Consumer financial service providers and depository institutions are no strangers to attacks on fees charged to consumers while servicing a loan or account. Regulatory action and litigation have long targeted these fees. However, in 2023, federal and state regulators significantly increased pressure to attack so-called “junk fees,” defined by opponents as “fees designed either to confuse or deceive consumers or to take advantage of lock-in or other forms of situational market power.” Consumer financial service providers and depository institutions would do well to prepare for more scrutiny of their fees and practices next year.
Federal Regulatory Action on Junk Fees
The Consumer Financial Protection Bureau (CFPB) is spearheading efforts to eliminate ‘junk fees.’ Beginning with a January 2022 initiative, the Bureau has consistently targeted such fees through advisory opinions, supervision, and enforcement actions against consumer financial institutions. Notably, the CFPB dedicated two issues of its Supervisory Highlights to examining illicit fees charged by various financial entities, including depository and mortgage servicing, and auto loan servicers, as well as payday lenders and student loan servicers. The CFPB and the Federal Trade Commission (FTC) have brought numerous enforcement actions addressing the imposition and disclosure of these fees, and the Biden administration has underscored the work of these agencies as a key administration priority.
On October 11, 2023, President Biden, FTC Chair Lina Khan, and CFPB Director Rohit Chopra announced new measures aimed at tackling junk fees throughout the economy. The CFPB highlighted its efforts to crack down on junk fees, noting that more than $140 million has been refunded to consumers as a result of its supervisory work. The FTC also published a proposed rule to eliminate junk fees in most industries. The rule would create additional disclosure requirements and limit surprise or hidden fees in transactions. Both agencies expressed their commitment to protect consumers from junk fees and encouraged consumers to report these fees to the agencies.
Heading into 2024, financial service providers and depository institutions should expect the CFPB and FTC are likely to increase their supervisory, enforcement, rulemaking, and educational activities regarding junk fees in the financial sector and beyond. Both agencies are likely to share information and coordinate their efforts with other federal and state agencies. With reported increases of around 50% for enforcement attorneys and staff, institutions should be prepared for a particularly large increase in CFPB enforcement activity. The agencies may seek any available penalties and remedies including: civil penalties, injunctive relief, restitution, disgorgement, or pursuing individual liability against officers, directors, or managers of these companies.
State Law and Litigation
Beyond federal regulatory scrutiny, state legislators, regulators and attorneys general are also focusing on consumer fees. State attorneys general have leveraged their legal authority to enforce state and certain federal laws prohibiting unfair, deceptive, or abusive practices, resulting in consent orders and multistate actions against companies over fee practices.
Several states have proposed and enacted new laws to target these fees. These laws mandate full disclosure of the fees and charges associated with a product at the time it is advertised, clarify whether the fee is required or optional, and impose other restrictions. Notable examples are California SB 478, which was signed by the governor on October 7 and is set to take effect on July 1, 2024, and regulations proposed by Massachusetts Attorney General Andrea Joy Campbell on November 30.
Consumer attorneys represent another faction targeting these fees through class actions and other litigation. A review of these lawsuits reveals that consumer attorneys allege a wide range of violations of federal or state law. These violations span statutes governing debt collection, usury, trade practices, and those specific to certain regulated entities such as mortgage lenders and servicers. Consequently, each case necessitates an analysis of the alleged statutory violations and the authority and practices surrounding the specific fee at issue in the case.
Examples of Fees Under Fire
Some examples of the fees that have recently sparked the attention of regulators, attorneys general, and consumer attorneys are:
- Convenience or Pay-to-Pay Fees: Convenience fees or pay-to-pay fees are often charged by servicers of various consumer loan products to accept a payment online or by phone. The CFPB issued an advisory opinion on convenience fees charged by debt collectors in June 2022, which stated that companies subject to the FDCPA are prohibited from collecting pay-to-pay or convenience fees unless the amount is expressly authorized by the agreement creating the debt or expressly authorized by law. In addition to the CFPB’s advisory opinions, a coalition of state attorneys general have urged the CFPB to specifically ban convenience fees by mortgage servicers. Additionally, consumer attorneys continue to use class action litigation to allege violations of FDCPA and other federal and state laws related to these charges.
- Overdraft and NSF Fees: Many depository institutions have ceased charging overdraft and NSF fees as a result of public pressure and enforcement actions by the CFPB and other regulators. Institutions should expect continued review by the CFPB and other examiners for overdraft fees on debits that were authorized on a positive balance but settled negative, often referred to as APSN, due to intervening transactions and multiple NSF fees charged on a single transaction, usually related to re-presentments.
- Property Inspection Fees: Property inspections are authorized by mortgage agreements and serve as an important tool for mortgage holders and servicer to ensure their security is in good condition and comply with investor requirements. Charges for conducting these inspections typically are assessed to the customer’s loan. Though regulators often understand the need for these inspections, the fees associated with the inspections are under question. The CFPB noted this year that it found in examinations mortgage servicers were charging for property inspections to visit the wrong address and continued assessing those charges to the consumer even after knowing the address was incorrect. State law is also important to consider for these charges and the underlying property preservation activities. For instance, Maryland state law has been interpreted as prohibiting mortgage lenders and servicers from charging consumers for property inspections, which has resulted in litigation and regulatory action by MD Office of Commissioner of Financial Regulation.
- Late Fees: Unlike some fees classified as “junk fees,” late fees are typically explicitly authorized by the agreement creating the debt and expressly authorized and regulated by state law. Late fees are also charged directly because of consumer behavior – the failure to make a contractual payment by the due date or during a grace period. Despite this, late fees can still be a focus for litigation and regulatory examinations. Notably, the CFPB highlighted examples of mortgage and auto loan servicers charging the maximum allowable late fees under state law despite the consumers’ agreement capping late fees at a lower amount under state maximums. Servicers may also impermissibly assess late fees when a payment is not due, such as during a forbearance period.
- Fees for Information Requests: Most recently, the CFPB released guidance to large banks and credit unions reiterating that the 2010 Dodd-Frank Act prohibits these institutions from charging customers for answering inquiries about their account.
Looking to the Future
As the regulatory, compliance, and litigation pressure around fees continues into 2024, institutions should carefully review any fees and charges assessed to consumers. Institutions should also assess how fees are disclosed to consumers, whether fees are optional or mandatory, and whether the underlying agreement creating the debt or state law explicitly allow the fees. Some companies have entirely ceased certain fee practices, creating additional market pressures and shifting the focus of regulators and consumer attorneys to entities that continue to charge the fees. Because of these changing environments, companies should also evaluate dependency on certain types of fees and charges and consider the impacts to the company’s procedures and financial outlook if these fees were interpreted to be unlawful.