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:
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:
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:
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:
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:
Review regulatory environment and analyze business wide impacts from evolving regulatory requirements to incorporate new requirements into existing compliance frameworks.
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.
Review fee policies and procedures for compliance with regulatory requirements and industry best practices and provide recommendations.
Evaluate current practices and transaction systems to ensure assessed fees were reasonable, customary, and compliant with federal and state guidelines.
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.