CFPB Declares Proposed Rule Concerning Nonsufficient Funds Charges

On Wednesday, January 24, 2024, the Shopper Monetary Safety Bureau (CFPB) introduced a Proposed Rule aimed toward blocking nonsufficient funds (NSF) charges on debit card, ATM, and sure peer-to-peer fee transactions that monetary establishments decline in actual time. The Proposed Rule would prohibit these NSF charges, deeming them illegal as abusive practices underneath the unfair, misleading, or abusive acts or practices (UDAAP) provisions of the Shopper Monetary Safety Act.

Coated Monetary Establishments and Transactions

This Proposed Rule covers “Monetary Establishments” as outlined within the Digital Fund Switch Act’s (EFTA) implementing regulation, Regulation E. Coated monetary establishments embrace banks, financial savings associations, credit score unions, and individuals who maintain client accounts or present digital fund switch providers.

Beneath the Proposed Rule, lined establishments could be required to eradicate NSF charges for instantaneous transactions, or transactions the place the cost, withdraw, or switch of funds is declined instantly due to inadequate funds. As a result of checks and Automated Clearing Home (ACH) transactions are sometimes processed by clearing inside a number of enterprise days or by way of in a single day batch processing, respectively, checks and ACH transactions usually are not captured on this Proposed Rule.

NSF Charges

An NSF payment is a cost a client incurs if there are inadequate funds within the client’s account when the buyer makes an attempt to withdraw, debit, pay, or switch funds.

The Proposed Rule identifies NSF charges as an abusive apply, or a apply that “takes unreasonable benefit of a lack of knowledge on the a part of the buyer of the fabric dangers, prices, or situations of the services or products.” The Proposed Rule explains that NSF charges are inclined to affect shoppers who battle to satisfy common bills and reap the benefits of these shoppers by gaining a payment from them whereas offering no profit, since they don’t cowl the rejected transaction or in any other case help the buyer. The Proposed Rule would additionally cowl “returned merchandise charges,” “returned fee charges,” “uncollected funds charges,” “overdraft — unpaid charges,” and “scarcity of funds charges.”[1]

Affect of this Proposed Rule

Within the commentary to the Proposed Rule, the CFPB asserts that this rulemaking is a preventative measure, acknowledging that NSF charges usually are not continuously charged at point-of-sale or debit transactions and are as a substitute most continuously employed with examine or ACH transactions, which aren’t in scope of the Proposed Rule. Moreover, 65% of banks with over $10 billion in belongings have eradicated NSF charges.

The CFPB claims, nevertheless, that since 80% of credit score unions with over $10 billion in belongings nonetheless cost NSF charges,[2] and because the median payment is $32 in banks with over $10 billion in belongings that do nonetheless cost NSF charges, this Proposed Rule addresses a considerable penalty for shoppers.[3] Contemplating these components, the CFPB estimates that the Proposed Rule would profit shoppers by about $16.2 to $64.6 million in diminished charges.[4] Moreover, the CFPB calculates that the mixed prices of NSF and overdraft charges are increased to shoppers than upkeep and ATM charges and are sometimes borne by these with excessive monetary vulnerability.[5] This Proposed Rule was not provided in isolation and is a part of the CFPB’s bigger effort to cut back “junk charges.”

CFPB Junk Charges Initiative

In January 2022, the CFPB launched an initiative to focus on monetary establishments that add “junk charges,” described by the CFPB to embody late charges, NSF and overdraft charges, or different practices the place an establishment might add charges after disclosing a selected value or charge to a client. In October 2023, the CFPB’s bulletin centered on its investigation into checking account deposits, auto mortgage providers, and remittances that led corporations to refund $120 million to shoppers due to shock overdraft and extreme NSF charges. In July 2023, the CFPB and Workplace of the Comptroller of the Foreign money (OCC) fined a nationwide financial institution a mixed $150 million for alleged improper charges and opening client accounts with out consent.[6]

Even past CFPB enforcement actions, this “junk charges” initiative continues to have extensive repercussions. In February 2024, a criticism was filed in opposition to one other nationwide financial institution by a proposed class motion alleging unjust enrichment and numerous state unfair, misleading, and abusive practices (UDAP) legislation violations underneath its earlier coverage of charging charges on all return deposits.[7] The criticism cites to the CFPB bulletin for instance the alleged violations.

The CFPB additionally not too long ago introduced a Proposed Rule to restrict overdraft charges by very massive monetary establishments (VLFI) that had beforehand been exempted from the Reality in Lending Act. This Proposed Rule would cowl monetary establishments with greater than $10 billion in belongings. The Proposed Rule goals to carry all costs VLFIs make use of as overdraft charges to finance costs, subjecting them to Reality in Lending rules (Rules Z and E). Beneath the Proposed Rule, if a VLFI costs an overdraft payment above its breakeven value, an overdraft cost would grow to be a finance cost, eliminating a earlier exemption that an overdraft payment shouldn’t be a finance cost when the VLFI didn’t agree in writing to cowl an overdrawn cost. That breakeven value could be set by both the VLFI (after accounting for its prices) or by utilizing a benchmark the CFPB creates (proper now, the Proposed Rule states that the CFPB is contemplating benchmark charges of $3, $6, $7, or $14). A VLFI that costs for overdrafts at a degree at or beneath the breakeven value would nonetheless be permissible and exempted from consideration as a finance cost. Relatedly, the Proposed Rule would additional recharacterize overdraft charges as finance costs, regardless of beforehand being exempted when the cost is lower than a cost for the same account with out overdraft providers, shifting overdraft providers to a type of credit score to shoppers. The CFPB’s actions mirror a broader regulatory agenda to cut back what the present administration sees as a proliferation of complicated and misleading prices to the shoppers.  

The Bigger Regulatory Panorama

In October 2023, President Biden made an announcement that he sees addressing “junk charges,” or hidden charges on shoppers, as a part of his agenda to extend competitors, since they distort the prices of products, could also be exploitative or fraudulent, and are sometimes a shock to shoppers.

Companies have been fast to comply with this initiative. The Division of Transportation simply introduced a Last Rule requiring airways to reveal payment info relating to baggage, cancellation, and alter charges. The Federal Commerce Fee proposed a rule, “Rule on Unfair or Misleading Charges,” which goals to ban omitting charges from listed costs or misrepresenting sure charges on items or providers, resembling in resort reservations, housing charges, ticket gross sales, eating places payments, fitness center memberships, supply functions, telecommunication companies, or in monetary providers. Housing and City Improvement Secretary Marcia Fudge wrote an open letter urging elimination of “junk charges” for renters. The Federal Communications Fee (“FCC”) proposed a rule to ban service suppliers from using early termination charges and billing cycle charges in an effort to handle “junk charges” by cable and satellite tv for pc service suppliers. As well as, the FCC introduced a proposed rule to eradicate “bulk billing” in housing the place tenants should pay sure costs for web, broadband, cable, or satellite tv for pc service, with out the power to choose out. Within the announcement, the FCC acknowledged that this proposed rule is certainly one of a sequence to “fight junk charges and assist transparency for shoppers.”

Conclusion

In mild of this Proposed Rule, together with the CFPB’s different rulemaking and enforcement actions, it is vital for monetary establishments to judge and monitor charges it costs to shoppers to make sure compliance inside this regulatory panorama. By labeling NSF charges as abusive practices, the CFPB has signaled probably steep penalties for noncompliance.

If in case you have questions or issues about this text, please be happy to succeed in out to any of the authors or your Foley & Lardner lawyer.

[1]Charges for Instantaneously Declined Transactions (“Proposed Rule”), 89 Fed. Reg. 6031, 6037 (proposed January 24,2024) (to be codified at 12 C.F.R. pt. 1042).

[2] Proposed Rule, 89 Fed. Reg. at 6035.  

[3] Proposed Rule, 89 Fed. Reg. at 6033.

[4] Proposed Rule, 89 Fed. Reg. at 6047.

[5] Proposed Rule, 89 Fed. Reg. at 6032.

[6] The CFPB issued a wonderful of $30 million associated to opening client bank card accounts and associated rewards language, and $60 million for “junk charges.” OCC issued a penalty of $60 million in response to using a number of overdraft and NSF funds charges in opposition to shoppers in a single transaction.

[7] Maslowski et al. v. JPMorgan Chase Financial institution, N.A., Docket No. 7:24-cv-01277 (S.D.N.Y. Feb 20, 2024).