Maryland Legal Alert for Financial Services

In This Issue

How Can Financial Institutions Comply with CFPB’s Junk Fee Guidance?

CFPB’s Supervisory Highlights Report Reveals Continued Scrutiny of Auto Loan Servicing and Credit Reporting Compliance

How Can Financial Institutions Comply with CFPB’s Junk Fee Guidance?

As we reported in our October Maryland Legal Alert, on October 26, 2022, the Consumer Financial Protection Bureau (CFPB) issued guidance addressing certain “junk” fees imposed by financial institutions.  This is the latest in regulatory focus on overdrafts associated with debit card transactions, as several banking regulatory agencies have issued similar guidance. Prior guidance from the Federal Reserve Board (issued in July of 2018) and the Federal Deposit Insurance Corporation (issued in June of 2019) focused on overdraft fees that occur when a debit card transaction is authorized based on a positive available balance, but then settles negative when processed by the applicable merchant (often referred to as APSN). 

The latest CFPB guidance focuses on APSN “surprise” overdraft fees and “indiscriminate” depositor charges. The guidance takes the form of a circular posing and answering the question: can the assessment of certain deposit account fees by a financial institution constitute an unfair practice even when it appears that the financial institution has complied with applicable statutory/regulatory requirements? Surprise overdraft fees include the common APSN situation where a consumer has sufficient available funds at the time a debit card transaction is approved, but because intervening transactions post before that transaction is finally settled, an overdraft occurs. Indiscriminate depositor charges involve fees such as those assessed to consumers when they attempt to deposit a check that is returned unpaid. The CFPB’s primary criticisms are: (a) consumers do not understand how a deposit account works; (b) consumers do not reasonably anticipate that they will be assessed fees like this; and (c) there is no way for consumers to reasonably avoid these fees.

In connection with the “do not understand” and “do not reasonably anticipate” parts of the CFPB’s pronouncement, it is worth noting that financial institutions in recent years have gone to great lengths to explain in detail how debit card transactions work. Deposit account agreements typically contain easy-to-follow examples highlighting the delay between debit card transaction approval and debit card transaction settlement. The delay is not controlled by the financial institution holding a particular consumer’s account.  The delay is caused by the overall payment processing system and how and when merchants submit debit card charges for processing.

The CFPB does not allocate any responsibility to consumers to keep track of other transactions they have initiated and/or are initiating when they make a particular debit card transaction. A financial institution can give a snapshot of the available balance at the time a debit card transaction is initiated, but it is impractical to believe that the financial institution should then have the responsibility to monitor a consumer’s account and tell them when the other transactions that the consumer has initiated will cause an overdraft.  Technologically, it is unlikely a financial institution could even do something like this. Also, for APSN situations, when a financial institution reduces a consumer’s available balance to account for a requested debit card approval, the financial institution does not sequester those funds to line them up with the merchant settlement. A financial institution cannot do this because the requested approval amount does not always line up with the pending merchant settlement. Gas station and restaurant-related debit card approvals are good examples: many gas station approval requests come through to a financial institution for $1 and most restaurant approval requests do not include a consumer-added gratuity.

The guidance makes much of the perceived evils of APSN debit card overdraft situations and levels the blame entirely on financial institutions, while leaving out a crucial point. The primary reason that these transactions settle negative is because of consumer and merchant actions and the mechanics and timing of the debit card transaction network. These are factors that the financial institution holding the consumer’s deposit account cannot control.

The guidance is a warning to other financial institutions following a Regions Bank consent order issued on September 28, 2022. The consent order faults the bank for waiting for several years to adjust its APSN practices. The CFPB stressed in the consent order that the bank’s customers did not understand and could not reasonably avoid overdraft fees in APSN situations because “they resulted from counter-intuitive complex processes that are outside the control of the consumer.” What the CFPB did not note is that the “complex processes” are also outside the control of the bank. Presumably, Regions Bank had a robust deposit account agreement that explained the delay between debit transaction authorization and merchant presentment of that same transaction and made clear when an overdraft fee would be assessed. One might argue that it is a stretch to conclude, as the CFPB did, that consumers did not understand this delay. It could also be argued that there are ways for consumers to avoid a resulting overdraft fee in these situations, such as keeping track of transactions and ensuring that there are sufficient available funds for transactions initiated.

In any event, what is a financial institution to do in the wake of the CFPB’s guidance and the wave of regulatory displeasure in the APSN area? Three options are apparent: (1) stop charging any overdraft fees in connection with debit card transactions; (2) address the “do not understand” and “cannot” avoid prongs of the CFPB’s reasoning; and/or (3) work with core processors to find a way to hold funds once authorized for a particular debit card transaction, then match the hold with the related merchant settlement. 

The CFPB wants all financial institutions to follow option number one, and simply stop charging overdraft fees in connection with debit card transactions. The guidance is a policy pronouncement designed to scare financial institutions into turning off all debit card overdraft fees. Option number three may be technically infeasible, as core processing platforms may not properly accommodate matching authorizations and merchant presentments and consumers themselves may hate actually having only those transactions go through for which they actually have sufficient funds. But what about option number two? Isn’t there room for increased disclosure concerning how the debit card authorization and merchant presentment timing works, perhaps coupled with a reduced overdraft fee for these situations? Additional disclosure could also be made concerning how consumers can avoid APSN overdrafts through closely monitoring available balance information using mobile apps and online access and keeping accurate and up to date records concerning purchases. 

Practice Pointer: This is an area of increased regulatory focus and with the CFPB’s latest pronouncement, financial institutions are likely to see a rise in not only regulatory scrutiny during exams, but in class action litigation involving deposit account fees that are perceived as “junk” fees. Financial institutions should carefully evaluate how debit card transactions are processed, how overdraft situations are disclosed to consumers, and how much is a reasonable overdraft fee. 

For questions concerning this topic, please contact Christopher R. Rahl.

CONTACT CHRISTOPHER R. RAHL | 410-576-4222

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CFPB’s Supervisory Highlights Report Reveals Continued Scrutiny of Auto Loan Servicing and Credit Reporting Compliance 

On November 16, 2022, the Consumer Financial Protection Bureau (CFPB) published the Fall edition of its Supervisory Highlights report. Among other things, the CFPB highlighted its continued scrutiny of auto servicing and credit reporting practices.

CFPB examiners reported continued instances of unfair and deceptive acts or practices in the auto servicing industry, including:

• Failing to refund for unearned fees related to add-on products after an early payoff of the loan,
• Misleading consumers in connection with loan modification approvals. Servicers were advising consumers that they had been preliminarily approved for a modification but needed to make a good faith payment; however, such consumers usually were ultimately denied for a modification despite making the payment,
• Double billing for force-placed insurance,
• Using starter interruption devices when consumers had not defaulted on a loan, and
• Deceiving consumers during collection calls by threatening to suspend a consumer’s driver’s license and tags without the authority to do so.

The CFPB also noted (in line with a recent CFPB circular) that its examiners identified credit reporting deficiencies from furnishers, including:

• Reporting information with actual knowledge of errors and failing to specify an address clearly and conspicuously for notices relating to inaccurately furnished information,
• Failing to comply with duty to correct and update information,
• Third party debt collectors’ failure to provide the date of first delinquency,
• Failing to establish and implement policies to ensure accuracy and integrity of the information, and
• Failing to conduct reasonable investigations of direct disputes.

The CFPB also introduced a new Repeat Offender Unit, which will focus on:

• Reviewing and monitoring the activities of repeat offenders;
• Identifying the root cause of recurring violations;
• Pursuing and recommending solutions and remedies that hold entities accountable for failing to consistently comply with Federal consumer financial law, and
• Designing a model for order review and monitoring that reduces the occurrences of repeat offenders.

Practice Pointer: The CFPB has repeatedly signaled that auto servicing is an area of emphasis, as three of the last four editions of the Supervisory Highlights have detailed violations related to auto servicing acts and practices. Credit reporting has emerged as a renewed area of emphasis, as consumers’ credit reporting complaints to the CFPB have increased dramatically since 2019. Financial institutions should review the CFPB’s Supervisory Highlights and review internal policies and procedures to ensure compliance and remediate any areas of concern.
 
For questions about this topic, please contact Bryan M. Mull or Tonya R. Foley.

CONTACT BRYAN M. MULL| 410-576-4227

Contact Tonya R. Foley | 410-576-4238

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