October 11 Was a Red-Letter Day in the Growing Federal-State War on Fees

On October 11, the Consumer Financial Protection Bureau (CFPB or Bureau) published a special edition of its Supervisory Highlights report. This report serves as a “victory lap” for the Bureau, which highlights the relief it has obtained for consumers since the release of its March 2023 Special Fees Edition, discussed here. According to the Bureau, its supervisory efforts have led to institutions refunding over $140 million to consumers, including $120 million in overdraft and non-sufficient funds (NSF) fees.

Simultaneously, the Federal Trade Commission (FTC) announced a proposed rule to prohibit “hidden and bogus” fees. The proposed rule is in response to a proceeding last year where the FTC sought public input on such fees.

These initiatives were announced by CFPB Director Rohit Chopra and FTC Chair Lina Khan at a White House event where they received the express approval of President Biden.

On the state level, last week California Governor Gavin Newsom signed into law Senate Bill 478 (SB 478). Effective on July 1, 2024, this law will prohibit hidden fees in California.

In all, these events show that the coordinated federal-state emphasis on attacking so-called “junk fees” is continuing.

CFPB’s Supervisory Highlights:

The CFPB highlighted the below issues as the most significant ones identified by examiners during their supervisory activities, and notably, many of them are repeat issues the CFPB has written about in prior editions of Supervisory Highlights.

Overdraft, NSF, and Statement Fees:

Examiners found that some financial institutions charged consumers re-presentment NSF fees without giving the consumer an opportunity to prevent another fee after the first failed attempt.

• A re-presentment occurs when, after declining a transaction because of insufficient funds and assessing a fee, the merchant presents the same transaction to the consumer’s account-holding institution for payment again.
  
  
• The CFPB noted that beyond issuing refunds, most institutions reported plans to stop charging NSF fees going forward.

Examiners continued to cite institutions that charged consumers Authorize-Positive Settle-Negative (APSN) overdraft fees.

• APSN overdraft fees occur when financial institutions assess overdraft fees for debit card transactions where the consumer had a sufficient available balance at the time the transaction was authorized, but an insufficient balance when the transaction settled, i.e., another transaction settled during that time frame.
  
  
• According to the CFPB, institutions reported they planned to stop charging APSN overdraft fees.

Examiners found that some institutions charged fees for the printing and delivery of paper statements, including additional fees when a statement was returned undelivered.

• According to the CFPB, some institutions did not print or attempt to deliver paper statements but still assessed paper statement fees and returned mail fees each month.

Auto Loans:

Examiners founds that some auto servicers failed to ensure consumers received refunds for add-on products, such as vehicle service contracts, guaranteed asset protection (GAP), or credit-life insurance, following early loan termination or repossession.

Examiners also found that some servicers miscalculated add-on product refund amounts after early loan termination. For example, these servicers either inaccurately communicated higher deficiency balances or provided smaller refunds than warranted.

Remittance Rule:

Examiners found that some remittance providers failed to disclose fees, which resulted in a reduced wire transfer amount.

Examiners also found that certain providers failed to refund fees when the recipients did not receive the transfers on time.

FTC Proposed Rule:

The proposed rule by the FTC would “prohibit unfair or deceptive practices relating to fees for goods or services, specifically, misrepresenting the total costs of goods and services by omitting mandatory fees from advertised prices and misrepresenting the nature and purpose of fees.” Specifically, the proposed rule aims to ban “hidden fees,” or fees imposed shortly before the purchase is made that significantly increase the total amount. The proposed rule also seeks to ban “bogus fees” by requiring businesses to disclose upfront the amount and purpose of the fees and whether they are refundable.

Under the proposed rule, the FTC will be able to seek reimbursement for harmed consumers and levy monetary penalties against companies that do not comply with its provisions.

The proposed rule will be published in the Federal Register and interested parties will have 60 days to submit comments.

White House Support:

The CFPB and FTC are receiving the Biden administration’s full support. Last year, as part of his Executive Order on Promoting Competition, President Biden called on federal agencies to crack down on fees and provide consumers with disclosures of the full price up front. More recently in his State of the Union address in February, discussed here, President Biden called out fees in a variety of transactions involving banks, ticket vendors, airlines and online sellers.

The press release announcing the October 11 White House event stated:

"Junk fees cost American families tens of billions of dollars each year and inhibit competition, hurting consumers, workers, small businesses, and entrepreneurs. Research shows that fees charged at the back-end of the buying process make it harder to comparison shop for the best deal and lead to consumers paying upward of twenty percent more. Junk fees also make it hard for honest businesses to compete, stifle innovation, and hurt small businesses."

California SB 478:

Fees are not just a priority for the federal government. As of July 1, 2024, California will prohibit advertising, displaying, or offering a price for a good or service that doesn’t disclose all mandatory fees or charges other than taxes or fees imposed by the government. Companies that don’t comply with the new law could face steep penalties.

This legislation is significant, as California has the fifth largest economy in the world and the nation’s largest population.

Troutman Pepper's Take:

It’s obvious that the “war on fees” continues to rage with the federal regulatory agencies, and that the Biden administration views it as a beneficial political issue to pursue. Interestingly, the FTC proposed rule and the California statute are focused on disclosure of fees, while the CFPB’s actions are more of a frontal assault on the existence of fees themselves, which the CFPB believes are inherently unfair or abusive. It is also unclear how impactful the FTC and California measures would be in connection with credit transactions, since both of them only address disclosure of “mandatory” fees, and many of the fees that occur in consumer lending are not mandatory, but rather are either optional (like payment convenience fees) or are triggered by some occurrence after the credit transaction is entered into (like a late fee or NSF fee). But regardless of what the FTC and California measures may mean, the CFPB has shown itself to be hostile to fees of any kind, in any context.