COMPLIANCE CORNER
by Timothy A. Schenk KBA Assistant General Counsel tschenk@kybanks.com
Junk Fees?...
CFPB’s New Regulatory Front
On February 2nd, the Bureau of Consumer Financial Protection (CFPB) took aim at banks and others by requesting feedback from consumers due to their concern that “consumer finance has become part of a ‘fee economy’” and that “exploitative ‘junk fees’” charged by banks and non-bank financial institutions have become widespread, with “the potential effect of shielding substantial portions of the true price of consumer financial products.” I was initially shocked at the use of the term “junk fees” in a formal request for comment published in the Federal Register. These “junk fees” included: “return item fees; stop payment fees; wire transfer fees; ACH fees, overdraft fees; ancillary fees in the foreclosure process”; and other fees. The list includes over twenty-five different fees, admonishing nearly every entity that has charged any fee regardless of its amount, validity or prior disclosure. The publication never mentioned that these “junk fees” are heavily regulated by the Truth in Lending Act (TILA), the Electronic Fund Transfer Act (EFTA), the Fair Debt Collection Practices Act (FDCPA), the Unfair, Deceptive, or Abusive Practices Act (UDAAP), and other regulations for years with banks and others adhering to strict guidelines so that fees are not a surprise to consumers. Credit cards, an apparent primary target of the commentary, are required to abide by the Credit Card Accountability Responsibility and Disclosure Act that places caps on late fees and other charges. These “junk fees” are not unregulated. Even more surprising is the fact that all of this comes at a time when many banks are moving away from traditional fees such as overdraft fees by reducing fees to as low as $10 with many eliminating them all together. Overdraft fees made up less than 2% of banks’ overall revenue in 2019 in a climate where banks are operating with record low margins. Return on assets are at near record lows with quarterly net operating revenue to average assets at its lowest level since 1984. Despite the already organic transition away from these fees, industry experts generally agree that the analysis is simple: Rather than discuss particular fees, it is easier to lump them together into one category. The term “junk fees” is unpalatable to nearly every consumer and by asking consumers what they think about “junk fees,” it is an almost certain that the overwhelming response from consumers will be “we don’t like junk.” From there, the CFPB will likely act within its powers under UDAAP to further regulate these fees. As one banker said to me, “It’s like asking if you would rather pay $2 or $3 for your milk. No one is going to want to pay more.”
cardholders, the merchant and the issuer. If that pool shrinks, you look at those three legs and say, “How would you adjust any of those?”” Neither consumers nor lenders win. The only readily apparent “winners” in this are class action lawyers. As one legal publication stated, “The CFPB’s continued focus on fees for financial services is likely to spur an active plaintiff’s bar that has created a cottage industry of pursuing class action lawsuits against financial institutions alleging insufficient disclosures with respect to consumer banking fees. The risks associated with these types of consumer class actions are not insignificant. A court recently approved an award of fees to class action plaintiff’s counsel of $25 million, to be paid from a $75 million settlement fund, in a consumer class action targeting bank fees.” James Cooper, a law professor at George Mason University’s Antonin Scalia Law School, and a former deputy director in the Federal Trade Commission’s Bureau of Consumer Protection captured the real effect by stating, “Competition is always the best protection against high prices, whether in the form of overdraft fees or any other financial service. And it’s already happening without the government’s help. Reports this (last) summer show that many major banks have altered overdraft programs to be more transparent and affordable ought to please Mr. Chopra. Regulatory mandates discourage competition by making disruptive entry more expensive. If the CFPB, other agencies and Congress really want to help consumers of financial services, they should do what they can to foster competition.” The CFPB should seek commentary from, and work with banks to recognize the value their products, services and institutions have on the lives of the people in their communities. Anyone that would walk into any community bank in Kentucky could readily identify the impact the bank and its bankers have on the community. It would make much more sense to have meaningful conversations with those on the front lines of their communities than to burden banks with additional oversight and regulation that ultimately reduces bankers’ ability to serve consumers. As bankers we must continue to hope that CFPB leadership changes course in choosing to work with banks on resolving any concerns and understand that better results can be reached through cooperation rather than rulemaking. In the meantime, make sure you monitor your “junk fees” to ensure they are consistent with current regulation.
The reality is that with further regulation comes additional costs and angst for everyone involved. As one credit card CEO stated, “Each store-branded card is a three-legged stool with a pool of benefits for KENTUCKY BANKER MAGAZINE | 13
