One of the consequences of shrinking interest rates and interest margins is that financial institutions’ reliance on non-interest income has significantly increased over the last decade. The Consumer Financial Protection Bureau (CFPB) published an initiative on January 26, 2022 stating its intention to research the impact of fees on American consumers. The press release specifically cited the volume of late payment fees for credit cards and overdraft fees for checking accounts. The initiative began with the collection of consumers’ experiences with financial institutions regarding the number and amount of fees that they paid for various products and services. The target of the CFPB’s investigation includes:
- Fees for services that consumers believed were included as part of the product
- Unexpected fees that consumers believed were not properly disclosed
- Fees that exceeded the value for the product/service
- Fees that did not adequately describe why they were charged
The CFPB received over 47,000 comments in response to its January 2022 request for information. Some comments were as simple as individual consumers expressing concern about high fees while others came from state banking associations and financial service providers noting that the CFPB does not have the authority to fix prices, and that all fees are already required to be disclosed by existing consumer protection regulations. It remains to be seen how this will impact the industry as there have not been any formal rulemakings published. However, it is clear that prudential regulators are significantly increasing their review of bank fees and potential instances of consumer harm.
Based on TCA’s discussions with regulators and review of examination reports of our clients, we identify several types of fees that present the greatest amount of risk for criticism.
ADD-ON FEES
The most basic bank product, the checking account, is also one of the most expensive accounts to service due to the cost of producing periodic statements and processing frequent transactions. Financial institutions used to primarily charge a flat monthly fee to have a checking account, but competitive pressures in the 1990’s led many institutions to offer free checking accounts with no minimum balance and no monthly service fees. As these products became a loss-leader, institutions sought ways to reintroduce fees for these accounts in a way that would be palatable to consumers. One method is add-on products where consumers can have an account that does not have a minimum balance but may have ancillary services added on that do include fees, such as identity theft protection. To reduce the cost of printing and postage, many institutions began charging monthly fees for a paper statement to consumers that did not enroll in electronic statements. The practices below led to criticisms from examiners:
- Identity theft services added to an account automatically requiring a consumer to opt-out of the fee. However, if the consumer did not complete separate enrollment processes, they would be charged a fee for a service they did not actually receive or benefit from.
- Institutions that charged for paper statement fees continued to advertise their accounts as “free” claiming the paper statement was an ancillary service and that the account was free if the consumer had E-Statements. Regulation DD 1030.8 (a)(2) considers a paper statement fee to be a monthly maintenance fee and prohibits accounts with paper statement fees from being advertised as ‘free.’
- Add-on fees are often considered ‘deceptive’ as the circumstances under which they are charged or what service is being provided is unclear.
TRANSACTION FEES
Regulations DD, E and Z all have requirements for disclosing fees associated with transactions, whether there is a limit to the number of transactions before a fee is charged, fees for speaking with a customer service representative, convenience fees for making a payment, or fees for processing certain types of transactions such as international purchases. Although fees may be properly disclosed, the CFPB and other prudential regulators expressed concern for fees that are unfair, not avoidable, or do not provide adequate consumer choice.
- Loan payment convenience fees: Although consumers may select an initial institution when obtaining a mortgage, servicing rights and mortgage loans may be bought and sold. Consumers may be subject to fees from new servicers to which they did not agree and have no ability to avoid.
- Debit/prepaid card denial fees: Consumers often have no control over merchants attempting to authorize charges against a debit/prepaid card. In the case of a recurring transaction, a merchant may attempt to obtain several authorizations over the course of a month to charge a recurring transaction to a card. As a result, the consumer pays multiple decline fees even though they initiated a purchase attempt one time.
- Customer call fees: Institutions that provide internet or telephone banking to obtain account information may charge fees to consumers who contact a live agent to inquire about their account. This can have a disproportionate impact on customers who don’t have access to or struggle with using technology. Additionally, consumers that contact an agent to file claims of electronic funds transfers may incorrectly be charged fees in connection with their claim in violation of Regulation E 1005.11(c).
- Some institutions charge an “inactivity fee” for accounts that do not have transactions. The industry cited reason for this fee is the cost of the extra security that is implemented to protect dormant accounts from identity theft. Most systems are designed to automatically flag an account as dormant after a period of inactivity and there is no additional cost to the Bank as the system automatically restricts access. The CFPB may consider this type of fee as a charge for a non-existent service or a service that provides no value. In addition, institutions that have instituted inactivity fees for existing accounts have been the subject of lawsuits from consumers for whom mail had been returned as the fees were knowingly instituted on accounts for which the consumer would clearly not receive notice of the new fee.
OVERDRAFT FEES
Fees for paying or returning items that overdraw an account received the greatest scrutiny from the CFPB. According to the CFPB’s research, in 2019 overdraft and non-sufficient funds (NSF) fees exceeded $15 billion. The CFPB notes that low and moderate-income individuals who can least afford overdraft fees bear the brunt of them. Examiners focus how these fees are disclosed and the processes that institutions follow to obtain opt-ins to access courtesy overdraft programs as required by Regulation E.
Potential areas of scrutiny include:
- Paying multiple fees for the same item: When financial institutions still processed paper checks, the Federal Reserve rules limited a check to being presented twice. Upon second presentment, the drawee bank would punch physical holes through the account number so that the item could not be presented a third time. In today’s digital age, checks may be converted to electronic debits and an originator can submit an entry multiple times (even if this violates NACHA or other clearinghouse rules.)
TCA has had multiple clients reporting that as part of examination request lists, examiners are inquiring about procedures for limiting multiple presentments of the same item and reviewing processes for charging multiple fees associated with the same item. A major forms vendor adjusted terms and conditions to better disclose that a single item could result in multiple fees if it is presented multiple times. In more than one instance, examiners have directed banks to perform look backs to identify consumers who were charged multiple fees prior to disclosures being updated.
- Debit card opt-in processes: Regulation E does not mandate how a customer can opt-in to one-time ATM/debit card transactions for a courtesy overdraft program. In one instance, the CFPB noted that a large institution’s process was to verbally explain an overdraft program to consumers and then provide an opt-in form with the opt-in option preselected. The CFPB concluded that consumers did not receive a description of the institution’s overdraft practices in writing prior to opting-in and required the institution to reimburse affected customers and pay a civil money penalty.
- Daily overdraft fees: Institutions that charge fees for accounts that are overdrawn for a specified period must be careful to clearly disclose when and under what circumstances a fee is charged. Institutions that charge daily overdraft fees because of overdrafts caused by other bank fees have been ordered to perform lookbacks and reimburse consumers if they do not clearly disclose that an overdraft can be caused by a bank fee. Additionally, daily fees charged on weekends and holidays have been deemed unfair since consumers do not have a way to avoid the fee since deposits are posted on the first business day the institution is open.
- Cost of overdraft service compared to cost to pay an overdraft: Since most courtesy overdraft programs are automated, the CFPB is examining the cost of paying an overdraft to the amount of the fee charged for paying the overdraft. Although some overdrafts are charged off due to non-payment, the volume of profits from overdraft fees leads the CFPB to conclude that the fees associated with paying overdrafts far exceeds the institution’s cost and risk. For this reason, many large financial institutions including Walls Fargo, Chase, Capital One, and Citibank announced that they are eliminating or reducing overdraft fees. Institutions that do not adjust their overdraft programs or increase fees can expect additional scrutiny of their programs.
PENALTY FEES
In addition to its research of overdrafts, the CFPB also reviewed penalty and late fees for consumer credit. Credit card companies charged $14 billion in late fees in 2019. Similar to overdraft fees, the CFPB determined that low and moderate-income borrowers were most likely to be negatively impacted by late fees. Often, criticism over penalty fees related to change in terms.
- Shortening of grace period that adjusted payment due dates.
- Increase of minimum payments without adequate notice.
As part of its review of deceptive collection practices, in June 2022 the CFPB published an additional Advisory focusing on payment fees debt collectors charge. Debt collections are prohibited from tacking on extra fees that were not part of the original loan agreement, but many still charge payment processing fees in violation of applicable laws. Institutions that outsource collection of its own debts to third parties should perform adequate vendor due diligence and assess third-party risk to ensure that its debt collectors do not violate the Fair Debt Collection Practices Act.
Each institution should evaluate the potential risk of consumer harm for each product, service, regulation, and business line as part of its Compliance Management Risk Assessment. Policies and procedures should address how the institution ensures that fees are clearly disclosed. Training should include an overview of fees and the methods the institution uses to appropriately communicate fees to consumers. Monitoring should test staff knowledge and critical systems that assess fees to ensure they are charged correctly and are properly disclosed on periodic statements. Finally, Management should evaluate its reliance on fees and consider its financial, legal, and regulatory risk.
As your compliance partner, TCA is committed to assisting you in identifying risk trends in the industry such as examiner scrutiny of fees and includes a review of risk as part of our compliance review and consulting services. Contact TCA today at 800-934-7347 to schedule your next UDAAP or compliance review.
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