Continuing the uptick in regulatory scrutiny of overdraft and other bank fees by state and federal regulators, the Consumer Financial Protection Bureau (CFPB) on September 28, 2022, announced an enforcement action/consent order against Regions Bank for "Authorized-Positive Overdraft Fees" (also referred to as "authorize positive, settle negative" / "APSN fees").
Starting with studies released by the CFPB in 2021, moving on to letters and guidance from state and federal financial regulators, and now this week's action, regulator action against overdraft fees continues to ramp up.
CFPB Enforcement Action Against Regions Bank
In its order against Regions Bank, the CFPB alleged that from August 2018 through July 2021 Regions engaged in "Authorized-Positive" overdraft practices, which the Bureau calls "surprise overdraft fees." The CFPB defined these as practices in which the bank processed debit card transactions or ATM withdrawals such that accounts that had displayed a positive balance when the card was swiped or when the customer withdrew funds at an ATM then reflected a negative balance only visible to the bank's internal systems when the transaction or ATM withdrawal later "settled" within the system.
Customers then incurred an overdraft fee or multiple overdraft fees for transactions the bank had authorized when the account had displayed a positive balance – that is, when the customer may have assumed, based on the information shown to them by the bank, that there was enough money in the account to cover the transaction.
These "Authorized-Positive Overdraft Fees" were confusing to bank customers and even bank personnel, the CFPB alleged, and were unfair and abusive in violation of the unfair, deceptive, or abusive acts or practices (UDAAP) provisions of the Consumer Financial Protection Act (12 U.S.C. §§ 5531(a) and (d)(2)(A) and 5536(a)(1)(B)) because: (1) the overdraft fees caused substantial injury, (2) customers could not reasonably avoid these fees which they did not understand or expect and could not control, (3) the fees were not outweighed by countervailing benefits to consumers or competition, and (4) the bank took "unreasonable advantage" of consumers' lack of understanding to generate $141 million in fee income to Regions over several years.
The CFPB alleged that the bank had intended to stop its APSN fee assessments precisely because of the UDAAP risk but delayed its decision to do so until the bank had formulated new ways to capture fee revenue. The order details federal regulators' warnings over the years that APSN fee practices may constitute UDAAPs, reviewing supervisory highlights and other statements and guidance since the CFPB's 2015 consent order against Regions, which targeted Regions' alleged failure to implement opt-in practices in connection with overdraft fees.
Notably, the order does not indicate whether the APSN practices were disclosed to or agreed to by consumers in account agreements or otherwise – which is often a key factor when APSN fees are challenged in class action litigation.
The CFPB ordered Regions to reimburse $141 million to customers, pay a civil money penalty of $50 million, and forgo charging any Authorized-Positive Overdraft Fees (among other relief) going forward.
The Gathering Storm
The CFPB action against Regions is the latest addition to the growing scrutiny of and regulatory actions against financial institutions' assessment of overdraft and non-sufficient funds fees. Federal financial regulators have released reports and guidance highlighting perceived problems with overdraft and non-sufficient fund fees. Many states have followed suit, with state attorneys general voicing concerns and calling on the banking industry to stop assessing overdraft fees. States have also enacted their own regulation of overdraft fees assessed by state-supervised financial institutions, and state enforcement actions may soon follow.
Recent Federal Activity
Other recent CFPB activity certainly foreshadowed this week's action. In 2021, the Bureau released two reports on banks' use of overdraft fees, which it referred to as "fee harvesting," calling their use a "serious ris[k] to consumers" and announcing that the CFPB would be "enhancing its supervisory and enforcement scrutiny of banks that are heavily dependent on overdraft fees."
In January 2022, the CFPB announced that it was launching an initiative to reduce fees charged by financial institutions to "save Americans billions in junk fees." Then in February 2022, the CFPB cited an "ongoing and growing concern about the impact of bank overdraft fees on families."
In March 2022, the CFPB released a study concluding that overdraft fees can price families out of banking and described the use of overdraft fees in certain circumstances as exploitative. In June 2022, the CFPB announced that it was piloting a supervision effort to collect metrics on overdraft and non-sufficient-funds fees.
In August 2022, the FDIC joined in, issuing supervisory guidance stating that the use of multiple NSF fees arising from the same transaction ("re-presentment" NSF fees, i.e., when merchants resubmit transactions for payment to a consumer's bank after a transaction has already been declined for non-sufficient funds, resulting in the bank charging multiple NSF fees) can violate Section 5 of the FTC Act, which prohibits unfair or deceptive acts or practices. The FDIC focused on a lack of clear disclosure and notice to consumers as a key exacerbating factor in determining whether re-presentment NSF fees could constitute a UDAP. It also highlighted other risks potentially arising from assessment of multiple re-presentment NSF fees, including third-party risk and litigation risk.
Federal regulators appear to be paving the way for additional unfair, deceptive, and abusive acts and practices actions against financial institutions arising from overdraft and NSF fees, which, in the cases of many institutions, are already the subject of heightened supervisory activity.
At the state level, one of the most significant actions related to overdraft and nonsufficient fund fees has been letters to members of the industry (Letters), which were penned by the New York Attorney General's Office (NY AG) and signed onto by 16 additional states. On April 4, 2022, the Letters, each titled "A Call for Increased Financial Inclusion," were sent to four of the Nation's largest banks. The Letters asked these banks to eliminate what it termed "harmful junk fees" to consumers. The additional signatories were attorneys general and regulatory authorities from the District of Columbia, California, Connecticut, Delaware, Hawaii, Illinois, Iowa, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, Oregon, Washington, and Pennsylvania.
The Letters were individually addressed to the CEOs of the banks and highlighted other large banks' 2021 and 2022 decisions to eliminate overdraft and NSF fees, returned items fees, and overdraft protection fees for consumer banking customers. The Letters encouraged the four recipient banks to do the same.
Characterizing banks' actions to eliminate overdraft fees as "vital steps toward creating a fairer and more inclusive consumer financial system," the Letters stated they were motivated by a concern that overdraft and non-sufficient fund fees disproportionately affect low-income communities and communities of color. Eliminating the "crushing impacts" of such fees on these communities should spur banks to eliminate the use of such fees, the Letters exhorted.
True to the Letters' promise that eliminating overdraft and non-sufficient fund fees is a priority for several states, on July 22, the New York Department of Financial Services released guidance prohibiting certain overdraft and NSF fee practices deemed unfair and deceptive, again focusing on their effect on low-income consumers. California, one of the signatories to the Letters, enacted a law in 2021 that curtailed the use of overdraft fees for prepaid accounts offered by non-bank financial services companies unless they comply with CFPB rules.
What to do?
In light of these developments, consumer-facing financial institutions should review recent supervisory findings and their own policies, customer disclosures and account agreements, internal guidelines on overdraft/non-sufficient fees, as well as any potential disparate impact these fees may pose. Smelling blood in the water, plaintiffs' lawyers continue to pursue overdraft fee class actions, and it appears further enforcement actions are on the horizon. It will pay for consumer-facing financial institutions to be proactive.
* We would like to thank 2022 Washington, D.C. Summer Associate, Tanner Harris, for her contributions to this post.