Overdraft and late fees continue to dominate banking headlines and regulator announcements. Competitive pressure from new industry participants and the evolving regulatory environment have led many financial institutions and fintechs to make preemptive changes to their fee policies and procedures. In the past year, multiple financial institutions have either revised, reduced, or eliminated their fee assessment practices. Some have:

• Eliminated or reduced the number of and cost of overdraft and non-sufficient funds (NSF) fees.
• Removed overdraft protection fees for when funds are automatically moved from one account to cover the cost of a transaction in another.
• Provided customers with grace periods to cover an overdraft transaction before being assessed an overdraft fee.
• Increased customer’s overdraft limits prior to customer’s being assessed an overdraft fee.

Despite their actions, Congress and regulators continue to focus on fee oversight and regulation. This heightened regulatory scrutiny has created additional pressure for financial institutions and fintechs to review their fee policies in the hopes of getting ahead of potential changes. One key regulatory example is the Consumer Financial Protection Bureau (CFPB) effort to address “junk fees,” which are defined by the CFPB as fees that are tacked on to the back-end cost of products, goods, or services and obscure the true cost.  In addition to “junk fees,” the CFPB is also weighing in on other types of fees. These range from fees on Earned-Wage Access products, overdraft or NSF fees, credit card late fees, and prepaid account and card fees. These factors have created a dynamic environment that is rapidly evolving. Financial institutions and fintech companies that wait to act may find themselves on the wrong end of CFPB scrutiny. 

The CFPB Fee Announcements:
On January 26, 2022, the CFPB published a new initiative seeking feedback from the public on “junk fees.” The CFPB outlined “junk fees” as fees that are: 

• Charged for things consumers believed were covered by the baseline price of a product, good, or service.
• Unexpected. 
• Greatly disproportionate to the cost of the service.
• Vague and created confusion as to why they were charged.  

CFPB Director Rohit Chopra noted, “In many cases, junk fees often act as penalties, like with non-sufficient funds and credit card late fees, rather than compensation for a legitimate service.” He argues that these types of fees trick consumers with low introductory pricing but excessive back-end fees and costs. To increase consumers’ awareness, the CFPB provided additional examples it views as “junk fees” in consumer finance. These include:

• Convenience fees for processing payments, returning items, check images, providing paper statements, stopping payments, replacing cards, and using out-of-network ATMs.
• Account and payment processing fees for minimum balances, foreign transactions, Automated Clearing House transfers, wire transfers, account closures, and inactivity.
• Ancillary fees in the mortgage closing process.¹

The CFPB plans to use feedback to “exercise its enforcement, supervision, regulatory, and other authorities to create fairer, more transparent, and competitive consumer financial markets.”  It is expected the CFPB will continue its heightened scrutiny of financial institutions’ and fintechs’ fee practices, and the industry should expect related regulatory promulgation or enforcement actions. 

Since the junk fee Request for Information (RFI) was released, the CFPB published reports on three other types of penalty fees: 

• Overdraft and NSF Fees: On February 10, the CFPB published a table highlighting financial institutions’ overdraft and NSF fee revenue and policies and procedures. The table details the top 20 banks’ overdraft and NSF fee revenue through the first three quarters of 2021 and also details what transactions or actions would lead to a consumer incurring a fee. While total overdraft and NSF fee revenues are down from their pre-pandemic high of $15.5 billion in 2019, the CFPB noted that they still “cost [Americans] billions during the [COVID] crisis.” Despite the stern rhetoric, the CFPB admits that banks’ changes to their overdraft and NSF policies are “encouraging” and heading in the right direction. The table helps detail, through blue shading, which banks have or will be making changes to their overdraft and NSF practices. The CFPB hopes this table will help consumers make educated decisions. 
• Prepaid Card Fees: On February 15, the CFPB issued a new compliance report reminding recipients, as well as companies that distribute government benefits, that prepaid cards are not the sole method for distribution and receipt of government benefits. This is known as compulsory use prohibition, which is a provision of the Electronic Fund Transfer Act and Regulation E. The purpose of the provision is to ensure that consumers receiving government benefits have a choice with respect to how they receive their funds. In the press release, the CFPB noted, “When companies act as gatekeepers for government benefits, they often abuse that power to extract unavoidable fees. Barriers to choice kill competition and can harm families who need every dollar to make ends meet.”  
• Credit Card Late Fees: On March 29, 2022, the CFPB published a detailed overview of credit card providers’ assessment of late fees. Late fees are charged on top of assessed interest on unpaid balances and can represent a surcharge of almost 25 percent. Since 2010, the CFPB found that most major credit card issuers charged the maximum late fee they could under the regulations set by the Federal Reserve Board of Governors. These limits were designed to ensure penalty fees were “reasonable and proportional” to the service provided. However, the regulations are subject to an annual inflation adjustment. As a result, the CFPB projects that credit card providers will use this current hyperinflationary environment to increase late-fee costs. The CFPB alleges that credit card late fees, statistically speaking, disproportionately burden low- to moderate-income and minority consumers and are negatively correlated with indicators of upward economic mobility.  In some cases, the CFPB found consumers living in the poorest neighborhoods paid almost twice as much in total late fees as those in the richest.

How Guidehouse Can Help:

While some debate the validity of aspects of the CFPB’s heightened scrutiny of fees, financial institutions and fintechs should begin reviewing their fee structures and practices. Updating ones’ policies, procedures, processes, systems, and controls, along with appropriate internal and external communication, as appropriate, can be a lengthy process. Proactive steps help financial institutions and fintechs remain competitive, in compliance, and prepared for potential future regulations.

Guidehouse can help financial institutions and management teams with:

Regulatory Change Management

Review regulatory environment and analyze business wide impacts from evolving regulatory requirements to incorporate new requirements into existing compliance frameworks.

Market Comparison Fee Examinations

Conduct market research to gather pricing and frequency information to develop a model that analyzes, at the transaction-level, assessed fees against the developed market benchmarks.

Fee Documentation Reviews

Review fee policies and procedures for compliance with regulatory requirements and industry best practices and provide recommendations.

Reasonable and Regulatory Compliant Fee Validations

Evaluate current practices and transaction systems to ensure assessed fees were reasonable, customary, and compliant with federal and state guidelines. 

Fee Recoverability and Remediation Support

Leverage Guidehouse’s automated rules-based engine to conduct lookback reviews to identify and compare previously assessed fees against policies and procedures as well as regulatory rules and limits. 

Special thanks to Henry Darmstadter for co-authoring this article.