends on the type of product and reason for early
termination. For example, many vehicle service contracts continue to
provide possible benefits to consumers after early payoff but not after
repossession, while a credit product (such as Guaranteed Asset
Protection (GAP) or credit-life insurance) will not offer any possible
benefits after either early payoff or repossession.
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\20\ The CFPB previously discussed similar issues with add-on
product refunds after repossession and early payoff in Supervisory
Highlights, Issue 26, Spring 2022, available at: <a href="https://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-issue-26-spring-2022/">https://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-issue-26-spring-2022/</a>; Consumer Financial Protection
Bureau (<a href="http://consumerfinance.gov">consumerfinance.gov</a>) and Supervisory Highlights, Issue 28,
Fall 2023, available at: <a href="https://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-issue-28-fall-2022/">https://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-issue-28-fall-2022/</a>.
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Examiners found auto servicers engaged in unfair acts or practices
because consumers suffered substantial injury when servicers failed to
ensure they received refunds for add-on products following early loan
termination; consumers were essentially required to pay for services
they could no longer use, as the relevant products (including vehicle
service contracts, GAP, or credit-life insurance) terminated either
when the loan contract was terminated or provided no possible benefits
after the consumer lost use of the vehicle. Consumers could not
reasonably avoid the injury because they had no control over the
servicers' refund processing actions. When servicers present consumers
with payoff amounts, deficiency balances, or refunds, consumers may
have no reason to know that the amounts include unearned add-on product
costs. And reasonable consumers might not apply for refunds themselves
because they may be unaware that the contract provided that they could
do so. Examiners concluded that the injury was not outweighed by any
countervailing benefits to consumers or competition.
In response to these findings, servicers are remediating impacted
consumers more than $20 million and
[[Page 71538]]
implementing processes to ensure consumers receive refunds for add-on
products that no longer offer any possible benefit to consumers.
2.2.2 Miscalculating Refunds for Add-On Products After Early Loan
Termination
Examiners also have continued to identify problems with the
calculation of unearned fee amounts after loan termination.\21\
Examiners found that servicers engaged in unfair acts or practices when
they used miscalculated add-on product refund amounts after loans
terminated early. These servicers had a policy to obtain add-on product
refunds and relied on service providers to calculate the refund
amounts. The service providers miscalculated the refunds due, either
because they used the wrong amount for the price of the add-on product
or because they deducted fees (such as cancellation fees) that were not
authorized under the add-on product contract; the servicers then used
these miscalculated refund amounts.
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\21\ The CFPB previously discussed similar issues with add-on
product refund calculations in Supervisory Highlights, Issue 18,
Winter 2019, available at: <a href="https://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-winter-2019/">https://www.consumerfinance.gov/data-research/research-reports/supervisory-highlights-winter-2019/</a>.
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Examiners found that servicers engaged in an unfair act or practice
when they used miscalculated add-on product refund amounts after loans
terminated early. Using miscalculated refund amounts caused, or was
likely to cause, substantial injury because servicers either
communicated inaccurately higher deficiency balances or provided
smaller refunds than warranted after early loan termination. Consumers
could not reasonably avoid the injury because they were not involved in
the servicers' calculation process, and it is reasonable for consumers
to assume that the calculations are accurate. And the injury was not
outweighed by countervailing benefits to consumers or competition.
In response to these findings, servicers are remediating impacted
consumers and improving monitoring of service providers.
2.3 Remittances
Examiners also review activities of remittance transfer providers
to ensure that fees are disclosed and charged consistent with subpart B
of Regulation E (the Remittance Rule). These examinations found that
certain providers have violated regulations by failing to appropriately
disclose fees or failing to refund fees, in certain circumstances,
because of an error.
The Remittance Rule requires that remittance transfer providers
disclose any transfer fees imposed by the provider.\22\ Recent
examinations have found that remittance providers have failed to
disclose fees imposed by their agents at the time of the transfer, in
violation of 12 CFR 1005.31(b)(1)(ii). This reduced the total wire
amount the recipients received as compared to the amount that had been
disclosed. Additionally, in the case of an error for failure to make
funds available to a designated recipient by the date of availability,
the Remittance Rule states that if a remittance transfer provider
determines an error occurred, the provider shall refund to the sender
any fees imposed, and to the extent not prohibited by law, taxes
collected on the remittance transfer.\23\ Examiners found that certain
providers failed to correct errors by refunding to the sender fees
imposed on the remittance transfer, within the specified time frame,
where the recipients did not receive the transfers by the promised
date, in violation of 12 CFR 1005.33(c)(2)(ii)(B). In response to these
findings, supervised institutions implemented corrective action to
prevent future violations and provided remediation to consumers charged
fees in violation of regulatory requirements.
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\22\ 12 CFR 1005.31(b)(1)(ii). As stated in comment 31(b)(1)-
1(ii), fees include ``any fees imposed by an agent of the provider
at the time of the transfer.''
\23\ 12 CFR 1005.33(c)(2)(ii)(B).
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3. Consumer Risk-Payment Processing
3.1 Payment Platforms for Student Meal Accounts
Some kindergarten through 12th grade school systems contract with
companies that run online platforms that allow parents or guardians to
manage their students' meal accounts. In most cases, families using
these online platforms pay a per-transaction fee to add funds to their
meal accounts. Any school district that participates in Federal school
meal programs and contracts with fee-based online platforms must also
provide free options for adding money to student meal accounts. As a
result, families can avoid the transaction fee by adding funds using
one of these alternative methods, such as making payments directly to
the school or district.
The CFPB learned of covered persons that maintained these online
payment platforms where consumers may have paid fees that they would
not have paid if they had known of the existence of free options for
adding meal funds to the student's account. Because consumers did not
know their options, they incurred transaction fees that they could have
avoided. As the fees were assessed on a per-transaction basis, the fees
likely disproportionately affected lower-income families that must add
smaller amounts more often, thereby incurring more transaction fees
than higher-income users that can deposit larger amounts less
frequently.
The CFPB notified the covered persons that these practices may not
comply with consumer financial protection laws.
4. Supervisory Program Developments
4.1 Recent CFPB Supervision Program Developments
Set forth below is a recap of the most salient supervision program
developments that implicate junk fees. More information including
circulars, bulletins, and advisory opinions about the CFPB's junk fee
initiative can be found at: <a href="https://www.consumerfinance.gov/rules-policy/junk-fees/">https://www.consumerfinance.gov/rules-policy/junk-fees/</a>.
4.1.1 CFPB Issued a Circular on Unanticipated Overdraft Fee Assessment
Practices
On October 26, 2022, the CFPB issued guidance indicating that
overdraft fees may constitute an unfair act or practice under the CFPA,
even if the entity complies with the Truth in Lending Act (TILA) and
Regulation Z, and the Electronic Fund Transfer Act (EFTA) and
Regulation E.\24\ As detailed in the circular, when supervised
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 fees
on purchases made with a positive balance. These overdraft fees occur
when an institution 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
institution relies on complex back-office practices to justify charging
the fee. For instance, after the institution 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.
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\24\ Consumer Financial Protection Circular 2022-06,
Unanticipated Overdraft Fee Assessment, available at: <a href="https://files.consumerfinance.gov/f/documents/cfpb_unanticipated-overdraft-fee-assessment-practices_circular_2022-10.pdf">https://files.consumerfinance.gov/f/documents/cfpb_unanticipated-overdraft-fee-assessment-practices_circular_2022-10.pdf</a>.
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[[Page 71539]]
4.1.2 CFPB Issued a Bulletin on Unfair Returned Deposited Item Fee
Assessment Practices
As described above, on October 26, 2022, the CFPB issued a bulletin
\25\ stating that 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 CFPA.
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\25\ Bulletin 2022-06: Unfair Returned Deposited Item Fee
Assessment Practices, available at: <a href="https://files.consumerfinance.gov/f/documents/cfpb_returned-deposited-item-fee-assessment-practice_compliance-bulletin_2022-10.pdf">https://files.consumerfinance.gov/f/documents/cfpb_returned-deposited-item-fee-assessment-practice_compliance-bulletin_2022-10.pdf</a>.
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4.1.3 CFPB Issued an Advisory Opinion on Debt Collectors Collection of
Pay To Pay Fees
On June 29, 2022, the CFPB issued an advisory opinion \26\
affirming that Federal law often prohibits debt collectors from
charging ``pay-to-pay'' fees. These charges, commonly described by debt
collectors as ``convenience fees,'' are imposed on consumers who want
to make a payment in a particular way, such as online or by phone.
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\26\ Advisory Opinion on Debt Collectors' Collection of Pay-to-
Pay Fees, available at: <a href="https://www.consumerfinance.gov/compliance/advisory-opinion-program/">https://www.consumerfinance.gov/compliance/advisory-opinion-program/</a>.
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5. Remedial Actions
5.1 USASF Servicing
On August 2, 2023, the CFPB filed a lawsuit in Federal court
against auto loan servicer USASF Servicing, alleging USASF engaged in a
host of illegal practices that harmed individuals with auto loans.\27\
These alleged practices include wrongfully disabling borrowers'
vehicles, wrongfully activating late payment warning tones, improperly
repossessing vehicles, double-billing borrowers for insurance premiums,
misallocating consumer payments, and failing to return millions of
dollars in unearned GAP premiums to consumers. The CFPB is seeking
redress for consumers, civil money penalties, and to stop any future
violations.
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\27\ Consumer Financial Protection Bureau v. USASF Servicing,
LLC. The complaint is available at: <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-sues-usasf-servicing-for-illegally-disabling-vehicles-and-for-improper-double-billing-practices/">https://www.consumerfinance.gov/about-us/newsroom/cfpb-sues-usasf-servicing-for-illegally-disabling-vehicles-and-for-improper-double-billing-practices/</a>.
Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2023-22869 Filed 10-16-23; 8:45 am]
BILLING CODE 4810-AM-P
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</html>Indexed from Federal Register on October 17, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.