[Federal Register Volume 89, Number 21 (Wednesday, January 31, 2024)]
[Proposed Rules]
[Pages 6031-6051]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-01688]
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CONSUMER FINANCIAL PROTECTION BUREAU
12 CFR Part 1042
[Docket No. CFPB-2024-0003]
RIN 3170-AB16
Fees for Instantaneously Declined Transactions
AGENCY: Consumer Financial Protection Bureau.
ACTION: Proposed rule; request for public comment.
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SUMMARY: The Consumer Financial Protection Bureau (CFPB) is proposing
to prohibit covered financial institutions from charging fees, such as
nonsufficient funds fees, when consumers initiate payment transactions
that are instantaneously declined. Charging such fees would constitute
an abusive practice under the Consumer Financial Protection Act's
prohibition on unfair, deceptive, or abusive acts or practices.
DATES: Comments must be received on or before March 25, 2024.
ADDRESSES: You may submit comments, identified by Docket No. CFPB-2024-
0003 or RIN 3170-AB16, by any of the following methods:
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments. A brief summary of
this document will be available at https://www.regulations.gov/docket/CFPB-2024-0003.
Email: [email protected]. Include Docket No. CFPB-
2024-0003 or RIN 3170-AB16 in the subject line of the message.
Mail/Hand Delivery/Courier: Comment Intake--2024 NPRM Fees
for Instantaneously Declined Transactions, c/o Legal Division Docket
Manager, Consumer Financial Protection Bureau, 1700 G Street NW,
Washington, DC 20552.
Instructions: The CFPB encourages the early submission of comments.
All submissions should include the agency name and docket number or
Regulatory Information Number (RIN) for this rulemaking. Commenters are
encouraged to submit comments electronically. In general, all comments
received will be posted without change to https://www.regulations.gov.
All submissions, including attachments and other supporting
materials, will become part of the public record and subject to public
disclosure. Proprietary information or sensitive personal information,
such as account numbers or Social Security numbers, or names of other
individuals, should not be included. Submissions will not be edited to
remove any identifying or contact information.
FOR FURTHER INFORMATION CONTACT: Pavitra Bacon, Joseph Devlin, Lawrence
Lee, or Michael G. Silver, Senior Counsels, Office of Regulations, at
202-435-7700 or https://reginquiries.consumerfinance.gov/. If you
require this document in an alternative electronic format, please
contact [email protected].
SUPPLEMENTARY INFORMATION:
[[Page 6032]]
I. Background
A. Rulemaking Goals
When a consumer's attempted withdrawal, debit, payment, or transfer
transaction amount exceeds the available funds in their account,
currently, a financial institution might decline the transaction and
charge the consumer a fee, often called a nonsufficient funds (NSF)
fee. NSF fees might be charged on transactions that the financial
institution declines within seconds after the payment request is
initiated, as well as on transactions that are rejected hours or days
after the initial request to pay is made. As discussed below, many
financial institutions in recent years have stopped charging NSF fees.
To the extent they continue to be charged currently, however, NSF fees
are almost always charged only on check or Automated Clearing House
(ACH) transaction declinations, which do not occur instantaneously. In
contrast, NSF fees are rarely charged on Automated Teller Machine (ATM)
or point-of-sale (POS) debit transaction declinations, which do occur
instantaneously. The CFPB is aware of limited instances where such fees
might be charged on the latter set of transactions (for example, in
connection with prepaid accounts and transactions declined at ATMs that
are outside the depository institution's ATM network).\1\ To a
similarly limited extent, the CFPB has also observed such fees being
charged in connection with other types of transactions (such as online
transfer and in-person bank teller transactions).\2\
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\1\ See Trevor Bakker et al., Consumer Fin. Prot. Bureau, Data
Point: Checking account overdraft, at 20 tbl. 8 (July 2014), https://files.consumerfinance.gov/f/201407_cfpb_report_data-point_overdrafts.pdf (CFPB 2014 Data Point).
\2\ Id.
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The CFPB is proposing to prohibit covered financial institutions
from charging NSF fees on transactions that are declined
instantaneously or near-instantaneously.\3\ As technological
advancements may eventually make instantaneous payments ubiquitous, the
CFPB believes that is important to proactively set regulations to
protect consumers from abusive practices.
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\3\ As explained below, covered transactions would include
transactions that are declined ``instantaneously'' or ``near-
instantaneously.'' The discussion below describes the difference in
terminology. For ease of reference, the proposal sometimes refers
jointly to these two terms as ``instantaneously.''
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B. High-Level Summary of the Proposed Rule
To prevent abusive practices related to NSF fees on instantaneously
declined transactions, as detailed below in part IV (Discussion of
Proposed Rule), the CFPB proposes to prohibit covered financial
institutions from charging such fees. The CFPB preliminarily concludes
that charging NSF fees in these circumstances would constitute an
abusive practice under the Consumer Financial Protection Act's
prohibition on unfair, deceptive, or abusive acts or practices. The
proposal would prohibit financial institutions from engaging in this
practice across all instantaneously declined transactions, regardless
of transaction method (e.g., debit card, ATM, person-to-person).
C. NSF Fees in the Market
Today, the combined costs of overdraft and NSF fees constitute a
higher cost to consumers than the combined costs of periodic
maintenance fees and ATM fees.\4\ Although overdraft and NSF fees are
distinct, many publications discuss them together,\5\ and, in recent
decades, a financial institution's NSF fee has typically been the same
amount as any per-transaction overdraft fee it may charge.\6\ The
amount of an NSF fee is typically not pegged to the transaction's
processing cost \7\ or the transaction's amount; \8\ institutions
generally charge a fixed amount per declined transaction.\9\ The CFPB's
research found that in 2012, the median NSF fee among 33 large
institutions sampled was $34.\10\ While many institutions have opted to
stop charging NSF fees within the last two years,\11\ the CFPB recently
found
[[Page 6033]]
through its market monitoring that, among institutions above $10
billion in assets still charging such fees, the median fee is $32.
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\4\ See, e.g., Consumer Fin. Prot. Bureau, Data Point:
Overdraft/NSF Fee Reliance Since 2015--Evidence from Bank Call
Reports, at 2-3 (Dec. 2021), https://files.consumerfinance.gov/f/documents/cfpb_overdraft-call_report_2021-12.pdf (CFPB December 2021
Data Point); see generally Fed. Fin. Insts. Examination Council,
Central Data Repository's Public Data Distribution, https://cdr.ffiec.gov/public/ManageFacsimiles.aspx (last visited Jan. 17,
2024).
\5\ Generally, an overdraft fee is charged when a transaction
(debit, payment, transfer, or withdrawal) that exceeds the
consumer's account balance is paid (covered) by the accounting-
holding financial institution. An NSF fee is charged when a
transaction (debit, payment, transfer, or withdrawal) that would
exceed the account balance if it were paid is instead returned
unpaid by the account-holding financial institution. Despite this
distinction, the CFPB believes that surveys, reports, and studies
often group these two types of fees together. This is in part
because banks with over $1 billion in assets report overdraft and
NSF fees together within the ``consumer overdraft-related service
charges'' category (see Fed. Fin. Insts. Examination Council, FFIEC
031 and 041, Instructions for Preparation of Consolidated Reports of
Condition and Income, at RI 36, https://www.ffiec.gov/pdf/FFIEC_forms/FFIEC031_FFIEC041_202303_i.pdf (last updated Mar.
2023)). In addition, either of these fees can be charged when a
consumer's available balance is insufficient to cover a transaction,
and there is substantial overlap in the population of consumers who
incur overdraft and NSF fees. See Consumer Fin. Prot. Bureau, A
Closer Look: Overdraft and the Impact of Opting-In (Jan. 19, 2017),
https://files.consumerfinance.gov/f/documents/201701_cfpb_Overdraft-and-Impact-of-Opting-In.pdf (CFPB Closer Look); Consumer Fin. Prot.
Bureau, Overdraft and NSF Practices at Very Large Financial
Institutions (Jan. 2024), https://files.consumerfinance.gov/f/documents/cfpb_overdraft-nsf-practices-very-large-financial-institutions_2024-01.pdf (Overdraft and NSF Report).
\6\ See, Consumer Fin. Prot. Bureau, CFPB Study of Overdraft
Programs: A white paper of initial data findings, at 11 n.f, 52
(June 2013), https://files.consumerfinance.gov/f/201306_cfpb_whitepaper_overdraft-practices.pdf (CFPB White Paper).
\7\ For example, the median cost of issuing a business check is
$2.01-$4.00 and the cost to receive a business check is $1.01-$2.00.
See Ass'n for Fin. Profs. (underwritten by Corpay), 2022 AFP
Payments Cost Benchmarking Survey, at 16 (Jan. 2022), https://www.afponline.org/publications-data-tools/reports/survey-research-economic-data/Details/paymentscost (available for download at
https://www.corpay.com/resources/whitepapers/2022-afp-payments-cost-benchmarking-survey/gated). The CFPB expects that the costs for
consumer checks to be within similar ranges. The median total
processing cost across issuers for all types of debit card
transactions was 11 cents per transaction in 2011 (see 76 FR 43394,
43397 (July 20, 2011)) and the average per-transaction
authorization, clearing, and settlement costs, excluding issuer
fraud losses, among issuers covered by the Board's debit card
interchange fee rule was 3.9 cents in 2021 (Bd. of Governors of the
Fed. Rsrv. Sys., 2021 Interchange Fee Revenue, Covered Issuer Costs,
and Covered Issuer and Merchant Fraud Losses Related to Debit Card
Transactions, at 24 (Oct. 2023), https://www.federalreserve.gov/paymentsystems/files/debitfees_costs_2021.pdf (FRB 2021
Interchange)).
\8\ The average value of a check payment in 2021 was $2,430. Bd.
of Governors of the Fed. Rsrv. Sys., The Federal Reserve Payments
Study: 2022 Triennial Initial Data Release, https://www.federalreserve.gov/paymentsystems/fr-payments-study.htm (last
updated July 27, 2023) (FRB 2022 Payments Study). In 2022, the
average value of a debit card transaction was $46.84. Bd. of
Governors of the Fed. Rsrv. Sys., Regulation II (Debit Card
Interchange Fees and Routing)--Average Debit Card Interchange Fee by
Payment Card Network, https://www.federalreserve.gov/paymentsystems/regii-average-interchange-fee.htm (last updated Sept. 23, 2022) (FRB
Regulation II).
\9\ CFPB White Paper at 11.
\10\ Id. at 52.
\11\ See Consumer Fin. Prot. Bureau, Data spotlight: Vast
majority of NSF fees have been eliminated, saving consumers nearly
$2 billion annually (Oct. 11, 2023), https://www.consumerfinance.gov/data-research/research-reports/vast-majority-of-nsf-fees-have-been-eliminated-saving-consumers-nearly-2-billion-annually/ (CFPB October 2023 Data Spotlight); Consumer Fin.
Prot. Bureau, Non-sufficient fund (NSF) fee practices of the 25
banks reporting the most overdraft/NSF revenue in 2021, https://files.consumerfinance.gov/f/documents/cfpb_nsf-fee-banks-chart_2023-05.jpg (last visited Jan. 17, 2024). See also Meghan Greene et al.,
Fin. Health Network, FinHealth Spend Report 2023: U.S. Household
Spending on Financial Services Amid Historic Inflation and an
Uncertain Economy, at 5 (June 2023), https://finhealthnetwork.org/wp-content/uploads/2023/06/FinHealth-Spend-Report-2023.pdf
(FinHealth Spend Report 2023) (documenting a continued decrease in
spending on overdraft and NSF fees, from $10.6 billion in 2021 to
$9.9 billion in 2022); Oz Shy & Joanna Stavins, Who Is Paying All
These Fees? An Empirical Analysis of Bank Account and Credit Card
Fees, at 6 (Fed. Rsrv. Bank of Bos., Working Paper No. 22-18, 2022),
https://www.bostonfed.org/-/media/Documents/Workingpapers/PDF/2022/wp2218.pdf (Boston Fed Working Paper) (finding that ``[a] `bounced'-
check fee--assessed when the amount on a check exceeds the account
balance--was [ ] rare, with only 1.0 percent of all consumers having
paid such a fee in 2021'').
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1. NSF Fee Impacts on Certain Consumer Populations
Overdraft and NSF fees tend to be incurred by consumers with higher
financial vulnerability (including those with lower incomes \12\ and
lower credit scores \13\). The CFPB has previously found that
individuals with more overdraft and NSF fees in the prior year tend to
have lower account balances and tend to be more credit-constrained than
other consumers, as they have lower average credit scores, are less
likely to possess a general-purpose credit card, have less available
credit when they do have such cards, and more often possess thin credit
files.\14\ Researchers also found that only 4 percent of ``Financially
Healthy'' \15\ households with checking accounts reported paying an
overdraft or NSF fee in 2022, compared with 46 percent of ``Financially
Vulnerable'' \16\ households.\17\ According to a CFPB study, 9 percent
of all accounts at the studied banks paid nearly 80 percent of combined
overdraft and NSF fees.\18\
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\12\ One study found that consumers making under $30,000 a year
are nearly twice as likely to incur an overdraft fee as those making
over $30,000 (20 percent vs. 10 percent). Pew Ctr. on the States,
Overdraft America: Confusion and Concerns about Bank Practices, at 6
(May 2012), https://www.pewtrusts.org/-/media/legacy/uploadedfiles/pcs_assets/2012/sciboverdraft20america1pdf.pdf (Pew 2012 Survey).
See also Boston Fed Working Paper at 6.
\13\ See, e.g., David Low et al., Consumer Fin. Prot. Bureau,
Data Point: Frequent Overdrafters, at 16 tbl. 2 (Aug. 2017), https://files.consumerfinance.gov/f/documents/201708_cfpb_data-point_frequent-overdrafters.pdf (CFPB 2017 Data Point).
\14\ CFPB 2017 Data Point at 5; Boston Fed Working Paper at 6,
16 (finding that individuals with FICO scores of less than 600 were
more likely to have paid NSF fees in 2021 (3.5 percent) than the
average consumer; that individuals with scores above 800 were
significantly less likely to have done so (0.1 percent); and that
this disparity also applied to overdraft fees although to a starker
extent (32.0 percent versus 2.3 percent)).
\15\ FinHealth Spend Report 2023 at 12 (describing ``Financially
Healthy'' individuals as ``able to manage their day-to-day expenses,
absorb financial shocks, and progress toward meeting their long-term
financial goals'').
\16\ Id. (describing ``Financially Vulnerable'' individuals as
``struggling with almost all aspects of their financial lives'').
\17\ FinHealth Spend Report 2023 at 7.
\18\ CFPB 2017 Data Point at 13.
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Beyond the impact of having insufficient funds, incurring NSF fees
can negatively affect a consumer's overall perceptions of whether the
banking system is fair, transparent, and competitive.\19\ The Federal
Deposit Insurance Corporation (FDIC) has found that among unbanked
households in 2021, almost three in ten (29.2 percent) cited as a main
reason for not having an account concerns related to fees or minimum
balance requirements--``Bank account fees are too high,'' ``Bank
account fees are too unpredictable,'' or ``Don't have enough money to
meet minimum balance requirements.'' \20\
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\19\ Joe Valenti, Overdraft fees can price people out of
banking, Consumer Fin. Prot. Bureau (Mar. 30, 2022), https://www.consumerfinance.gov/about-us/blog/overdraft-fees-can-price-people-out-of-banking/.
\20\ Fed. Deposit Ins. Corp., 2021 FDIC National Survey of
Unbanked and Underbanked Households, at 2 (Oct. 2022), https://www.fdic.gov/analysis/household-survey/2021report.pdf (FDIC 2021
Survey).
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2. The Rise of Noncash Payments
When NSF fees are charged, they are almost always charged
exclusively in connection with noncash payments (that is, ACH, cards,
mobile application payments, and checks), the use of which has grown
rapidly due in large part to technological and regulatory changes. In a
recent study, the Federal Reserve Bank of San Francisco (FRBSF) found
that generally, consumers are shifting away from cash and increasingly
making card payments.\21\ The FRBSF attributed this shift in large part
to consumers making a greater share of purchases remotely when compared
to before the COVID-19 pandemic \22\ and to increased preference for
card payments.\23\ In addition, consumers are increasingly adopting
newer noncash payment methods, such as those initiated through digital
applications.\24\ This shift away from cash by banks also coincided
with certain regulatory developments--such as the enactment of the
Check Clearing for the 21st Century Act (Check 21), a Federal law that
took effect in 2004.\25\ Check 21 provided that a properly prepared
paper reproduction of an original check (a ``substitute check'') is the
legal equivalent of an original paper check \26\ and allowed banks to
avoid the ``inefficient and costly'' \27\ transportation of paper
checks.
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\21\ Emily Cubides & Shaun O'Brien, Fed. Rsrv. Bank of S.F.,
2023 Findings from the Diary of Consumer Payment Choice, at 4, 6
(May 2023), https://www.frbsf.org/cash/wp-content/uploads/sites/7/2023-Findings-from-the-Diary-of-Consumer-Payment-Choice.pdf.
\22\ Id. at 7-8 (20 percent of purchases and person-to-person
(P2P) payments were made remotely or online in 2020 and 2021 versus
13 percent of such payments in 2019).
\23\ Id. at 8 (``Consumers prefer credit cards because of the
perceived convenience, lower rates of cash acceptance, and the ease
of record keeping as compared to cash.'').
\24\ See Kevin Foster et al., The 2021 Survey and Diary of
Consumer Payment Choice: Summary Results, at 7 (Sept. 2022), https://www.atlantafed.org/-/media/documents/banking/consumer-payments/survey-diary-consumer-payment-choice/2021/sdcpc_2021_report.pdf
(finding that 66.4 percent of all consumers had adopted one or more
payment applications in the previous 12 months--a share that was
nearly 20 percent higher than five years earlier).
\25\ Check Clearing for the 21st Century Act, Public Law. 108-
100, 117 Stat. 1177 (2003).
\26\ Fed. Fin. Insts. Examination Council, Check Clearing for
the 21st Century Act Foundation for Check 21 Compliance Training,
https://www.ffiec.gov/exam/check21/check21foundationdoc.htm (last
visited Jan. 17, 2024).
\27\ Bd. of Governors of the Fed. Rsrv. Sys., Frequently Asked
Questions about Check 21, https://www.federalreserve.gov/paymentsystems/regcc-faq-check21.htm (last visited Jan. 17, 2024).
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3. Government Regulation of Noncash Payments and NSF Fees
The rise in noncash payments also prompted regulatory interventions
necessary to protect consumers. For example, in 2009, the Board of
Governors of the Federal Reserve System (Board) amended Regulation E,
which was subsequently recodified by the CFPB, to require financial
institutions to obtain account holders' affirmative consent (i.e.,
their ``opt-in'') for overdraft coverage of ATM and one-time (non-
recurring) POS debit card transactions before the financial institution
could charge a fee for paying such overdraft transactions (2009 Opt-in
Rule).\28\ Following implementation of that rule, the CFPB found that
consumers who opted in pay significantly more fees than consumers who
do not opt in (i.e., opted-in consumers paid on average $22 per month
in overdraft and NSF fees while non-opted-in consumers paid on average
$3 per month).\29\ The CFPB also found that if a consumer has not opted
in, depository institutions typically will not authorize any ATM or
one-time debit card transactions if there are insufficient funds at the
time the transaction is attempted.\30\ These institutions rarely charge
an NSF fee when declining an ATM transaction or a debit card
authorization inquiry at a merchant POS,\31\ likely for two reasons.
First, the cost of declining such transactions has always been
trivial.\32\
[[Page 6034]]
Second, in its preamble to the 2009 Opt-In Rule, the Board wrote that
such fees ``could raise significant fairness issues'' under the Federal
Trade Commission (FTC) Act because ``the institution bears little, if
any, risk or cost to decline authorization of an ATM or one-time debit
card transaction.'' \33\ The CFPB understands that many financial
institutions interpret that language to suggest that charging NSF fees
in these circumstances would violate the FTC Act's unfairness
prohibition, and have oriented their practices to charge fees generally
only when overdraft coverage is provided on ATM and one-time debit card
transactions and to not charge fees when those transactions are
declined.\34\
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\28\ See Regulation E, 12 CFR 1005.17(b)(2).
\29\ CFPB Closer Look at 4.
\30\ Id. at 2.
\31\ Id. at 1; see also Pew 2012 Survey at 1.
\32\ In 2010, card issuers reported that their median per-
transaction cost of nonsufficient funds handling was one cent. 76 FR
43394, 43398 (July 20, 2011). Since then, the transacted weighted
average cost of nonsufficient funds handling has fallen to $0.005.
FRB 2021 Interchange at 39 tbl. 14A. Nonsufficient funds handling
costs were described in the survey as ``[c]osts of handling of
events in which an account does not have enough funds to settle an
authorized debit card transaction between the time of authorization
of that transaction and the settlement of that transaction.'' Id. at
28 n.25. Based on this description, the cost of handling events in
which the debit card transaction was not authorized is likely even
lower.
\33\ See 74 FR 59033, 59041 (Nov. 17, 2009).
\34\ Through its enforcement work, the CFPB recently found that
one bank had violated the Consumer Financial Protection Act's
prohibition on deceptive practices by, among other things,
misleading deposit account holders into thinking that they would
incur NSF fees on one-time debit card and ATM transactions if they
chose not to exercise their rights to opt into overdraft coverage
under Regulation E. See Atlantic Union Bank, File No. 2023-CFPB-
0017, at 11 ] 26 (Dec. 7, 2023).
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Another impactful change in the noncash market came in 2011 when
the debit card interchange fee standard in Regulation II \35\ first
went into effect, capping the interchange fee that a larger debit card
issuer may charge or receive.\36\ In response to this rule, some
financial institutions initially sought to replace the lost revenue
with debit usage fees, but then quickly abandoned such efforts, largely
due to public displeasure and pressure.\37\
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\35\ This rule implemented the provisions of section 1075 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act, which
amended the Electronic Fund Transfer Act (15 U.S.C. 1693 et seq.) by
adding a new section 920 regarding interchange transaction fees and
rules for payment card transactions.
\36\ Bd. of Governors of the Fed. Rsrv. Sys., 2011 Interchange
Fee Revenue, Covered Issuer Costs, and Covered Issuer and Merchant
Fraud Losses Related to Debit Card Transactions, at 2 (Mar. 5,
2013), https://www.federalreserve.gov/paymentsystems/files/debitfees_costs_2011.pdf. More recently, the Board requested comment
on a proposal to lower the maximum interchange fee that a large
debit card issuer can receive for a debit card transaction and to
establish a regular process for updating the maximum amount every
other year going forward. See 88 FR 78100 (Nov. 14, 2023).
\37\ See FRB Regulation II; Rick Rothacker, Under pressure, Bank
of America drops $5 debit card fee (Nov. 1, 2011), https://www.reuters.com/article/us-bankofamerica-debit/under-pressure-bank-of-america-drops-5-debit-card-fee-idUSTRE7A04E120111101/; Samantha
Cornell, BofA to Impose Debit Card Fee: Will Competitors and
Consumers Stay on Board of Jump Ship?, Fordham J. Corp. & Fin. L.
(Oct. 31, 2011), https://news.law.fordham.edu/jcfl/2011/10/31/bofa-to-impose-debit-card-feed-will-competitors-and-consumers-stay-on-board-of-jump-ship/; Press Release, The Fin. Brand, BofA's $5
Monthly Debit Fee: The Backlash, The Fallout and What It All Means
(Oct. 4, 2011), https://thefinancialbrand.com/news/checking-accounts/bank-of-america-debit-card-fee-fallout-19989/.
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More recently, there has been an effort across the Federal
Government to eliminate fees that are not subject to the competitive
processes to ensure fair pricing. In January 2022, the CFPB launched an
initiative to reduce certain fees charged by banks and other companies
under its jurisdiction.\38\ Soon after, the CFPB issued a Request for
Information (RFI) regarding anti-competitive fees in banking,\39\ took
action to constrain ``pay-to-pay'' fees,\40\ and announced a proposed
rulemaking on credit card late fees.\41\ The CFPB also published
several research reports on overdraft/NSF fees,\42\ an analysis of fees
on college banking products,\43\ and a report on credit cards.\44\ Most
recently, the CFPB issued guidance to stop large banks from charging
illegal fees for basic customer service \45\ and proposed to supervise
larger nonbank companies that offer services like digital wallets and
payment applications.\46\
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\38\ Press Release, Consumer Fin. Prot. Bureau, Consumer
Financial Protection Bureau Launches Initiative to Save Americans
Billions in Junk Fees (Jan. 26, 2022), https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-launches-initiative-to-save-americans-billions-in-junk-fees/.
\39\ 87 FR 5801 (Feb. 2, 2022).
\40\ Press Release, Consumer Fin. Prot. Bureau, CFPB Moves to
Reduce Junk Fees Charged by Debt Collectors (June 29, 2022), https://www.consumerfinance.gov/about-us/newsroom/cfpb-moves-to-reduce-junk-fees-charged-by-debt-collectors/.
\41\ 88 FR 18906 (Mar. 29, 2023).
\42\ See, e.g., CFPB December 2021 Data Point; CFPB October 2023
Data Spotlight; Consumer Fin. Prot. Bureau, Data spotlight:
Overdraft/NSF revenue down nearly 50% versus pre-pandemic levels
(May 24, 2023), https://content.consumerfinance.gov/data-research/research-reports/data-spotlight-overdraft-nsf-revenue-in-q4-2022-down-nearly-50-versus-pre-pandemic-levels/full-report/. See also
Consumer Fin. Prot. Bureau, Trends in overdraft/non-sufficient fund
(NSF) fee revenue and practices, https://www.consumerfinance.gov/data-research/research-reports/trends-in-overdraftnon-sufficient-fund-nsf-fee-revenue-and-practices/ (last updated May 24, 2023)
(CFPB Overdraft/NSF Trends).
\43\ Consumer Fin. Prot. Bureau, College Banking and Credit Card
Agreements (Oct. 2022), https://files.consumerfinance.gov/f/documents/cfpb_college-banking-report_2022.pdf.
\44\ Consumer Fin. Prot. Bureau, The Consumer Credit Card
Market, at 52 (Sept. 2021), https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2021.pdf.
\45\ 88 FR 71279 (Oct. 16, 2023).
\46\ 88 FR 80197 (Nov. 17, 2023).
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The CFPB's recent supervisory and enforcement activity has also
focused, in part, on certain types of NSF fees. In its supervisory
work, the CFPB has cited financial institutions for engaging in several
problematic practices related to deposit account fees, including
assessing certain types of NSF fees. For example, the CFPB previously
found that some institutions engaged in unfair acts or practices by
assessing multiple NSF fees for the same transaction.\47\ The CFPB also
took concurrent action with the Office of the Comptroller of the
Currency (OCC) addressing this practice, among others.\48\ Most
recently, the CFPB discussed its supervisory findings related to the
charging of multiple NSF fees for the same transaction and of returned
deposit item fees.\49\
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\47\ Consumer Fin. Prot. Bureau, Supervisory Highlights: Junk
Fees Special Edition, Issue 29, Winter 2023, at 5-6 (Mar. 2023),
https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights-junk-fees-special-edition_2023-03.pdf.
\48\ Press Release, Consumer Fin. Prot. Bureau, CFPB Takes
Action Against Bank of America for Illegally Charging Junk Fees,
Withholding Credit Card Rewards, and Opening Fake Accounts (July 11,
2023), https://www.consumerfinance.gov/about-us/newsroom/bank-of-america-for-illegally-charging-junk-fees-withholding-credit-card-rewards-opening-fake-accounts/.
\49\ Consumer Fin. Prot. Bureau, Supervisory Highlights Junk
Fees Update Special Edition, Issue 31, Fall 2023, at 4-6, 10, 17
(Oct. 2023), https://files.consumerfinance.gov/f/documents/cfpb_supervisory_highlights_junk_fees-update-special-ed_2023-09.pdf.
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Other Federal agencies have also taken actions to address certain
practices related to NSF fees.\50\ In September 2023, the Board issued
a supervisory statement noting it had cited NSF representment fees as
unfair.\51\ In April 2023, the OCC issued a bulletin that found, among
other things, that the practice of assessing an additional NSF fee on a
representment transaction was, in some instances, unfair and
deceptive.\52\ In August 2022, the FDIC issued supervisory guidance
stating that practices involving the charging of multiple NSF fees
arising
[[Page 6035]]
from the same unpaid transaction results in heightened unfairness and
other risks.\53\ In 2019, the National Credit Union Administration
(NCUA) issued a rule prohibiting Federal credit unions from charging
overdraft or NSF fees related to certain types of loan payments drawn
against a borrower's account.\54\
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\50\ As noted above, Federal agencies have also taken recent
actions to address fees that are not subject to competitive
processes. For example, in October 2023, the FTC issued a proposed
rule that would prohibit businesses across the economy from charging
hidden and misleading fees, require the full price up front, and
provide for monetary penalties and consumer refunds when violated.
Press Release, Fed. Fin. Insts. Examination Council, FTC Proposes
Rule to Ban Junk Fees (Oct. 11, 2023), https://www.ftc.gov/news-events/news/press-releases/2023/10/ftc-proposes-rule-ban-junk-fees.
\51\ See Bd. of Governors of the Fed. Rsrv. Sys., Compliance
Spotlight--Supervisory Observations on Representment Fees, Consumer
Compliance Outlook (Second Issue 2023), https://www.consumercomplianceoutlook.org/2023/second-issue/compliance-spotlight/ (last visited Jan. 17, 2024).
\52\ Off. of the Comptroller of the Currency, OCC Bulletin 2023-
12: Overdraft Protection Programs: Risk Management Practices (Apr.
26, 2023), https://www.occ.treas.gov/news-issuances/bulletins/2023/bulletin-2023-12.html.
\53\ Fed. Deposit Ins. Corp., FIL-40-2022, Supervisory Guidance
on Multiple Re-Presentment NSF Fees (Aug. 2023), https://www.fdic.gov/news/financial-institution-letters/2022/fil22040.html.
\54\ 84 FR 51942 (Oct. 1, 2019).
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The CFPB has observed recent significant reductions in NSF fees, at
least in part due to these actions. The CFPB has found that banks'
overdraft/NSF fee revenue declined significantly compared to pre-
pandemic levels (predominantly due to changes in bank policies),\55\
and nearly two-thirds (65 percent) of banks with over $10 billion in
assets have eliminated NSF fees, representing an estimated 97 percent
of annual NSF fee revenue earned by those institutions.\56\ However, 80
percent of credit unions with over $10 billion in assets still charge
NSF fees.\57\
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\55\ See Consumer Fin. Prot. Bureau, Data Spotlight: Banks'
overdraft/NSF fee revenue declines significantly compared to pre-
pandemic levels (Feb. 7, 2023), https://www.consumerfinance.gov/data-research/research-reports/banks-overdraft-nsf-fee-revenue-declines-significantly-compared-to-pre-pandemic-levels/.
\56\ See CFPB October 2023 Data Spotlight.
\57\ Id.
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II. Stakeholder Outreach and Consultation
The CFPB has engaged in outreach and research related to overdraft
and NSF fees since soon after the CFPB's inception. In 2012, the CFPB
initiated a broad inquiry into overdraft programs for consumer checking
accounts.\58\ This inquiry included issuance of an RFI on the impacts
of overdraft-related fees, including NSF fees, on consumers \59\ and
collection and analysis of overdraft-related data from several large
banks over $10 billion in assets that provided a significant portion of
all U.S. consumer checking accounts.\60\ The CFPB published analyses of
these data in a series of reports from 2013-2017, which examined
institution-level policies and data, as well as account- and
transaction-level data.\61\ These studies assessed, among other things,
overdraft and NSF fee size, incidence, and related account closure;
overdraft-related policies and practices across institutions; the
distribution of overdraft and NSF fee incurrence across accounts; and
the characteristics of account holders across distributions of
overdraft frequency. The CFPB also collected anonymized institution-
level information from several core processors, which provide
operations and accounting systems to financial institutions. This data
collection informed the CFPB's 2021 report assessing overdraft and NSF
policies and practices among a large sample of financial institutions
using core processors.\62\
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\58\ Press Release, Consumer Fin. Prot. Bureau, CFPB Launches
Inquiry into Overdraft Practices (Feb. 22, 2012), https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-launches-inquiry-into-overdraft-practices/.
\59\ 77 FR 12031 (Feb. 28, 2012). The RFI specifically defined
overdraft fees to include, among other things, fees for returned
checks, which the RFI termed NSF fees. See id. at 12033 (``[W]e use
the terms `overdraft' and `overdraft fee' broadly to refer to
practices followed and fees charged when a consumer initiates a
transaction for which there are insufficient funds in the consumer's
checking account. Specifically, the term overdraft fee includes fees
charged for a returned check (e.g., an NSF fee), fees charged when
an overdraft item is paid (i.e., an overdraft coverage fee), and
fees charged if an overdraft is not repaid within a specified period
of time.'').
\60\ See CFPB White Paper at 8; CFPB 2014 Data Point at 6-7.
\61\ See CFPB White Paper; CFPB 2014 Data Point; CFPB 2017 Data
Point.
\62\ Nicole Kelly & [Eacute]va Nagyp[aacute]l, Ph.D., Consumer
Fin. Prot. Bureau, Data Point: Checking Account Overdraft at
Financial Institutions Served by Core Processors (Dec. 2021),
https://files.consumerfinance.gov/f/documents/cfpb_overdraft-core-processors_report_2021-12.pdf.
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In 2021, the CFPB examined financial institutions' reliance on
overdraft/NSF fees from 2015 to 2019, finding that it was
persistent.\63\ Since then, the CFPB has continued tracking overdraft
and NSF trends in the marketplace \64\ and evaluating some banks' key
overdraft-related metrics through the CFPB's supervision work.\65\ From
April 2023 to August 2023, the CFPB reviewed the publicly available
overdraft and NSF practices of financial institutions with assets over
$10 billion.\66\ In addition, the CFPB has recently collected
information from several financial institutions under the CFPB's
supervision regarding their overdraft-related practices.\67\
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\63\ Id.
\64\ See CFPB Overdraft/NSF Trends (reflecting data and analysis
published periodically from Dec. 1, 2021 to present).
\65\ Patrick Gibson & Lisa Rosenthal, Measuring the impact of
financial institution overdraft programs on consumers, Consumer Fin.
Prot. Bureau (June 16, 2022), https://www.consumerfinance.gov/about-us/blog/measuring-the-impact-of-financial-institution-overdraft-programs-on-consumers/.
\66\ See CFPB October 2023 Data Spotlight.
\67\ See generally Overdraft and NSF Report.
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In 2022, CFPB issued an RFI regarding fees that are not subject to
competitive processes that ensure fair pricing, which received over
80,000 comments.\68\ Overdraft-related fees were by far the most common
issue raised in the comments. Many consumers expressed concerns that
the fees were charged for reasons that were unclear, disproportionate
compared to the incidents resulting in the fees, and difficult or
impossible to avoid. Consumers also reported that they were being
charged fees that they believed were excessive, they appeared surprised
by the fees, and they evidenced confusion about whether they were being
charged an overdraft or NSF fee.
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\68\ 87 FR 5801 (Feb. 2, 2022).
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Through market monitoring engagement with credit union and State
bank associations, the CFPB has received feedback pertaining to NSF and
overdraft practices. Some banks and credit unions stated that many
consumers place value on the short-term liquidity provided by overdraft
services, while other institutions claimed that these types of fees are
important for funding other services and programs offered to customers,
such as financial literacy programs. Federal and State depository trade
associations also have critiqued the characterization of their members'
fees as so-called ``junk fees'' and urged the CFPB to study consumer
preferences before taking further action.
The CFPB also gathers information on NSF and other bank fees from
its Consumer Complaint Database. Consumers who submit complaints
sometimes do not appear to understand the difference between NSF and
overdraft fees. The complaints strongly suggest that consumers are
often confused about why they were charged NSF fees when they declined
overdraft protection and some consumers complain that their bank's
transaction posting order led to fees that should not have been
charged. Consumers also expressed frustration at not being able to
track their account balance accurately. For example, consumer
complainants frequently express the belief that deposited funds would
be available, but an extended hold placed on the deposit led to
overdraft or NSF fees.\69\
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\69\ See, e.g., Consumer Fin. Prot. Bureau, Consumer Complaint
3745300, https://www.consumerfinance.gov/data-research/consumer-complaints/search/detail/3745300.
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As discussed in connection with section 1022(b)(2) of the Consumer
Financial Protection Act (CFPA) below, the CFPB's outreach included
consultation with other Federal consumer protection and prudential
regulators. The CFPB has provided other regulators with information
about the proposal, and received feedback that has assisted the CFPB in
preparing this proposal. The CFPB's outreach also included State
Attorneys General, Tribal
[[Page 6036]]
Attorneys General, State financial regulators, and organizations
representing the officials charged with enforcing applicable Federal,
State, and local laws.
III. Legal Authority
Consumer Financial Protection Act Section 1031
Section 1031(b) of the CFPA provides the CFPB with the authority to
``prescribe rules applicable to a covered person or service provider
identifying as unlawful unfair, deceptive, or abusive acts or practices
in connection with any transaction with a consumer for a consumer
financial product or service, or the offering of a consumer financial
product or service.'' \70\ CFPA section 1031(b) further provides that
rules under section 1031 may include requirements for the purpose of
preventing such acts or practices.\71\
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\70\ CFPA section 1031(b), 124 Stat. 2005-2006 (12 U.S.C.
5531(b)).
\71\ Id.
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Under CFPA section 1031(d), the CFPB ``shall have no authority . .
. to declare an act or practice abusive in connection with the
provision of a consumer financial product or service'' unless the act
or practice meets at least one of several enumerated conditions.\72\
CFPA section 1031(d)(2) provides, in pertinent part, that an act or
practice is abusive when it takes unreasonable advantage of a
consumer's lack of understanding of the material risks, costs, or
conditions of the product or service.
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\72\ 12 U.S.C. 5531(d). For a more detailed discussion of the
CFPB's authority under the abusive conduct prohibition, see
Statement of Policy Regarding Prohibition on Abusive Acts or
Practices, 88 FR 21883 (Apr. 12, 2023) (Abusive Policy Statement).
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Congress intended the statutory phrase ``abusive acts or
practices'' to encompass conduct by covered persons that is beyond what
would be prohibited as unfair or deceptive acts or practices.\73\
Unlike unfairness, but similar to deception, a finding of abusive
conduct requires no showing of substantial injury to establish
liability. Rather, it is focused on conduct that Congress presumed to
be harmful or distortionary to the proper functioning of the market. An
act or practice need fall into only one of the enumerated conditions
under CFPA section 1031(d) to be abusive, but an act or practice could
satisfy more than one condition.\74\
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\73\ See, e.g., S. Rept. No. 111-176, at 172 (2010) (``Current
law prohibits unfair or deceptive acts or practices. The addition of
`abusive' will ensure that the [CFPB] is empowered to cover
practices where providers unreasonably take advantage of
consumers.''); Public Law 111-203 pmbl. (listing, in the preamble to
the CFPA, one of the purposes of the CFPA as ``protect[ing]
consumers from abusive financial services practices'').
\74\ The conduct that underlies an abusive conduct determination
may also be found to be unfair or deceptive, depending on the
circumstances.
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Consumer Financial Protection Act Section 1022(b)(1)
Section 1022(b)(1) of the CFPA provides that the CFPB's Director
``may prescribe rules and issue orders and guidance, as may be
necessary or appropriate to enable the CFPB to administer and carry out
the purposes and objectives of the Federal consumer financial laws, and
to prevent evasions thereof.'' \75\ The term ``Federal consumer
financial law'' includes rules prescribed under title X of the CFPA,
which include rules prescribed under section 1031.\76\
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\75\ 12 U.S.C. 5512(b)(1).
\76\ 12 U.S.C. 5481(14).
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Section 1022(b)(2) of the CFPA prescribes certain standards for
rulemaking that the CFPB must follow in exercising its authority under
CFPA section 1022(b)(1).\77\ See part VI for a discussion of the CFPB's
standards for rulemaking under CFPA section 1022(b)(2).
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\77\ 12 U.S.C. 5512(b)(2).
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IV. Discussion of the Proposed Rule
Definitions (Sec. 1042.2)
2(a) Account
Proposed Sec. 1042.2(a) provides that ``account'' has the same
meaning as the term in Regulation E, 12 CFR 1005.2(b). Pursuant to that
definition, an account would include the following: (1) a checking,
savings, or other consumer asset account held by a financial
institution (directly or indirectly), including certain club accounts,
established primarily for personal, family, or household purposes,\78\
and (2) a prepaid account, as defined in 12 CFR 1005.2(b)(3).\79\ An
account would not include, for example: (1) an account held by a
financial institution under a bona fide trust agreement; \80\ (2) an
occasional or incidental credit balance in a credit plan; \81\ (3)
profit-sharing and pension accounts established under a bona fide trust
agreement; \82\ (4) escrow accounts such as for payments of real estate
taxes, insurance premiums, or completion of repairs or improvements;
\83\ or (5) accounts for purchasing U.S. savings bonds.\84\
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\78\ 12 CFR 1005.2(b)(1).
\79\ 12 CFR 1005.2(b)(3).
\80\ 12 CFR 1005.2(b)(2).
\81\ 12 CFR 1005.2(b)(1).
\82\ See Comment 2(b)(2)-2; Comment 2(b)-2.i.
\83\ Comment 2(b)-2.ii.
\84\ Comment 2(b)-2.iii; for a general discussion of the
``account'' definition, see Consumer Fin. Prot. Bureau, Interagency
Consumer Laws and Regulations--Electronic Fund Transfer Act, at 5
(Mar. 2019), https://files.consumerfinance.gov/f/documents/cfpb_supervision-and-examination-manual_efta-exam-procedures-incl-remittances_2019-03.pdf.
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The CFPB preliminarily concludes that referencing this existing
definition of account for purposes of this proposal would help to
foster consistency with Regulation E and would provide a familiar
regulatory definition that has already been successfully implemented by
many covered financial institutions. This definition would also capture
a broad range of consumer account types to maximize the number of
consumers protected from the preliminarily identified abusive practice.
The CFPB seeks comment on its proposed approach to this definition.
2(b) Covered Financial Institution
Proposed Sec. 1042.2(b) provides that ``covered financial
institution'' means a ``financial institution'' as defined in
Regulation E, 12 CFR 1005.2(i). Applying that definition, a ``covered
financial institution'' would mean a bank, savings association, credit
union, or any other person that directly or indirectly holds an account
belonging to a consumer, or that issues an access device and agrees
with a consumer to provide electronic fund transfer services. A covered
financial institution would not include a motor vehicle dealer, as
defined in CFPA section 1029(f)(2), that is predominantly engaged in
the sale and servicing of motor vehicles, the leasing and servicing of
motor vehicles, or both.\85\ Adopting this definition would also
incorporate related definitions and commentary, such as those for
``access device'' \86\ and ``electronic funds transfer.'' \87\
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\85\ 12 CFR 1005.2(i); 12 U.S.C. 5519; Public Law 111-203, 124
Stat. 1376, 2005 (2010).
\86\ 12 CFR 1005.2(a).
\87\ 12 CFR 1005.2(g), 1005.3.
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The CFPB preliminarily concludes that referencing this existing
definition of account for purposes of this proposal would help to
foster consistency with Regulation E and would provide a familiar
regulatory definition that has already been successfully implemented by
many covered financial institutions. This definition would also capture
a broad range of financial institutions to ensure an equal playing
field. The CFPB seeks comment on its proposed approach to this
definition.
2(c) Covered Transaction
Proposed Sec. 1042.2(c) provides that ``covered transaction''
means an attempt by a consumer to withdraw, debit, pay,
[[Page 6037]]
or transfer funds from their account that is declined instantaneously
or near-instantaneously by a covered financial institution due to
insufficient funds. A declination occurs instantaneously or near-
instantaneously when the transaction is processed in real time and
there is no significant perceptible delay to the consumer when
attempting the transaction. While consumers may attempt to withdraw,
debit, pay, or transfer funds from their account in a variety of
different ways, including by check, ACH, person-to-person (P2P)
transaction, or debit card, this proposed definition would only cover
transactions that are instantaneously or near-instantaneously declined
due to insufficient funds. Transactions declined or rejected due to
insufficient funds hours or days after the consumer's attempt would not
be covered by the proposal. Transactions authorized in the first
instance, even if they are later rejected or fail to settle due to
insufficient funds, also would not be covered by the proposal.
Based on this proposed definition, checks and ACH transactions
would not be covered, assuming these payment mechanisms do not evolve
in such a way that they are able to be declined instantaneously or
near-instantaneously. Generally, a check is physically accepted by the
merchant or payee, without payment authorization or guarantee, and is
deposited in its bank and sent through the check clearing process to
the payor's bank.\88\ Checks usually clear within one or two business
days.\89\ Similarly, ACH transactions generally are not processed in
real time--they are typically processed in batches several times a day
when the applicable ACH operator (the Federal Reserve Bank or the
Electronic Payments Network) is open for business.\90\
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\88\ 76 FR 43394, 43400 (July 20, 2011).
\89\ Off. of the Comptroller of the Currency, I deposited a
check. When will my funds be available/released from the hold?,
HelpWithMyBank.gov, https://www.helpwithmybank.gov/help-topics/bank-accounts/funds-availability/funds-availability-check.html (last
visited Jan. 17, 2024).
\90\ Nacha, The ABCs of ACH, https://www.nacha.org/content/abcs-ach (last visited Jan. 17, 2024).
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Based on this proposed definition, one-time debit card transactions
that are not pre-authorized, ATM transactions, and certain P2P
transactions would be covered by the proposal, assuming these payment
mechanisms continue to be declined instantaneously or near-
instantaneously. ATM and one-time debit card transactions that are
subject to the requirements of Regulation E's opt-in requirements \91\
are authorized instantaneously or near-instantaneously, and in the
event of insufficient funds, are declined instantaneously or near-
instantaneously.\92\ Some debit card transactions are not authorized in
real time--for example, decoupled debit card transactions are typically
processed as ACH debits,\93\ and most recurring debit card transactions
are authorized in advance. Some P2P transactions are authorized in real
time and may be declined instantaneously or near-instantaneously,
whereas others are processed as ACH debits.\94\ The applicability of
the proposal to P2P transactions may also depend in part on whether the
P2P provider offers a stored value account for funds or links to a
deposit account, and on the evolution of P2P transaction mechanisms
more generally.\95\
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\91\ See 12 CFR 1005.17(b).
\92\ This instantaneous (or near-instantaneous) authorization or
declination occurs with debit card transactions that are ``single
message'' (where the authorization request and the settlement
request are sent in the same transmission at the same time) as well
as ``dual message'' (where the first transmission requests
authorization and the second transmission requests settlement)--in
both cases, the authorization request is processed in real time.
\93\ 76 FR 43394, 43408 (July 20, 2011).
\94\ When a P2P transaction is processed as an ACH debit, the
funds are often made immediately available to the recipient, but the
sender may not instantly see the funds withdrawn from their linked
account, as the sender's account-holding institution may take
several days to settle the payment. In contrast, when a P2P
transaction is processed as a credit card or debit card transaction,
the funds are often made immediately available to the recipient and
the sender may instantly see the funds withdrawn from their linked
account, as the sender's account-holding institution authorizes and
settles the transaction instantaneously or near-instantaneously.
\95\ While some P2P providers merely facilitate transactions
between linked deposit accounts, others allow users to hold funds
within their P2P provider account. These providers automatically
place funds received into the stored value account, and the consumer
can transfer the funds into a linked deposit account or send the
funds in a future P2P transaction. Attempts to send funds to another
person from a stored value account may be declined instantaneously
or near-instantaneously. In contrast, transfers from a stored value
account to a linked deposit account that does not involve a debit
card are typically ACH transactions taking between one and three
business days, although some providers may offer an instantaneous or
near-instantaneous transfer on those transactions (often for a fee).
See Kate Rooney, PayPal users can now transfer funds instantly to
their bank accounts, CNBC (Mar. 12, 2019), https://www.cnbc.com/2019/03/12/venmo-users-can-now-transfer-funds-instantly-to-their-bank-accounts.html. P2P transactions are continuing to increase in
speed due to technology and payment network infrastructure advances,
including, recently, the launch of the FedNow Service. See U.S.
Dep't of Treas., The Future of Money and Payments, at 30-31 (Sept.
2022), https://home.treasury.gov/system/files/136/Future-of-Money-and-Payments.pdf; Fed Rsrv. Bank Servs., Instant payments could help
financial institutions capture a piece of the P2P pie,
FRBservices.org, https://www.frbservices.org/financial-services/fednow/instant-payments-education/instant-payments-could-help-fi-capture-p2p.html.
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The CFPB solicits comment on the proposed definition of covered
transaction, including whether: (1) the timing component is
sufficiently clear to determine coverage; (2) the proposed definition
appropriately accounts for emerging payment networks and technology
innovations; and (3) the proposed definition captures the scope of
relevant transactions where potential abusive practices are occurring
in the market or are at risk of occurring in the future.
2(d) Insufficient Funds
Proposed Sec. 1042.2(d) provides that ``insufficient funds''
refers to the status of an account that does not have enough money to
cover a withdrawal, debit, payment, or transfer transaction. The CFPB
preliminarily concludes that including this definition would streamline
the rule by avoiding circular definitions. The CFPB seeks comment on
its proposed approach to this definition.
2(e) Nonsufficient Funds Fee or NSF Fee
Proposed Sec. 1042.2(e) provides that ``nonsufficient funds fee or
NSF fee'' means a charge that is assessed by a covered financial
institution for declining an attempt by a consumer to withdraw, debit,
pay, or transfer funds from their account due to insufficient funds.
This proposed definition also would clarify that the name used by the
financial institution for a fee is not determinative of whether it is
considered a ``nonsufficient funds fee.''
Unlike overdraft fees, which can also be charged in the event of
insufficient funds, NSF fees as defined herein are only charged after a
declined transaction. As a result, such fees may sometimes be referred
to as ``declination'' fees or ``bounced check'' fees. The CFPB has also
observed such fees labeled as, for example, ``returned item fees,''
\96\ ``returned payment fees,'' ``uncollected funds fees,''
``overdraft--unpaid fees,'' and ``shortage of funds
[[Page 6038]]
fees.'' This proposed definition broadly includes the types of fees
that, if charged, would in substance constitute an abusive practice,
regardless of how the fees are labeled. The CFPB seeks comment on its
proposed approach to this definition. The CFPB also solicits comments
on its examples of fee labels.
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\96\ ``Returned item'' NSF fees are charged to the consumer's
account when dishonoring or returning checks or other items that are
drawn on the consumer's account due to insufficient funds. These
fees are distinct from ``returned deposited item fees'' that are
imposed when items deposited by the consumer are returned due to
insufficient funds in the check originator's account. See 12 CFR
1030.11(a)(1); Comment 11(a)(1)-2. This proposal does not address
whether returned deposited item fees are an abusive practice. The
CFPB's ``Bulletin 2022-06: Unfair Returned Deposited Item Fee
Assessment Practices'' addressed potential unfairness concerns with
returned deposited item fees. See 87 FR 66940 (Nov. 7, 2022).
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Abusive Conduct/Lack of Understanding (Sec. Sec. 1042.2 and 1042.3)
The CFPB's preliminary findings regarding covered financial
institutions' abusive charging of NSF fees in connection with covered
transactions are discussed below. The CFPB is making these preliminary
findings based on the evidence discussed in the abusive conduct
analysis below and in the section-by-section analysis and Background
discussion above.
Under CFPA section 1031(d)(2)(A), the CFPB may declare an act or
practice to be abusive in connection with the provision of a consumer
financial product or service if the act or practice takes unreasonable
advantage of a lack of understanding on the part of the consumer of the
material risks, costs, or conditions of the product or service.\97\ The
CFPB is preliminarily determining that charging an NSF fee in
connection with a covered transaction would take unreasonable advantage
of consumers' lack understanding of the material risks, costs, or
conditions associated with their deposit accounts, and thus would be
abusive.
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\97\ 12 U.S.C. 5531(d)(2)(A).
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The CFPB understands, based on its market monitoring, that
currently covered financial institutions rarely charge NSF fees on
covered transactions.\98\ The CFPB is proposing this rule primarily as
a preventive measure.\99\ Financial institutions have ongoing
incentives to generate revenue, and NSF fees may become increasingly
appealing as a revenue source in the absence of this proposal. For
example, if the recently released Overdraft Proposed Rule \100\ is
finalized and curbs overdraft fee revenue, institutions might have an
incentive to impose new fees. This proposal, if finalized, would
prevent the imposition of NSF fees in various contexts where they might
foreseeably arise, such as declines of ATM, debit card, and P2P
transactions.\101\ Thus, the CFPB is proposing to preempt imposition of
new fees that would harm consumers in the future.
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\98\ The CFPB and other regulators have taken action in other
ways to address harms from NSF fees that are prevalent in today's
market. Some of those actions are described elsewhere in this
proposal's preamble. Along those lines, the CFPB notes that the
CFPB's proposal addressing overdraft fees (Overdraft Proposed Rule),
which was released recently, would amend Regulation Z such that,
going forward, Sec. 1026.52(b) would apply to open-end covered
overdraft credit that can be accessed by a hybrid debit-credit card.
In doing so, the Overdraft Proposed Rule would prohibit any fee
imposed with respect to most potentially overdrawing transactions
that a card issuer declines to authorize, including certain declined
debit card transactions and declined ACH transactions. Thus, the
Overdraft Proposed Rule, if finalized, would prohibit certain NSF
fees charged in today's market under the CFPB's TILA authority, but
it generally would not prohibit the NSF fees that this proposal, if
finalized, would prohibit.
\99\ See 12 U.S.C. 5511(b) (CFPB's statutory objective under the
CFPA of ``ensuring that . . . consumers are protected from unfair,
deceptive, or abusive acts and practices and from discrimination'').
See also Nasdaq Stock Mkt. LLC v. SEC, 38 F.4th 1126 (D.C. Cir.
2022) (``[A]n agency has the latitude to `adopt prophylactic rules
to prevent potential problems before they arise'--that is, `[a]n
agency need not suffer the flood before building the levee.' '')
(quoting Stilwell v. Off. of Thrift Supervision, 569 F.3d 514, 519
(D.C. Cir. 2009)).
\100\ See Consumer Fin. Prot. Bureau, Overdraft Lending: Very
Large Financial Institutions, Proposed Rule (released Jan. 17,
2024), https://files.consumerfinance.gov/f/documents/cfpb_overdraft-credit-very-large-financial-institutions_proposed-rule_2024-01.pdf.
\101\ As described in the Background discussion above, P2P
transaction platforms are a fast-growing segment of the market, and
this trend is only expected to accelerate over the next few years,
so the CFPB proposes to forestall the imposition of such fees in
that market segment.
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The CFPB considered whether a disclosure remedy to the
preliminarily identified abusive practice would be sufficient, and has
preliminarily determined that although such a remedy might reduce the
incidence of the abusive conduct, it would not eliminate it and would
likely be too costly or not feasible in many or most situations.
Theoretically, a financial institution could present a disclosure when
the transaction is attempted, explaining that the transaction would be
declined and a fee would be charged. However, the CFPB is skeptical
that such a disclosure would be feasible because the financial
institution is often not the party operating the point-of-sale
terminal, ATM machine, or P2P application interface. If it were
feasible, it would likely be costly to present individual disclosures
for each such transaction and implement such disclosures across many
different payment channels and consumer interfaces. And a disclosure of
that nature would not eliminate the incidence of the abusive practice
because there would still be consumers who may not understand even a
well-crafted disclosure.\102\
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\102\ If covered financial institutions began assessing NSF fees
on covered transactions in the future, it is theoretically possible
for consumer understanding of the financial institutions' practices
to improve due to other factors. For example, some consumers who do
not anticipate an initial NSF fee may be less surprised after
incurring multiple NSF fees. However, as with a disclosure, such
improved understanding would only reduce, and not eliminate, the
incidence of the abusive practice. Such a development also would
likely only improve understanding of financial institutions'
practices, not understanding of the consumer's account balance at
the time the covered transaction is initiated (see discussion below
regarding ``risks, costs, or conditions'').
---------------------------------------------------------------------------
The CFPB seeks comment on whether the practices identified in this
proposal are broad enough to address the potential consumer harms and
if the description of the preliminarily identified abusive practice
should be revised in any way, and requests any relevant additional data
that should be considered.
Approaches to Abusive Conduct Prohibition in Prior CFPB Rulemakings
Before describing the reasoning behind the CFPB's preliminary
conclusion that it would be an abusive practice for covered financial
institutions to charge NSF fees on covered transactions, the CFPB first
discusses the approach taken to assess abusive practices in prior
rulemakings. Under CFPA section 1031(d)(2)(A), an act or practice can
be abusive if covered parties take unreasonable advantage of the ``lack
of understanding on the part of consumers of the material costs, risks,
or conditions of the product or service.'' The CFPB's 2017 rulemaking
on Payday, Vehicle Title, and Certain High-Cost Installment Loans (2017
rule) stated that consumers lack understanding in the context of
obtaining certain types of small-dollar loans ``if they fail to
understand either their personal likelihood of being exposed to the
risks of the product or service in question or the severity of the
kinds of costs and harms that may occur.'' \103\ This conclusion was
part of the 2017 rule's larger set of findings that a lender's failure
to determine whether a consumer had the ability to repay a covered loan
was abusive and unfair. In a separate 2020 rulemaking, the CFPB
rescinded certain provisions of the 2017 rule's UDAAP findings as well
as the 2017 rule's mandatory underwriting provisions (2020 rule).\104\
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\103\ 85 FR 44382, 44421 (July 22, 2020) (internal quotations
omitted) (citing 82 FR 54472, 54617 (Nov. 17, 2017)).
\104\ Id. at 44382.
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In explaining the rationales for rescission, the 2020 rule's
preamble included certain statements about the abusive conduct
prohibition. However, these rationales were specific to and
inextricably intertwined with the evidentiary record and financial
products at issue in the 2017 rule. Accordingly, the 2020 rule's
discussion of the abusive conduct prohibition was
[[Page 6039]]
likewise limited and did not address facts and circumstances other than
those at issue in the 2020 rule (which, again, was inextricably linked
to the 2017 rule's evidentiary record and product coverage).\105\ The
2020 rule does not, for example, address factual situations where a
lender exploits an information asymmetry between a lender and a
consumer about the level of risk posed to the consumer by the product
or service.\106\
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\105\ For example, both the ``Legal'' and ``Reconsidering the
Evidence'' subsections of the 2020 rule's lack-of-understanding
analysis rely heavily on the conclusion that a study of payday
borrowers' ability to predict future time in debt by Professor
Ronald Mann was insufficient to underpin the 2017 rule's lack-of-
understanding findings. See id. at 44422 (describing how
``[a]lthough the [2017 rule] concluded that a significant population
of consumers do not understand the material risks and costs of
covered loans, the [2017 rule] extrapolated or inferred this
conclusion from the [CFPB]'s interpretation of limited data from the
Mann study . . . [t]he limited data from the Mann study does not
address whether consumers lack understanding of the material costs,
risks, or conditions of covered loans''), and id. at 44423 (stating,
in reiterating the language from the proposed rule preceding the
2020 rule (2019 proposal), that ``the Mann study was not
sufficiently robust and reliable in light of'' the 2017 rule's
anticipated impacts on the market and how the Mann study was the
``linchpin'' of the 2017 rule's lack-of-understanding finding).
\106\ As the Abusive Policy Statement described, certain ``gaps
in understanding'' between a consumer and an entity can ``create
circumstances where transactions are exploitative.'' See Abusive
Policy Statement at 21886-87.
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Thus, as a general matter, the preamble in the 2020 rule does not
constrain the CFPB's authority to enforce, supervise, or regulate under
the full scope of the CFPA's abusive conduct prohibition in other rules
or in individual supervisory or enforcement matters. As the 2020 rule's
preamble itself explained, the 2020 rule ``addresses the legal and
evidentiary bases for particular rule provisions identified in [the
2020] rule. It does not prevent the [CFPB] from exercising tool
choices, such as appropriate exercise of supervision and enforcement
tools, consistent with the [CFPA] and other applicable laws and
regulations.'' \107\ The 2020 rule also explained that it ``does not
prevent the [CFPB] from exercising its judgment in light of factual,
legal, and policy factors in particular circumstances as to whether an
act or practice meets the standards for abusiveness under section 1031
of the [CFPA].'' \108\
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\107\ 85 FR 44382, 44415 n.286 (July 22, 2020).
\108\ Id.
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Nevertheless, out of an abundance of caution and to correct any
possible misimpressions that the 2020 rule's preamble set forth
interpretive limits on the CFPB's authority under the abusive conduct
prohibition that the agency must follow in other contexts, the CFPB
hereby proposes to clarify the interpretation of the abusive conduct
prohibition in the context of the 2020 rule, consistent with the
analysis below. The CFPB also requests comment on whether there are
other aspects of the 2020 rule's discussion of the abusive and unfair
conduct prohibitions that warrant clarification.
Conflation of lack-of-understanding and reasonable-avoidability
standards. The 2020 rule stated that the 2017 rule's lack-of-
understanding standard was ``problematic'' and ``too broad,'' \109\ and
instead ``should be treated as similar'' to the reasonable-avoidability
element of unfairness.\110\ The 2020 rule stated that, for purposes of
unfairness, consumers could reasonably avoid injury if they ``have an
understanding . . . sufficient for them to anticipate [the] harms and
understand the necessity of taking reasonable steps to prevent
resulting injury.'' \111\ It used a nearly identical approach to lack
of understanding, stating that consumers have a sufficient
understanding under section 1031(d)(2)(A) if their understanding is
``sufficient . . . to anticipate [the] harm and understand the
necessity of taking reasonable steps to prevent resulting injury.''
\112\
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\109\ Id.
\110\ 85 FR 44382, 44422 (July 22, 2020).
\111\ Id. at 44394.
\112\ Id. at 44422.
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These preamble statements reflect an overly narrow application of
the statutory text for lack of understanding. With respect to the
abusive conduct prohibition generally, it is worth noting that, unlike
the CFPA's unfairness provision, the statutory text for the abusive
conduct prohibition does not require any inquiry into reasonable
avoidability.\113\ Although the CFPB preliminarily finds that
consumers' lack of understanding that they would be charged an NSF fee
for covered transactions is generally reasonable, as discussed below,
the statute does not require that the lack of understanding was
reasonable to demonstrate abusive conduct.\114\ The 2020 rule also did
not specify why, in spite of the differences between the standards, it
was ``appropriate'' to treat reasonable avoidability and lack of
understanding as ``similar but distinct.'' \115\
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\113\ Compare 12 U.S.C. 5531(c)(1)(A), with 12 U.S.C.
5531(d)(2)(A).
\114\ Section 1031(d)(2)(A) refers to ``lack of understanding''
without a qualifier, whereas other UDAAP authority provisions in
section 1031 expressly include a reasonableness qualifier. Compare
12 U.S.C. 5531(d)(2)(A), with 12 U.S.C. 5531(d)(2)(C) (making
reference to ``reasonable'' reliance''), and 12 U.S.C. 5531(c)(1)(A)
(for purposes of the unfairness test, substantial injury must not be
``reasonably'' avoidable). See also DHS v. MacLean, 574 U.S. 383,
392 (2015) (describing how ``Congress generally acts intentionally
when it uses particular language in one section of a statute but
omits it in another'' and the ``interpretive canon that Congress
acts intentionally when it omits language included elsewhere applies
with particular force'' where the phrases being compared are in
close proximity).
\115\ 85 FR 44382, 44422-23 (July 22, 2020). The 2020 rule
merely repeated the 2019 proposal's language that ``unlike the
elements of unfairness . . . the elements of [the abusive conduct
prohibition] do not have a long history or governing precedents.
Rather, the CFPA marked the first time that Congress defined
`abusive acts or practices' as generally unlawful in the consumer
financial services sphere.'' Id. at 44421-22. The 2020 rule then
stated that, ``[f]or the same reasons that . . . there was an
insufficient basis to support the 2017 [rule's] finding that
substantial injury from the identified practice was not reasonably
avoidable . . . there is an insufficient basis to conclude that
consumers lack understanding of the material risks, costs or
conditions.'' Id. at 44422.
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Conflating the two standards in this manner contravenes the context
and purpose of the abusive conduct prohibition and the statutory text.
Congress passed the prohibition after the 2008 mortgage crisis,
recognizing that the unfairness and deception prohibitions were
insufficient to prevent predatory mortgage lending.\116\ The abusive
conduct prohibition was explicitly added as a new standard of fair
dealing, and clearly was not intended to simply mirror unfairness.\117\
Moreover, although a consumer's lack of understanding might, depending
on the facts, contribute to a consumer being unable to reasonably avoid
substantial injury, nothing in CFPA section 1031(d)(2)(A)'s text
supports interpreting the provision to track the reasonable-
avoidability standard. Rather, under the statute the inquiry is whether
the consumers at issue lack understanding of the risks, costs, or
conditions of a product or service and
[[Page 6040]]
whether the company took unreasonable advantage of that lack of
understanding--not whether, as noted above, the lack of understanding
was reasonable.\118\ Lastly, the 2020 rule itself in various passages
acknowledged these textual differences and recognized how they lead to
different contours of authority, which undermines the 2020 rule's
attempt to tether the two standards.\119\ Accordingly, the CFPB
proposes to clarify that lack of understanding under CFPA section
1031(d)(2)(A) is not synonymous with reasonable avoidability under the
unfairness standard.
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\116\ See generally Abusive Policy Statement (discussing
background and legislative history regarding CFPB's authority to
address abusive conduct); see also 86 FR 14808, 14809 (Mar. 19,
2021) (in rescinding an earlier policy statement issued by the CFPB
in 2020 on the abusive conduct prohibition, CFPB reasoned, in part,
that ``[d]eclining to apply the full scope of the statutory standard
pursuant to the policy has a negative effect on the [CFPB's] ability
to achieve its statutory objective of protecting consumers from
abusive practices'').
\117\ As the Abusive Policy Statement noted, in 2007, then-FDIC
Chairwoman Sheila Bair explained in congressional testimony that
unfairness ``can be a restrictive legal standard'' and proposed that
Congress consider ``adding the term `abusive,' '' which she noted
existed in the Home Ownership and Equity Protection Act, and which
``is a more flexible standard to address some of the practices that
make us all uncomfortable.'' Improving Federal Consumer Protection
in Financial Services: Hearing Before the H. Comm. on Fin. Servs.,
110th Cong. 40 (2007) (statement of Hon. Sheila C. Bair, Chairman of
the Federal Deposit Insurance Corporation), https://www.govinfo.gov/content/pkg/CHRG-110hhrg37556/html/CHRG-110hhrg37556.htm.
\118\ The Abusive Policy Statement noted that although
establishing that a reasonable consumer would lack understanding of
the material risks, costs, or conditions of a product or service is
not a prerequisite to establishing liability under CFPA section
1031(d)(2)(A), government enforcers or supervisory agencies may rely
on the fact that a reasonable consumer would lack such understanding
to establish that consumers did not have such understanding. See
Abusive Policy Statement at 21887 n.55.
\119\ For example, as noted above the 2020 rule acknowledged
that the reasonable-avoidability and lack-of-understanding standards
were ``similar but distinct.'' 85 FR 44382, 44423 (July 22, 2020).
It also acknowledged that the reasonable-avoidability standard ``has
a `means to avoid' requirement that is absent from the abusiveness
standard,'' and ``abusiveness could prohibit some conduct that
unfairness would permit.'' Id. And it stated that ``[t]he [CFPB]
believes that Congress intended for the statutory phrase `abusive
acts or practices' to encompass conduct by covered persons that is
beyond what would be prohibited as unfair or deceptive . . .
although such conduct could overlap and thus satisfy the elements
for more than one of the standards.'' Id. at 44416.
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Magnitude and likelihood of risk of harm. The 2020 rule stated that
consumers have ``sufficient understanding'' of the material costs,
risks, or conditions of small-dollar loans if they understand ``the
magnitude and likelihood of risk of harm associated with the [product
or service], as well as the necessity of taking reasonable steps to
prevent resulting injury.'' \120\ ``Magnitude and likelihood of risk of
harm'' is a reasonable articulation of the standard for understanding
certain ``risks'' that implicate prediction of future outcomes,
especially in relation to loan underwriting. However, that is not the
full scope of the potential risks under CFPA section 1031(d)(2)(A). As
the CFPB's Statement of Policy Regarding Prohibition on Abusive Acts or
Practices (Abusive Policy Statement) noted, the risks of which a
consumer lacks understanding ``encompass a wide range of potential
consumer harms.'' \121\
---------------------------------------------------------------------------
\120\ Id. at 44422. The 2020 rule went on to explain that
``sufficient understanding'' as applied in the context of the 2017
rule meant that consumers need only ``understand that a significant
portion of payday borrowers experience difficulty repaying and that
if such borrowers do not make other reasonable arrangements they may
either end up in extended loan sequences, default, or struggle to
pay other bills after repaying their payday loan.'' Id. at 44395.
The 2020 rule elaborated that, ``if consumers understand that a
significant portion of payday borrowers experience adverse outcomes,
they grasp the likelihood of risk,'' and that if consumers
``understand the potential outcomes arising from difficulty
repaying, they appreciate the magnitude of those risks.'' Id.
\121\ See Abusive Policy Statement at 21887.
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The CFPB proposes to clarify that the 2020 rule's focus on
``magnitude'' and ``likelihood'' of risk of harm was an application of
what it means under the statute to understand ``risks,'' not
necessarily ``costs'' or ``conditions.'' The statutory references to
``costs'' and ``conditions'' are textually disjunctive and can be
conceptually distinct from ``risks'' and from each other. Where
consumers lack understanding of the relevant costs or conditions, the
notion of ``likelihood and magnitude of harm'' may have no bearing on
the lack-of-understanding analysis. For example, it is enough to show
that a company takes unreasonable advantage of the fact that consumers
do not know a fee (``cost'') will be charged in a particular
circumstance, even if consumers have some understanding of the ``risk''
that a fee might sometimes be charged. See below for a discussion of
what risks, costs, and conditions mean in the particular context of
this proposal.
Specific vs. general understanding. The 2020 rule took issue with
the conclusion in the 2017 rule that consumers in the small-dollar
lending market lack understanding or cannot reasonably avoid harm under
the unfairness standard if they do not have a ``specific understanding
of their personal risks such that they can accurately predict how long
they will be in debt after taking out'' a covered loan.\122\ The 2020
rule stated, rather, that ``consumers need not have a specific
understanding of their individualized likelihood and magnitude of harm
such that they could accurately predict how long they would be in debt
after taking out'' a payday loan and that the appropriate analysis was
whether consumers ``have an understanding of the likelihood and
magnitude of risks of harm associated with payday loans sufficient for
them to anticipate those harms.'' \123\ According to the 2020 rule,
this means that ``consumers need only understand that a significant
portion of payday borrowers experience difficulty repaying,'' which the
2020 rule described as a ``generalized'' or ``general''
understanding.\124\ The 2020 rule applied this distinction between
``specific'' and ``general'' consumer understanding both to the lack-
of-understanding element of the abusive conduct prohibition, and to the
reasonable-avoidability element of unfairness. Because the 2020 rule
linked the unfair and abusive conduct prohibitions, the following
discussion applies to the interpretation of both prohibitions.
---------------------------------------------------------------------------
\122\ 85 FR 44382, 44422 (July 22, 2020). See also id. at 44390
(in context of the reasonable-avoidability analysis, which the 2020
rule relied on for the lack-of-understanding analysis, describing
the 2017 rule as requiring that consumers have a ``specific
understanding of their individualized risk, as determined by their
ability to accurately predict how long they would be in debt after
taking out a covered short-term or longer-term balloon-payment
loan'').
\123\ 85 FR 44382, 44390-91 (July 22, 2020).
\124\ Id. at 44391.
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The CFPB preliminarily declines to characterize consumers' lack of
understanding in this proposal as either ``specific'' or ``general''
because that binary framework is unhelpful for determining whether
consumers understand the material risks, costs, or conditions of a
consumer financial product or service, which is the statutory
requirement. A consumer's lack of understanding can be based on one or
the other, or a mixture of both, and each can inform one another.
Indeed, a person's understanding of their personal risk may be
intertwined with their understanding of the general risk to all
consumers--if one knows that many are harmed, they are more likely to
understand that they are likely to be harmed.
Furthermore, to the extent that the 2020 rule could be misconstrued
to suggest that analysis of the abusive conduct prohibition requires an
inquiry into a consumer's so-called general understanding of risk, the
CFPB is clarifying that is a misimpression for the reasons described
below. Consumers' understanding of risk, and specifically, their
anticipation of harm can be informed by a variety of factors, including
personal circumstances. As noted above, those factors sometimes include
general perception of risk in the market: if one knows that many are
harmed or that the magnitude of harm is high, they are more likely to
understand that they are likely to be harmed. But, in many
circumstances, consumers would not have an accurate general
understanding of risk in the market because, for example, either (1)
they cannot observe harm to other consumers, or (2) even if they could,
they would have no way of knowing whether those consumers are similarly
situated to them. For example, in the deposit market, consumers cannot
observe the frequency with which similarly situated consumers incur NSF
fees. A consumer's understanding of the
[[Page 6041]]
experience of their peers or general risk in the market may sometimes
not accurately inform their understanding of the likelihood of
incurring NSF fees generally or in connection with a particular
transaction.\125\ A consumer's lack of awareness of general risk in the
market also may not mean that the consumer necessarily lacks
understanding of the risk of using a product or service.
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\125\ In theory, financial institutions could provide these
types of disclosures at deposit account opening or before consumers
initiate a transaction. However, account opening disclosures of this
sort would likely have limited salience because at that moment in
time, consumers are not focused on the possibility that they will
incur a funds insufficiency in the future and on the consequences of
doing so. See Am. Fin. Servs. Ass'n v. FTC, 767 F.2d 957, 978 (D.C.
Cir. 1985) (AFSA). Moreover, as discussed above, providing a
disclosure prior to the transaction might reduce the incidence of
abusive conduct but would not eliminate it, and would likely be too
costly or infeasible in most instances.
---------------------------------------------------------------------------
A consumer's general understanding of risk may not always be the
sole relevant inquiry for purposes of ascertaining consumer
understanding of risk of the likelihood or magnitude of harm. As stated
earlier, a consumer's lack of understanding can be based on specific
understanding or general understanding, or a mixture of both, and each
can inform one another. Congress enacted the abusive conduct
prohibition largely in response to the circumstances leading up to the
2008 financial crisis, where consumers may have generally understood
the possibility of loan default and its consequences but lacked
understanding of the specific, individualized risks set-up-to-fail
mortgages posed to themselves.
Regarding unfairness, long-existing precedent in part frames the
reasonable-avoidability analysis through the lens of a consumer's
understanding of their own circumstances. For example, the D.C. Circuit
described the reasonable-avoidability analysis in the FTC's Credit
Practices Rule, in part, in the following manner: ``Since consumers do
not expect to default, the invocation of particular credit remedies
seems remote and speculative at the time of contracting and thus is not
a material element in the consumer's decision. Instead, consumers quite
reasonably focus their attention on the more immediate terms such as
interest rates and payments.'' \126\ This discussion of the conditions
relevant to how consumers comprehend contract terms relates to
consumers' understanding of their own risk of default. Similarly, in
addressing an FTC action against a website operator that allowed users
to create unverified checks drawn from unauthorized accounts, the Ninth
Circuit discussed individual consumer circumstances that were relevant
to the reasonable-avoidability analysis, including how it is ``likely
that some consumers never noticed the unauthorized withdrawals.'' \127\
While this precedent relates to the prohibition on unfair rather than
abusive conduct, the long history and precedent regarding the standards
of fair dealing in part inform how the CFPB interprets the abusive
conduct prohibition.
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\126\ AFSA, 767 F.2d at 978.
\127\ FTC v. Neovi, Inc., 604 F.3d 1150, 1158 (9th Cir. 2010)
(internal citation omitted).
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Material Risks, Costs or Conditions of the Product or Service
As stated above and explained more fully below, the CFPB has
preliminarily determined that consumers charged NSF fees on covered
transactions would lack understanding of the material risks, costs, or
conditions of their account at the time they are initiating covered
transactions. As explained in the preamble discussing proposed Sec.
1042.2(c), a covered transaction means a request by a consumer to
withdraw, debit, pay, or transfer funds from their account that is
declined instantaneously or near-instantaneously by a covered financial
institution due to insufficient funds. The CFPB considers the account
that is associated with a covered transaction to be a ``product or
service,'' under CFPA section 1031(d)(2)(A).\128\
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\128\ See 12 U.S.C. 5531(d)(2)(A).
---------------------------------------------------------------------------
In view of CFPA section 1031(d)(2)(A)'s disjunctive formulation of
``material risks, costs, or conditions,'' an act or practice is abusive
if it takes unreasonable advantage of the consumer's lack of
understanding of at least one material risk, cost, or condition. In the
circumstances addressed by this proposal, a lack of understanding of
all three elements would be present for at least some consumers, and
consumers would generally lack understanding of at least one element,
as explained in the next subsection.\129\
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\129\ As the Abusive Policy Statement explains, ``The inquiry
under section 1031(d)(2)(A) is whether some consumers in question
have a lack of understanding, not all consumers or even most
consumers.'' Abusive Policy Statement at 21888. Because the CFPB
does not believe that any consumer would knowingly incur a fee for
no service, the lack of understanding would be general in regard to
NSF fees charged for covered transactions, though the specific
elements that are not understood--risks, costs, or conditions--may
differ from consumer to consumer.
---------------------------------------------------------------------------
As used in section 1031(d)(2)(A), ``risks'' is an expansive
term.\130\ At the time a consumer considers initiating a request to
withdraw, debit, pay, or transfer funds from their account, the
relevant risks to the consumer would include the possibility the
transaction will be declined and result in an NSF fee. Furthermore,
once a consumer actually initiates a covered transaction, it is certain
that the transaction will be instantaneously declined and they will be
charged a fee; therefore, the likelihood of harm at that time is 100
percent. This is because no chance occurrence, consumer choice, or
other intervening event can happen between the transaction's initiation
and the instantaneous decline that could change the harmful outcome
(i.e., the assessment of the fee). In other words, for covered
transactions that are initiated, the risk of harm is a certainty.
Therefore, a consumer who initiates such a transaction believing the
transaction nevertheless might go through would lack understanding of
the likelihood of harm. Given the tangible and negative consequences of
both a transaction decline and the imposition of a fee, the CFPB
interprets this risk, if and when present, to be material.
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\130\ As noted in the Abusive Policy Statement, risks can
encompass a wide range of potential consumer harms. See id. at
21887. Merriam-Webster Dictionary Online defines ``risk'' as the
``possibility of loss or injury.'' See Risk, Merriam-Webster.com
Dictionary, https://www.merriam-webster.com/dictionary/risk (last
visited Jan. 17, 2024).
---------------------------------------------------------------------------
The ``costs'' associated with a covered transaction that would
result in an NSF fee would primarily be the amount of the fee
itself.\131\ NSF fees that are charged in today's market are usually
approximately $32 and typically are assessed on a per-transaction
basis.\132\ Even if NSF fees assessed on covered transactions were
significantly lower than $32, they would still be material because they
would be non-trivial to the consumer and would be paid without any
service being received. The personal magnitude of this cost might be
exacerbated by the fact that it could occur when the consumer's bank
[[Page 6042]]
account would be empty or close to empty.
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\131\ As the CFPB explained in the Abusive Policy Statement,
``costs'' can include any monetary charge to a person as well as
non-monetary costs such as lost time, loss of use, or reputational
harm. See Abusive Policy Statement at 21886; see also, e.g., Fort
Knox Nat'l Co., File No. 2015-CFPB-0008, at 8 (Apr. 20, 2015)
(entities took unreasonable advantage of consumers' lack of
understanding by charging fees that they ``did not adequately
disclose''); Consumer Fin. Prot. Bureau, Supervisory Highlights,
Issue 28, Fall 2022, at 22 (Nov. 2022), https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-28_2022-11.pdf (CFPB Fall 2022 Highlights)
(mortgage servicers took unreasonable advantage of consumers' lack
of understanding when they profited from insufficiently disclosed
phone-payment fees that were materially greater than the cost of
other payment options).
\132\ As discussed in part I (Background discussion), the CFPB
recently found that the median fee among institutions above $10
billion in assets that still charge the fee is $32.
---------------------------------------------------------------------------
The amount of funds in the account and whether they are sufficient
for a given transaction at the time the consumer is initiating that
transaction are relevant ``conditions'' of the consumer's deposit
account.\133\ Given how the conditions of the account would relate to
the financial institution's imposition of NSF fees (whether, when, and
how much), the CFPB would interpret these conditions as material.
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\133\ The Abusive Policy Statement explains that ``[g]aps in
understanding with respect to `conditions' include any circumstance,
context, or attribute of a product or service, whether express or
implicit. For example, `conditions' could include the length of time
it would take a person to realize the benefits of a financial
product or service, the relationship between the entity and the
consumer's creditors, the fact a debt is not legally enforceable, or
the processes that determine when fees will be assessed.'' See
Abusive Policy Statement at 21887.
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The following subsection explains more fully the CFPB's preliminary
finding that a consumer would lack understanding of the material risks,
costs, or conditions of the account if a covered transaction were to
take place.
Lack of Understanding on the Part of the Consumer
As the CFPB's Abusive Policy Statement explains, the prohibition in
CFPA section 1031(d)(2)(A) turns on a consumer's lack of understanding,
regardless of how that lack of understanding arose.\134\ Although
consumers' lack of understanding that they will be charged an NSF fee
in the circumstances addressed in this proposal is generally
reasonable, the statutory text of the prohibition does not require a
finding that the consumer's lack of understanding was reasonable to
demonstrate abusive conduct.\135\ In addition, as the Abusive Policy
Statement notes, the statutory text does not require that the covered
financial institution caused the person's lack of understanding through
untruthful statements or other actions or omissions.\136\
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\134\ See id.
\135\ As noted above in the discussion of the CFPB's approach to
the abusive conduct prohibition in prior rulemakings, CFPA section
1031(d)(2)(A) refers to ``lack of understanding'' without a
qualifier, whereas other UDAAP authority provisions in CFPA section
1031 expressly include a reasonableness qualifier.
\136\ See Abusive Policy Statement at 21887 (``While acts or
omissions by an entity can be relevant in determining whether people
lack understanding, the prohibition in section 1031(d)(2)(A) does
not require that the entity caused the person's lack of
understanding through untruthful statements or other actions or
omissions. Under the text of section 1031(d)(2)(A), the consumer's
lack of understanding, regardless of how it arose, is
sufficient.'').
---------------------------------------------------------------------------
The CFPB preliminarily finds that a consumer who would be charged
an NSF fee on a covered transaction would lack understanding of their
account's material risks, costs or conditions at the time they
initiated that transaction. Drawing on its experience and expertise
regarding consumer behavior, the CFPB believes that if a transaction
entails material risks or costs and consumers derive minimal or no
benefit from the transaction, it is generally reasonable to conclude
that consumers who nonetheless went ahead with the transaction did not
understand the material risks, costs or the conditions giving rise to
those risks or costs.\137\ In this instance, such a transaction would
provide no benefit to consumers, but consumers would incur a material
cost or risk. Consequently, consumers would be paying something or
taking a risk but receiving nothing in return. Therefore, the CFPB
preliminarily concludes that consumers initiating covered transactions
that incur NSF fees would generally lack awareness of their available
account balance or other information about the material risks, costs,
or conditions regarding their account. Indeed, if a consumer knew at
the time of initiating a specific payment, debit, transfer, or
withdrawal that they did not have enough funds to cover the transaction
and an NSF fee would be charged, that consumer would likely either use
a different payment method that would not result in such a fee or would
postpone or forgo the transaction.
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\137\ See id. at 21888.
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As explained further below, the CFPB also preliminarily concludes
that there are a variety of specific reasons why consumers generally,
or certain consumers individually, would lack understanding of the
material risks, costs, or conditions when initiating a covered
transaction. First, consumers' usage of deposit accounts has changed
due to the advent and increased importance of debit cards during the
past several decades.\138\ The rise in debit card usage for small
transactions resulted in increased transaction activity on the account
for consumers' individual purchases.\139\ These more frequent
transactions might make it harder for some consumers to track their
available funds. Although most consumers can now see a version of their
account balance electronically through a mobile application, older
consumers are far less likely to access their accounts through mobile
apps,\140\ and approximately 15 percent of Americans do not own a
smartphone.\141\ Even if consumers can access their account balance,
the number displayed
[[Page 6043]]
may not reflect what is available when the transaction takes
place.\142\ Furthermore, some consumers with smartphones might forgo
checking their balance before initiating a covered transaction for a
variety of reasons, including the rapidity of these transactions (see
below) and discomfort with pulling up account information in a public
location or using public Wi-Fi. And while ATM users can check their
balance on the screen, some consumers may want to avoid incurring a fee
to do so (particularly at an out-of-network ATM).
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\138\ From cashiers physically imprinting card details on paper
to internet-connected swipe terminals, the way consumers pay for
goods and services has evolved significantly over the last half-
century, and in turn, computing and telecommunication technologies
have enabled the use of modern payment cards by consumers. In 1970,
16 percent of American families had a credit card; by 1983, that
figure increased to 43 percent. By 2020, 72 percent of Americans had
a credit card and 83 percent of Americans had a debit card. See
Consumer Fin. Prot. Bureau, Issue Spotlight: Big Tech's Role in
Contactless Payments: Analysis of Mobile Device Operating Systems
and Tap-to-Pay Practices (Sept. 7, 2023), https://www.consumerfinance.gov/data-research/research-reports/big-techs-role-in-contactless-payments-analysis-of-mobile-device-operating-systems-and-tap-to-pay-practices/full-report/. The 2020 Survey of
Consumer Payment Choice states: ``In a typical month in 2020,
consumers on average made 23 debit card payments (33 percent of all
payments), 18 credit or charge payments (27 percent), and 14 cash
payments (21 percent). Consumers made three check payments per month
on average in 2020, and eight [non-debit card] payments directly
from a bank account . . . Checks were 4 percent of all payments, and
electronic payments were 11 percent.'' Kevin Foster et al., Fed.
Rsrv. Bank of Atlanta, The 2020 Survey of Consumer Payment Choice:
Summary Results, at 15 (2021), https://www.atlantafed.org/-/media/documents/banking/consumer-payments/survey-of-consumer-payment-choice/2020/2020-survey-of-consumer-payment-choice.pdf (internal
citation omitted). While all types of card payments have increased,
it is the increased usage of debit cards that primarily affects
consumer deposit accounts because credit or charge card payments do
not directly or instantaneously debit these accounts.
\139\ See id. See also Bd. of Governors of the Fed. Rsrv. Sys.,
The 2013 Federal Reserve Payments Study Recent and Long-Term Trends
in the United States: 2000-2012 (2012 Summary Report and Initial
Data Release), at 9 ex. 2 (July 2014), https://www.frbservices.org/assets/news/research/2013-fed-res-paymt-study-summary-rpt.pdf
(showing the average debit card transaction ranged from $37 to $40
from 2003-2012, while the average check transaction ranged from
$1,103 to $1,410), https://www.frbservices.org/binaries/content/assets/crsocms/news/research/2013-fed-res-paymt-study-summary-rpt.pdf; Bd. of Governors of the Fed. Rsrv. Sys., Trends in the Use
of Payment Instruments in the United States, Fed. Rsrv. Bull., at
183-4, 187 tbl. 3, 196-97 (Spring 2005), https://www.federalreserve.gov/pubs/bulletin/2005/spring05_payment.pdf
(discussing and demonstrating the growth in debit card payments,
which accounted for more than half the growth in electronic payments
over the review period); Maria LaMagna, Debit Cards Gaining on Cash
for Smallest Purchases, MarketWatch (Mar. 23, 2016), https://www.marketwatch.com/story/more-people-are-using-debit-cards-to-buy-a-pack-of-gum-2016-03-23 (describing industry analyst's take that,
``[A]s more locations accept credit and debit cards, more consumers
are viewing plastic as a more convenient option than refilling their
wallets with cash from an ATM''). See generally Bd. of Governors of
the Fed. Rsrv. Sys., Federal Reserve Payments Study (FRPS): Previous
Studies, https://www.federalreserve.gov/paymentsystems/frps_previous.htm (last updated Apr. 21, 2023) (The Federal Reserve
Payments Studies from 2004 to 2013 (Exhibit 1 in each study) show
that from 2000 to 2012, annual debit card transactions increased
from 8.3 billion to 47 billion, while annual check transactions
decreased from 41.9 billion to billion to 18.3 billion.).
\140\ FDIC 2021 Survey at 26.
\141\ Pew Rsrch. Ctr., Mobile Fact Sheet (Apr. 7, 2021), https://www.pewresearch.org/internet/fact-sheet/mobile/.
\142\ See, e.g., Lauren Debter, Why You Can't Trust Your Online
Bank Account Balance in the Smartphone Era, Forbes (July 13, 2016),
https://www.forbes.com/sites/laurengensler/2016/07/13/online-bank-account-balance-overdraft-fees (Debter 2016).
---------------------------------------------------------------------------
Second, certain account features and settlement practices that are
unknown, complex, or counterintuitive make it challenging for consumers
to understand whether they have the funds available for a transaction
at a given time, or how that transaction would be handled. These
complications make it difficult for consumers to understand the
material risks, costs, or conditions when initiating a covered
transaction. One example would be when a consumer has opted into
overdraft coverage on ATM or one-time debit card transactions and
expects the financial institution to pay a transaction into overdraft,
but the institution instead denies overdraft coverage and charges an
NSF fee, possibly because the consumer unknowingly exceeded the
overdraft coverage limit that the financial institution had set for
that particular customer.\143\ An analysis of supervisory data on NSF
practices at eight very large financial institutions suggests that 84.3
percent of NSF fees were assessed on accounts with overdraft coverage
in 2022.\144\ Other examples that could cause a lack of understanding
of the material risks, costs or conditions of a consumer's account
would be if the consumer were unaware of whether scheduled
transactions, checks, or other non-instantaneous withdrawals had
settled, or whether or not recent deposits had become fully
available.\145\
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\143\ Financial institutions typically assign each account an
overdraft coverage limit, which represents the maximum amount of
overdraft coverage the financial institution is willing to extend on
the account. Once an account reaches its overdraft coverage limit,
the financial institution will no longer pay items into overdraft,
but will return those items unpaid. Financial institutions often do
not communicate overdraft coverage limits to consumers. See CFPB
White Paper at 48-52.
\144\ Overdraft and NSF Report at 16, 17 tbl. 6.
\145\ See, e.g., Debter 2016.
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Third, some consumers would not understand that it is even possible
to overdraw their accounts with ATM or debit cards, or with a P2P
transaction--in contrast to other payment methods such as checks and
ACH transactions. As the Board explained in the 2009 Opt-in Rule,
``many consumers may not be aware that they are able to overdraft at an
ATM or [point of sale]'' and ``[d]ebit cards have been promoted as
budgeting tools, and a means for consumers to pay for goods and
services without incurring additional debt.'' \146\ Even following
implementation of the 2009 Opt-in Rule, consumers have experienced
confusion about whether their cards could overdraw their accounts.\147\
Furthermore, consumers who did not elect to opt into overdraft coverage
on ATM and one-time debit card transactions may be especially likely to
lack understanding in this context, since they may believe that it is
not possible to incur a fee (whether called an overdraft or an NSF fee)
on these covered transactions.
---------------------------------------------------------------------------
\146\ 74 FR 59033, 59038 (Nov. 17, 2009).
\147\ Pew Charitable Tr., Overdrawn: Persistent Confusion and
Concern about Bank Overdraft Practices, at 5 (June 2014), https://www.pewtrusts.org/-/media/assets/2014/06/26/safe_checking_overdraft_survey_report.pdf (describing how more than
half of those who incurred a debit card overdraft penalty fee do not
believe that they opted in to overdraft coverage).
---------------------------------------------------------------------------
Fourth, for many covered transactions under this proposal, the
decision-making environment and rapidity of the consumer's required
choices at the merchant POS, ATM, or online may contribute to
consumers' lack of understanding of the material costs, risks, or
conditions of these transactions, particularly in conjunction with the
reasons discussed above. Although, as noted above, many consumers can
now check their account balances on a smartphone, when a consumer
purchases a good or service at a merchant POS terminal, makes an online
purchase, or uses an ATM, the transaction typically occurs very rapidly
and the consumer may not have time (or may perceive that they do not
have time) to check the account balance, which may itself be a moving
target if there are transactions that have not settled (see earlier
discussion). Moreover, the burden of checking a balance immediately
prior to a purchase is likely to be higher for economically vulnerable
consumers, who are less likely to have internet or smartphone access to
their depository accounts. This increased expected burden of getting
information on an account balance, which may sometimes entail a fee
when a vulnerable consumer has limited access to a bank branch with an
in-network ATM, would make information acquisition about balances less
likely and could make covered transactions more likely.\148\
---------------------------------------------------------------------------
\148\ See generally Press Release, Consumer Fin. Prot. Bureau,
CFPB Releases Reports on Banking Access and Consumer Finance in
Southern States (June 21, 2023), https://www.consumerfinance.gov/about-us/newsroom/cfpb-releases-reports-on-banking-access-and-consumer-finance-in-southern-states/ (describing the CFPB's work on
the Rural South); Fed. Rsrv. Bank of St. Louis, Banking Deserts
Become a Concern as Branches Dry Up (July 25, 2017), https://www.stlouisfed.org/publications/regional-economist/second-quarter-2017/banking-deserts-become-a-concern-as-branches-dry-up (``The
closing of thousands of bank branches in the aftermath of the 2007-
09 recession has served to intensify societal concerns about access
to financial services among low[-]income and minority populations .
. . .''); Donald P. Morgan et al., Banking Deserts, Branch Closings,
and Soft Information, Liberty St. Econ. (Mar. 7, 2016), https://libertystreeteconomics.newyorkfed.org/2016/03/banking-deserts-branch-closings-and-soft-information/ (``U.S. banks have shuttered
nearly 5,000 branches since the financial crisis, raising concerns
that more low-income and minority neighborhoods may be devolving
into `banking deserts' with inadequate, or no, mainstream financial
services.''); Hoai-Luu Q. Nguyen, Are Credit Markets Still Local?
Evidence from Bank Branch Closings, 11(1) Am. Econ. J.: Econ. Pol'y
1 (2019), https://www.aeaweb.org/articles?id=10.1257/app.20170543
(showing that distance to bank branches affects credit access for
small businesses); Jung Sakong & Alexander K. Zentefis, Bank Access
Across America, Fed. Rsrv. Bank of Chi. (Feb. 15, 2022), https://www.chicagofed.org/publications/working-papers/2023/2023-15 (showing
how distance to a bank branch affects bank branch use and banking
access).
---------------------------------------------------------------------------
The decision-making environment and rapidity of the consumer's
choices may also contribute to consumers' lack of understanding of the
material costs, risks, or conditions of many P2P covered transactions.
Per the 2021 FDIC Survey, consumer households use nonbank online
payment services to send or receive money (58.2 percent), make
purchases in person (30.4 percent), and make purchases online (63.9
percent).\149\ When a consumer purchases a good or service in person
using a debit card, makes an online purchase, or sends money to a
friend, the transaction occurs very rapidly and misremembering their
account balance is possible. Although the speed and convenience can
generally be viewed as positive features of such transactions for
consumers, the CFPB preliminarily believes that these features, in
conjunction with other issues, may make it more challenging for
consumers to understand those transactions' material costs, risks, or
conditions.
---------------------------------------------------------------------------
\149\ FDIC 2021 Survey at 34 tbl. 6.6.
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Unreasonable Advantage-Taking
Under CFPA section 1031(d)(2)(A), a practice is abusive if it takes
unreasonable advantage of consumers'
[[Page 6044]]
lack of understanding of the material risks, costs, or conditions of a
consumer financial product or service. The CFPB preliminarily concludes
that the practice of charging NSF fees on covered transactions takes
unreasonable advantage of consumers' lack of understanding of the
above-referenced material risks, costs, or conditions of their accounts
when they initiate those transactions.\150\
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\150\ The CFPB notes that the fee charged in this situation
would involve unreasonable advantage-taking no matter what specific
situation creates the lack of understanding that is taken advantage
of and whether it relates to lack of understanding of a material
cost, risk, or condition or more than one of those factors.
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A determination of unreasonable advantage-taking, as the Abusive
Policy Statement explains, involves an evaluation of the facts and
circumstances that may affect the nature of the advantage and the
question of whether the advantage-taking was unreasonable under the
circumstances.\151\ The Abusive Policy Statement also explains that
such an evaluation does not require an inquiry into whether the
advantage-taking is typical or not--that even a relatively small
advantage may be abusive if it is unreasonable, and that one may rely
on qualitative assessment rather than an investigative accounting of
costs and benefits to determine whether a covered financial institution
takes an unreasonable advantage.\152\
---------------------------------------------------------------------------
\151\ See Abusive Policy Statement at 21886. Cf., e.g., Swift &
Co. v. Wallace, 105 F.2d 848, 854-55 (7th Cir. 1939) (``
`[U]nreasonable' is not a word of fixed content and whether
preferences or advantages are unreasonable must be determined by an
evaluation of all cognizable factors which determine the scope and
nature of the preference or advantage.'').
\152\ Abusive Policy Statement at 21886.
---------------------------------------------------------------------------
There is a point at which a covered financial institution's conduct
in leveraging its superior information becomes unreasonable advantage-
taking and thus is abusive. A number of analytical methods, including
but not limited to those described in the Abusive Policy Statement, can
be used to evaluate unreasonable advantage-taking.\153\ The identified
practice in this proposal preliminarily constitutes unreasonable
advantage-taking under multiple of those analytical methods.
---------------------------------------------------------------------------
\153\ See id.
---------------------------------------------------------------------------
First, NSF fees are not fees for a service. Profiting from
transactions where the consumer receives no service in return raises
threshold concerns that a covered financial institution may be engaging
in unreasonable advantage-taking. If a covered financial institution
were to assess an NSF fee on a covered transaction, the practice would
impose a cost (approximately $32 based on current NSF fees) with no
benefit to the consumer, while at the same time imposing only an
apparently de minimis cost on the covered financial institution ($0.005
at most, according to a 2021 Board survey) \154\ that presumably could
easily be recovered via fees collected on successful transactions. As
noted above, charging an NSF fee in connection with a covered
transaction would result in the consumer paying something for receiving
nothing. This effectively turns the fee into a penalty fee. The CFPB
notes that a consumer may already suffer disruption in the first
instance by the decline of the covered transaction itself, whether
through non-receipt of an expected good or service, embarrassment, or
other adverse consequences. The NSF fee would compound that disruption
by imposing a material cost.
---------------------------------------------------------------------------
\154\ See footnote 32.
---------------------------------------------------------------------------
Although the data noted above indicates that the cost to covered
financial institutions of declining covered transactions appears to be
de minimis, the CFPB requests submission of further data on these
costs, as well as comment on the possibility of limiting the
determination of unreasonable advantage-taking and the corresponding
prohibition to allow for cost recovery.
Second, covered financial institutions would have no reason for
imposing such fees other than reaping a windfall, because they could
simply refuse to authorize the transaction instantaneously, which, as
discussed above, would impose negligible cost on them.\155\ The CFPB
notes that in consumer litigation about banks' charging of fees on
debit card transactions prior to the 2009 Opt-in Rule, one court held,
for purposes of opining on a motion to dismiss, that charging such fees
was an unconscionable practice under State law in part because the
banks' ability to make an instantaneous decision about whether to
process or decline a debit card transaction means there is less risk to
the banks of the account having insufficient funds to cover the
transaction.\156\
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\155\ As the CFPB explained in the Abusive Policy Statement,
``One may also assess whether entities are obtaining an unreasonable
advantage by considering whether they are reaping more benefits as a
consequence of the statutorily identified circumstances, or whether
the benefit to the entity would have existed if the circumstance did
not exist,'' meaning that, ``[i]n other words, entities should not
get a windfall due to'' one or more of the enumerated conditions
under CFPA section 1031(d)(2). See Abusive Policy Statement at
21886. See also JPay, LLC, File No. 2021-CFPB-0006 (Oct. 19, 2021)
(consent order describing an abusive practice where a firm leveraged
an exclusive contract to charge fees on prepaid cards used to
provide money to individuals being released from prison or jail and
where the prepaid cards replaced the feeless option of receiving
such money as cash or by check that previously had been offered by
prisons and jails); CFPB Fall 2022 Highlights at 22 (describing how
mortgage servicers took unreasonable advantage of consumers' lack of
understanding when they profited from insufficiently disclosed
phone-payment fees that were materially greater than the cost of
other payment options).
\156\ See In re Checking Acct. Overdraft Litig., 694 F. Supp. 2d
1302, 1320-21 (S.D. Fla. 2010).
---------------------------------------------------------------------------
Third, covered financial institutions that charge NSF fees on
covered transactions would be benefiting from negative consumer
outcomes that result from one of the enumerated factors identified in
CFPA section 1031(d)(2),\157\ i.e., a consumer's lack of understanding.
As the Abusive Policy Statement explains, Congress, partly in response
to the financial crisis, prohibited certain abusive business models and
other acts or practices that--contrary to standard consumer finance
relationships where the company benefits from consumer success--
misalign incentives and generate benefit for a company when people are
harmed.\158\ The CFPB generally considers it unreasonable for a
financial institution to benefit from, or be indifferent to, negative
consumer outcomes resulting from a consumer's lack of
understanding.\159\
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\157\ As the Abusive Policy Statement noted, ``Congress
prohibited certain . . . acts or practices that--contrary to many
consumer finance relationships where the company benefits from
consumer success--generate benefit for a company when people are
harmed.'' Abusive Policy Statement at 21886.
\158\ As the CFPB's Abusive Policy Statement explained, ``The
financial crisis was set in motion by a set of avoidable
interlocking forces--but at its core were mortgage lenders profiting
(by immediately selling on the secondary market) on loans that set
people up to fail because they could not repay.'' See Abusive Policy
Statement at 21884; see also S. Rep. No. 111-176, at 11 (2010),
https://www.congress.gov/congressional-report/111th-congress/senate-report/176/1 (``Th[e] financial crisis was precipitated by the
proliferation of poorly underwritten mortgages with abusive terms,
followed by a broad fall in housing prices as those mortgages went
into default and led to increasing foreclosures.'').
\159\ See Abusive Policy Statement at 21886.
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Finally, in assessing whether the practice at issue here involves
unreasonable advantage-taking, a relevant factor is the vulnerability
of many of the consumers who would incur such NSF fees if they were
imposed.\160\ Although consumers of all
[[Page 6045]]
income levels overdraw their checking accounts,\161\ more affluent
consumers are more likely to be able to maintain a cushion to help
avoid doing so. As research shows, less well-off, more economically
vulnerable consumers are more likely to be struggling to meet their
regular expenses.\162\ For these vulnerable consumers, maintaining such
a cushion often is not possible.\163\ As a result, NSF fees function as
a penalty imposed on these consumers because they do not have enough
money in their account, whether that deficiency is due to chronic
income shortfalls, timing mismatches regarding inflows and outflows
over which they have no control, or other reasons.\164\ The harm
inflicted on economically vulnerable consumers from such fees, if they
were to be charged, would likely be greater than that which more
affluent consumers would suffer. Because much of the windfall from
charging NSF fees on covered transactions would be gained from
vulnerable consumers in exchange for providing no benefit to them, a
covered financial institution would be taking unreasonable advantage of
such consumers in doing so. As with consumers in general, the profit
accrued from imposing NSF fees in this circumstance would be derived
directly from vulnerable consumers' lack of understanding. This
practice would constitute unreasonable advantage-taking because covered
financial institutions are profiting directly from consumer hardship
rather than from providing useful services to avoid or alleviate it.
---------------------------------------------------------------------------
\160\ See 85 FR 44382, 44420 (July 22, 2020) (``As a preliminary
matter, the [CFPB] declines to use this rulemaking to articulate
general standards addressing whether the conduct of lenders or other
financial services providers take unreasonable advantage of
consumers. Instead, the [CFPB] will articulate and apply such
standards, including the 2017 [rule's] four-factor analysis, to the
extent necessary to decide the specific issue in this rulemaking,
namely, whether lenders take unreasonable advantage of consumers if
the lenders make covered loans without determining whether borrowers
have the ability to repay them.'').
\161\ CFPB 2017 Data Point at 25 tbl. 3 (showing that consumers
with high balances may also be heavy overdrafters).
\162\ See, e.g., Bd. of Governors of the Fed. Rsrv. Sys.,
Economic Well-Being of U.S. Households in 2022, at 29 (May 2023),
https://www.federalreserve.gov/publications/files/2022-report-economic-well-being-us-households-202305.pdf.
\163\ See Rob Levy & Joshua Sledge, Complex Portrait: An
Examination of Small-Dollar Credit Consumers, Ctr. for Fin. Servs.
Innovation (2012), https://s3.amazonaws.com/cfsi-innovation-files/wp-content/uploads/2017/01/31163518/A-Complex-Portrait-An-Examination-of-Small-Dollar-Credit-Consumers.pdf (discussing how
financial shortfalls may be due to mismatched timing between income
and expenses, misaligned cash flows, income volatility, unexpected
expenses or income shocks, or expenses that simply exceed income,
and noting that 32 percent of users of small-dollar credit products
reported misaligned cash flow as the precipitating factor for their
borrowing, while 30 percent reported chronic income shortfalls).
\164\ Through its supervisory work, the CFPB has learned that at
seven very large financial institutions in 2022 consumer accounts
with an average balance below $500 had more than 20 times as many
NSF transactions and more than 11 times as many NSF fees as consumer
accounts with an average balance above $1,500. Overdraft and NSF
Report at 17 tbl. 6.
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V. Proposed Effective Date
The CFPB is proposing that this rule have an effective date of 30
days after publication of a final rule in the Federal Register. The
CFPB is proposing this expedited effective date because the practice
that would be prohibited based on the CFPB's preliminary abusive
conduct determination is not thought to be prevalent today, and
therefore any burdens associated with implementation of this proposal,
if finalized, should be minimal. However, since the CFPB understands
that a limited number of providers may currently charge fees that would
be subject to the prohibition, the CFPB seeks comment on whether the
proposed effective date should be modified to provide additional time
for implementation.
VI. CFPA Section 1022(b) Analysis
A. Overview
In developing the proposed rule, the CFPB has considered the
proposed rule's potential benefits, costs, and impacts in accordance
with section 1022(b)(2)(A) of the CFPA. The CFPB requests comment on
the preliminary analysis presented below and submissions of additional
data that could inform the CFPB's analysis of the benefits, costs, and
impacts. In developing the proposed rule, the CFPB has consulted with
the appropriate prudential regulators and other Federal agencies,
including regarding the consistency of the proposed rule with any
prudential, market, or systemic objectives administered by those
agencies, in accordance with section 1022(b)(2)(B) of the CFPA.
B. Goals of the Proposed Rule
The CFPB is proposing this rule because of its preliminary
determination that consumers would lack understanding of the material
risks, costs, or conditions of a covered financial institution's
charging of an NSF fee in connection with a covered transaction. In
general, if consumers lack understanding of the material risks, costs,
or conditions of a particular transaction, their choices may be
suboptimal from an economic perspective.
C. Data Limitations and Quantification of Benefits, Costs, and Impacts
The discussion below relies on information that the CFPB has
obtained from industry and publicly available sources, including
reports published by the CFPB. These sources form the basis for the
CFPB's consideration of the likely impacts of the proposed rule. The
CFPB provides estimates, to the extent possible, of the potential
benefits and costs to consumers and covered persons of this proposal
given available data.
The specific data sources that inform this discussion and the
CFPB's existing analysis include public call report data, internal data
provided by financial institutions through supervisory information
requests, and research published by the CFPB. In addition, the existing
academic literature as well as policy work conducted by State
regulators, and by the Board were considered.
There remain important data limitations that preclude a more
exhaustive determination of the proposed rule's benefits, costs, and
impacts. Foremost among them is that the existing data sources and
evidence available to the CFPB generally do not separately identify
whether NSF transactions or NSF fees were incurred on requests by
consumers to withdraw, debit, pay, or transfer funds from their
checking, savings, or consumer asset account where the transaction is
declined instantaneously or near-instantaneously by the financial
institution (henceforth, covered transactions). In part, this reflects
the CFPB's understanding of the current prevalence of the practice;
based on its market monitoring activities the CFPB believes that
covered financial institutions rarely charge NSF fees on covered
transactions.
Relatedly, quantifying the benefits, costs, and impacts of the
proposed rule requires quantifying future consumer and covered
financial institution behavior both with and without the proposed
changes, and the CFPB is not aware of available data that could be used
to generate reliable predictions about such future behavior. In
particular, there is considerable uncertainty around the future
frequency with which financial institutions would charge NSF fees on
covered transactions in the absence of the proposed rule. This includes
uncertainty about how many, and which financial institutions would
begin charging NSF fees on covered transactions as well as at what rate
and fee amount these fees would be assessed. To reflect this
uncertainty, the CFPB considers a range of ways in which market
practices might evolve in the absence of the proposed rule when
calculating the costs, benefits, and impacts of the proposed rule.
The data, prior research, and existing policy work available to the
CFPB or with which the CFPB is familiar provide an important basis for
understanding
[[Page 6046]]
the potential effects of the proposed rule, albeit without being
sufficient to completely quantify the potential effects of the proposal
for consumers and covered persons. The deficits in existing data and
evidence are due primarily to the proposed rule addressing practices
not thought to currently be prevalent in consumer financial markets, to
existing data not enabling the identification of covered transactions,
to difficulty predicting the evolution of the market, and to the lack
of existing evidence on the magnitude or direction of potential
behavioral responses by consumers and covered persons to policies like
the proposed rule. While the CFPB acknowledges these data limitations,
the analysis below provides quantitative estimates where possible
alongside qualitative discussions of the proposed rule's benefits,
costs, and impacts. General economic principles and the CFPB's
expertise, together with the available data, allow the CFPB to provide
insight into these benefits, costs, and impacts. The CFPB requests
additional data or studies that could help quantify the benefits and
costs to consumers and covered persons of the proposed rule including
information related to the current or likely future incidence of NSF
fees on covered transactions.
D. Baseline for Analysis
In evaluating the proposal's benefits, costs, and impacts, the CFPB
considers the impacts of the proposed rule against a baseline in which
the proposed rule does not become effective. The baseline the CFPB
considers corresponds to current law, wherein NSF fees are not
explicitly prohibited for covered transactions. Based on its market
monitoring activities, the CFPB understands that covered financial
institutions rarely charge NSF fees on covered transactions; however,
the CFPB is uncertain about the extent to which such fees are currently
charged and the CFPB believes there is a risk that such fees may be
charged to a greater degree in the future. The CFPB recognizes that
financial institutions have incentives to generate new revenue;
assessing NSF fees on covered transactions is one potential source of
new revenue. Additionally, if the Overdraft Proposed Rule is finalized
and reduces overdraft fee revenue for covered financial institutions,
it may lead some institutions to consider imposing new fees. Increasing
the prevalence of NSF fees on covered transactions could be one way
that covered financial institutions respond, while market forces could
lead even non-covered financial institutions to begin charging NSF fees
on covered transactions.
Accordingly, for the baseline, the CFPB considers potential NSF
market practices that range from financial institutions rarely charging
NSF fees on covered transactions to a scenario where some financial
institutions charge NSF fees on covered transactions. The CFPB believes
that, absent the proposed rule, it is unlikely that NSF fees on covered
transactions would be assessed at a rate greater than the rate at which
they are currently charged on non-covered transactions.\165\ To
estimate the share of total NSF transactions \166\ that would be
covered, the CFPB uses data from the Federal Reserve Payments Study
(FRPS) \167\ to calculate the percent of total non-cash payments that
were non-prepaid debit card payments in 2021: 44.7 percent. As further
discussed below, this is informative of an upper bound on how large the
impact of the proposed rule might be.\168\
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\165\ See part I (Background discussion) for a discussion of NSF
fees assessed on non-covered transactions.
\166\ Throughout this section, ``NSF transactions'' refer to
requests by consumers to withdraw, debit, pay, or transfer funds
from their checking, savings, or consumer asset account for an
amount greater than the available funds in the account and where the
transaction is declined by the financial institution.
\167\ See FRB 2022 Payments Study.
\168\ The FRPS data are not informative about the possibility of
NSF fees being assessed on person-to-person (P2P) transactions, as
P2P transactions are not included in the FRPS data. Whether their
inclusion would increase or decrease the estimate of the share total
non-cash payments that are covered transactions will depend on
whether the ratio of covered to non-covered transactions is higher
or lower for P2P transactions than it is for the non-P2P non-cash
payments included in the FRPS data. However, the CFPB notes that
because P2P transactions currently make up a relatively small share
of non-cash payments, their inclusion is unlikely to affect this
estimate by much.
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For costs, benefits, and impacts, the CFPB estimates annual values
and, absent any evidence to suggest that the values would change over
time, the CFPB assumes that the annual values persist indefinitely.
The CFPB requests comment on the approach to evaluating the
proposal's benefits, costs, and impacts and, specifically, on the
assumptions implicit in providing estimates that correspond to a range
of future NSF market practices.
E. Potential Benefits and Costs to Consumers and Covered Persons
1. Potential Benefits and Costs to Consumers
The proposal to prohibit NSF fees on covered transactions would
directly benefit consumers who would have been assessed NSF fees on
covered transactions by reducing the amount that they pay in NSF fees.
In addition to the direct benefits from the absence of NSF fees, a
prohibition on NSF fees could have several indirect impacts on
consumers who would otherwise have been charged NSF fees. First, for
consumers with account balances low enough that an NSF fee brings their
balance below zero or farther below zero, NSF fees may lead consumers
to have their account closed or to have their account information
furnished to a checking account reporting company, which could make
getting access to a new depository account more difficult in the
future. By prohibiting NSF fees, the proposed rule should reduce (to
zero) the likelihood of these indirect impacts of NSF transactions.
Second, without the ability to assess NSF fees on transactions that
consumers undertake without sufficient funds, financial institutions
may opt to allow additional transactions to go through and charge
overdraft fees instead. By allowing accounts to go into overdraft this
implies more consumers will receive the item(s) they were attempting to
purchase, though they may be assessed an overdraft fee. A third
possibility is that a prohibition on NSF fees could reduce expected
revenue for the consumer segments most likely to incur NSF fees and
result in financial institutions being less willing to open depository
accounts for those consumers.\169\
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\169\ An additional possibility is that, to the extent financial
institutions would have charged NSF fees on covered transactions
under the baseline, those financial institutions could respond to
the proposed rule by attempting to offset lost NSF revenue through
changes in other account fees or prices. Any increases in these fees
would decrease the benefit of the proposed rule for some consumers,
with the net change in fee incidence (the decrease in NSF fee
incidence and the increase in offsetting fee incidence) determining
whether consumers benefit from the proposed rule.
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As discussed further below, the extent of any of these benefits
depends on the extent to which NSF fees would be charged on covered
transactions under the baseline. To the extent NSF fees would be
charged, the direct effects of the proposed rule should benefit
consumers by reducing the amount they pay in NSF fees. Similarly, the
first above-mentioned indirect effect--a decreased likelihood of
depository account closure and having negative information furnished to
a checking account reporting company--should increase consumer welfare.
Consumer welfare could increase or decrease from having more
transactions go through and being assessed an overdraft fee instead of
an NSF fee; whether consumers benefit will depend on the
[[Page 6047]]
relative size of NSF and overdraft fees as well as how much consumers
value the goods or services they were attempting to purchase. Consumer
welfare could also decrease if the inability to assess and collect NSF
fees makes financial institutions less willing to offer depository
accounts to certain consumers.
Direct Effects
As discussed above, the proposed rule will directly benefit
consumers to the extent that NSF fees would have been charged on
covered transactions, which are estimated to represent 44.7 percent of
checking account transactions based on 2021 FRPS data. The CFPB
understands that it is currently uncommon for financial institutions to
charge NSF fees on covered transactions, but the CFPB does not have
reliable data on how frequent the practice might be either now or in
the future.
Recent CFPB analysis of Call Report data suggests that even after
sharp declines in the number of banks with over $1 billion in assets
charging NSF fees, consumers will be paying roughly $250 million
annually in NSF fees to banks with more than $1 billion in assets.\170\
The CFPB estimates that an additional $73 million in annual NSF fees is
being paid to banks with less than $1 billion in assets and to credit
unions, for a total of $323 million in annual NSF fees.\171\
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\170\ See CFPB October 2023 Data Spotlight. The CFPB arrived at
this estimate by analyzing NSF fee practices of banks with over $10
billion in assets as of March 31, 2023, and the 75 banks that
collected the most overdraft/NSF fee revenue in 2021 (some of which
are under $10 billion in total assets). For each of these
institutions, NSF revenue based on FFIEC Call Report data is
calculated by taking 18.9 percent of reported overdraft/NSF fee
revenue (except in cases where the bank did not have an overdraft
program). Institutions that no longer charge NSF fees account for 86
percent of the total estimated NSF fee revenue of all banks over $1
billion in total assets. The remaining 14 percent of estimated 2021
NSF fee revenue is equal to approximately $250 million.
\171\ Call Report data do not include information on overdraft
or NSF fee revenue for credit unions or for banks with $1 billion or
less in assets. To account for this, the CFPB uses data collected
from core processors for the number of accounts by asset size and
the overdraft/NSF revenue per account, and from 2014 call report
data for the distribution of institutions by asset size, and then
assumes that overdraft/NSF revenue at small institutions saw the
same growth from 2014 to 2019 as large banks, to arrive at a 2019
estimate. These extrapolations suggest that banks with over $1
billion in total assets comprise 77.4 percent of marketwide
overdraft/NSF revenue. See CFPB 2021 Data Point at 7. For the annual
projection, the CFPB assumes that banks with assets over $1 billion
represent the same relative portion of total marketwide overdraft/
NSF revenue as they did in 2019. The CFPB then multiplies the annual
NSF fee revenue projection by 1/0.774 to arrive at an estimate of
NSF fee revenue from all financial institutions of $323 million. The
CFPB also explored using the share of consumer deposits at banks
with assets over $1 billion based on FFIEC and NCUA call report data
from the fourth quarter of 2022 to extrapolate projected annual NSF
revenue for banks with assets over $1 billion to arrive at a
projected marketwide estimate for annual NSF revenue. For credit
unions, the CFPB sums all possible shares and deposits for
consumers. For Banks and Thrifts, the CFPB sums noninterest-bearing
and interest-bearing deposits of individuals, partnerships, and
corporations held in domestic offices (total deposits). The CFPB
additionally sums the value of deposits of any type intended
primarily for individuals for personal, household, or family use as
reported only by Banks and Thrifts with more than $1 billion in
total assets (consumer deposits). The CFPB then calculates the
median share of total deposits that are represented by consumer
deposits at banks and thrifts with between $1 billion and $10
billion in total assets (0.41). The CFPB multiplies the total
deposit amount for Banks and Thrifts with less than $1 billion in
total assets by this share, to arrive at an estimate of consumer
deposits for each bank or thrift in the fourth quarter of 2022. The
CFPB sums consumer deposits or imputed consumer deposits across all
financial institutions regardless of size and calculate the ratio of
consumer deposits held by banks and thrifts with more than $1
billion in total assets to total consumer deposits: 0.75. If the
CFPB were to use this extrapolation factor to arrive at a marketwide
estimate, it would multiply the annual NSF fee revenue estimate by
1/0.75 to arrive at a similar estimate of NSF fee revenue from all
financial institutions of $333 million.
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Of this total, the CFPB's understanding is that the large majority
was paid on non-covered transactions and therefore would be unaffected
by the proposed rule, and the CFPB does not have definitive evidence
with which to forecast the revenue that might be generated by covered
transactions in the future under the baseline. As a starting point to
arrive at a range of possible future NSF fee practices for covered
transactions, the CFPB begins from our current annual estimate of all
NSF fee revenue: $323 million. As a likely lower bound for potential
future NSF fee market practices, the CFPB considers the scenario where
NSF fees are rarely charged on covered transactions. This would suggest
that the $323 million in current annual NSF fee revenue corresponds to
$0 in future NSF fee revenue from covered transactions. As a more
probable range of potential future NSF fee market practices for covered
transactions, if projected annual NSF fee revenue for covered
transactions were to correspond to between 5 and 20 percent of current
annual NSF fee revenue, it would suggest between $16.2 million and
$64.6 million in annual NSF revenue from covered transactions. The
proposed rule would therefore indicate a direct benefit to consumers of
between $16.2 million and $64.6 million in reduced NSF fees.
The CFPB seeks comment on the extent to which NSF fees are
currently charged on covered transactions and the extent to which they
might be charged on covered transactions in the future.
Indirect Effects
To the extent covered financial institutions would have charged NSF
fees on covered transactions under the baseline, the proposed rule
would benefit consumers by reducing to zero the probability that an NSF
fee on a covered transaction would bring their account balance below
zero and cause their account to be closed or their information to be
furnished to a checking account reporting company. The indirect
benefits to consumers from these reductions would increase consumer
welfare for the consumers that would have experienced these events in
the absence of the proposed rule.
The extent of these indirect benefits depends on the prevalence and
amount of NSF fees charged on covered transactions under the baseline.
At NSF fee market practices between the lower and upper bound
projections, the proposed rule would generate indirect benefits to
consumers through the same changes, though these benefits would be
proportionally smaller in size than under the upper bound projection.
If the prohibition on NSF fees induces some financial institutions
to allow additional transactions that they would have declined to go
into overdraft, it could also benefit consumers relative to the
baseline in instances where a consumer had a transaction declined, and
they were assessed an NSF fee of the same amount as the overdraft fee.
If the potential NSF fee is less than the potential overdraft fee,
whether consumers benefit will depend on the consumers' valuation of
the goods they were purchasing or attempting to purchase net of the
price of the good(s). Whether this benefit is as large as the benefit
the consumer receives if their transaction is declined but they are not
assessed an NSF fee will depend on the consumer's valuations and the
relative size of the NSF and overdraft fees. These indirect benefits
would accrue to consumers only under NSF fee market practice
projections that predict a positive number of NSF fees on covered
transactions.
Behavioral Effects
To the extent covered financial institutions would have charged NSF
fees on covered transactions under the baseline, the proposed rule
could generate changes in the behaviors of consumers or covered
persons. One possibility is that a prohibition on NSF fees could make
consumers less willing to exert effort to get information on their
account balance prior to making purchases and therefore could increase
[[Page 6048]]
the likelihood of NSF transactions for some consumers. However, the
CFPB can find little evidence to support the existence of a deterrent
effect of NSF fees on the prevalence of NSF transactions. Based on data
on NSF fees on transactions of all types from seven of the eight
financial institutions that submitted data, after controlling for
month-specific and financial institution-specific differences in the
number of NSF transactions, the number of NSF transactions financial
institutions report after decreasing or eliminating NSF fees decreased,
on average, for the five financial institutions that made a change
during the reporting period. This is consistent with the costs of
avoiding NSF fees being sufficiently high for consumers at risk of NSF
transactions that a change in NSF fee size does not result in a
meaningfully different amount of optimal effort put towards avoiding
these fees,\172\ or with consumers not being aware of the possibility
or size of NSF fees. The CFPB caveats that the NSF fees and
transactions observed in the data are likely to have occurred primarily
on non-covered transactions and it is possible that the relationship
between NSF transactions and NSF fee sizes could be different if we
were able to estimate it using only information on covered transactions
and fees. Similarly, data that cover a longer period after a reduction
in NSF fees would allow for the consideration of medium- and long-term
deterrent effects of NSF fees. The data available to the CFPB only
permit the consideration of effects that are observable less than
twelve months after an NSF fee reduction. Nevertheless, the CFPB seeks
comment on the potential deterrent effect of NSF fees on NSF
transactions, including data and information that could help inform our
understanding of this relationship.
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\172\ In the context of acquiring information about account
balances, this could be the case if consumers incur certain fees for
checking balances at ATMs, if ATMs or financial institution branches
are sufficiently far from where consumers live, or consumers lack
access to their financial accounts online or through mobile
applications.
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Another possibility is that a prohibition on NSF fees could reduce
expected revenue for the consumer segments most likely to incur NSF
fees on covered transactions under NSF fee market practice projections
above the lower bound, and result in financial institutions being less
willing to open depository accounts for those consumers. This would
decrease the benefits to the consumer segments that lose access to
depository accounts that they would have had under the baseline and
those NSF fee market projections.
Last, financial institutions could respond to the proposed rule by
offsetting the NSF fee revenue that they would earn under projections
above the lower bound with changes in other account fees or prices.
These increases in other account fees or prices would decrease the
benefits to consumers from the proposed rule.\173\ Consumers with
accounts that are assessed a greater value of new fees than they would
have been assessed in NSF fees will benefit less from the proposed
rule.
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\173\ To gauge the size of potential fees that financial
institutions would need to assess to fully replace the hypothetical
revenue they lose from the proposed prohibition on NSF fees at the
upper bound projection for future NSF fee market practices, the CFPB
used the data from the eight financial institutions included in the
most recent Supervisory Information Request. The CFPB calculated the
NSF fee revenue per account that each financial institution reported
in 2022, divided this amount by 12 and multiplied by the estimated
ratio of covered to non-covered transactions from the 2021 FRPS data
to get a monthly account fee that financial institutions would need
to assess to replace the revenue they would hypothetically lose
under the proposed rule. On average across the 31 checking products
in the data, this monthly account fee would need to be $0.20 per
account to replace the lost revenue from hypothetical NSF fees on
covered transactions at the upper bound projection for NSF fee
market practices. Consumers would then benefit less from the
proposed rule if they were required to pay additional monthly
account fees (or other similar fees). We caution that this is likely
to overstate the monthly fee size needed to replace NSF fee revenue
because of the five financial institutions that eliminated NSF fees
during 2022 that collected a positive amount of NSF fee revenue in
2022. As these financial institutions have already stopped charging
NSF fees, they would not need to replace any NSF fee revenue lost
under the proposed rule.
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Distribution of Consumer Impacts
NSF transactions and fees are more likely for consumers with
limited resources. Information from the eight financial institutions
that responded to the CFPB's supervisory information request suggest
that NSF transactions occurred 20 times as often on consumer accounts
with low average daily balances (below $500) as for consumer accounts
with high average daily balances (above $1,500).\174\ NSF fees are 11
times as likely to be assessed on low-balance consumer accounts as on
high-balance consumer accounts.
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\174\ Overdraft and NSF Report at 17 tbl. 6.
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2. Potential Benefits and Costs to Covered Persons
For covered persons, the costs and benefits are, in general, the
opposite of the benefits or costs to their customers, as detailed
above, and net of offsetting changes. Any decrease in fees paid by
consumers will result in an equally sized decrease in revenue for
covered persons. Any increase in fees paid by consumers due to
offsetting fees assessed by covered financial institutions will result
in an equally sized increase in revenue for covered persons.
Additional potential costs to covered persons are the legal and
personnel costs of reviewing current policies and pricing strategies to
determine whether existing policies are compliant and whether to re-
optimize behavior after considering the proposed rule. Given that the
CFPB understands that NSF fees today are rarely charged on covered
transactions, any such costs should be small, as current policies are
generally consistent with the proposed rule's requirements. Some of
these costs might be incurred by covered financial institutions due to
the Overdraft Proposed Rule, regardless of whether the proposed rule
takes effect.
As was the case above for consumers, for the baseline at the lower
bound projection for NSF fee market practices, the proposed rule would
generate few benefits, costs, or impacts for covered persons.
At levels above the lower bound projection, the proposed rule will
have distinct benefits, costs, and impacts on covered persons,
depending on whether financial institutions charge NSF fees on covered
transactions.
Based on a CFPB analysis of publicly available Call Report data and
publicly available information regarding banks' NSF practices, a
majority of NSF fees have been eliminated among banks with at least $1
billion in total assets.\175\ The CFPB report estimates that nearly
three-fourths of the 75 banks with the highest combined NSF and
overdraft revenue in 2021 have since stopped charging NSF fees. A
similar analysis of NSF fee practices among banks with over $10 billion
in assets estimates that two-thirds of those institutions have
eliminated NSF fees. These findings suggest that a growing share of
covered persons no longer charge NSF fees of any kind. These
differences in NSF fee policies across covered persons could persist
for covered transactions in the baseline. That is, some covered persons
are likely to be charging NSF fees on covered transactions while other
covered persons will not be charging NSF fees on covered transactions.
To the extent that this behavior follows similar patterns as the
currently observed decisions to charge NSF fees on non-covered
transactions, the analysis suggests that smaller financial institutions
may be less likely to not charge NSF fees on covered transactions than
larger financial institutions. However, it is also possible that the
[[Page 6049]]
covered financial institutions that have eliminated NSF fees on non-
covered transactions could opt to start charging NSF fees on covered
transactions under market scenarios above the lower bound projection.
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\175\ See CFPB October 2023 Data Spotlight.
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For covered persons that are not charging NSF fees on covered
transactions, the proposed rule would likely generate smaller costs and
benefits.
For covered persons that are charging NSF fees on covered
transactions or that would charge them under the baseline, the proposed
rule would impose costs equal to the loss in NSF revenue due to the
prohibition on NSF fees on covered transactions, net of any offsetting
revenue increases from new fees. If future annual NSF fees from covered
transactions represented between 5 and 20 percent of current total 2022
NSF revenue, the cost borne by covered persons charging NSF fees on
covered transactions would be between $16.2 million and $64.6 million.
As mentioned above, the direct benefits, costs, and impacts on
covered persons are likely to be the opposite of those discussed for
consumers. However, for some of the potential indirect impacts, this
may not be the case. For example, consumers may benefit from a reduced
probability that an NSF fee would bring their account balance below
zero and cause their account to be closed or their information to be
furnished to a checking account reporting company. For covered
financial institutions, these indirect impacts do not represent costs,
and they may represent benefits as they no longer need to incur the
costs associated with closing these depository accounts or furnishing
information to checking account reporting companies.
Similarly, if the prohibition on NSF fees induces some financial
institutions to not offer depository accounts to the consumer segments
most likely to incur NSF fees on covered transactions, it could impose
a cost on consumers in those segments who may find it more difficult to
access a depository account. This would also impose a cost on the
covered financial institutions that are no longer willing to offer
these accounts, with the cost being equal to the expected revenue on
the depository accounts they would have opened for these consumer
segments under the baseline and NSF fee market projection, but which
they are no longer willing to open under the proposed rule.
Any indirect effects for covered financial institutions from
allowing additional transactions to go into overdraft are likely to be
small and will depend on the relative size of expected revenue and cost
from charging an overdraft fee compared to charging an NSF fee.
3. Benefits and Costs of Potential Alternative of Permitting Fees That
Cover Costs of Processing NSF Transactions
The CFPB considered proposing an alternative in which financial
institutions would be permitted to charge fees on covered transactions
that are limited to the cost of handling NSF transactions. Such an
alternative would have little effect on the estimates presented above.
Research from the Board suggests the average cost of NSF handling was
just $0.005 in 2021 and this has remained relatively stable since
2011.\176\ If the CFPB assumes $32 per NSF fee along with our
projections for future NSF fee revenue from covered transactions that
correspond to between 5 and 20 percent of current annual NSF fee
revenue,\177\ wherein the proposed rule would result in between $16.2
million and $64.6 million in reductions in NSF revenue, this would
represent between 506,250 and 2,018,750 NSF fees. At $0.005 per NSF
fee, this would imply between $2,531 and $10,094 in total costs for
financial institutions to handle NSF transactions that generated fees.
The CFPB can also use the information requested from eight very large
financial institutions in a supervisory capacity to adjust this number
given that the eight institutions represented in the data assessed NSF
fees on 13.4 percent of NSF transactions.\178\ To account for the costs
of NSF transactions that did not generate fees, the range of $2,531 to
$10,094 in NSF handling cost totals can be inflated based on the number
of fee-generating transactions by 1/0.134, to estimate that the total
allowed cost recovery for financial institutions from their handling of
NSF transactions would be between $18,888 and $75,328. The remaining
benefit to consumers from reduced NSF fees after accounting for allowed
cost recovery for financial institutions at between 5 and 20 percent of
the upper bound projection for NSF fee practices would be between
$16,181,112 and $64,524,672. As was the case above, these also
represent the costs to covered persons after accounting for allowed
cost recovery if NSF fees on covered transactions were assumed to be
responsible for between 5 and 20 percent of projected annual NSF
revenue.
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\176\ See FRB 2021 Interchange. Furthermore, as this estimate is
based on the cost of handling authorized debit card transactions,
the CFPB expects that the corresponding estimate for declined
transactions would be smaller.
\177\ Based on CFPB market monitoring activity conducted between
December 2022 and August 2023, the median institution-level NSF fee
among banks and credit unions charging NSF fees with more than $10
billion in total assets was $32. Including information from smaller
financial institutions would change this estimate, but likely not by
much, given that the already-included, larger financial institutions
will be the source of most feed NSF transactions. Still, even if
between $16.2 million and $64.6 million in NSF fee revenue were
charged on covered transactions and if the feed transaction-level
median NSF charged were to drop to $25, it would imply there were
between 648,000 and 2,584,000 feed, covered NSF transactions in 2022
and the allowed cost recovery would be between $3,240 and $12,920.
\178\ See Overdraft and NSF Report at 16, 17 tbl. 6.
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F. Potential Specific Impacts of the Proposed Rule on Depository
Institutions and Credit Unions With $10 Billion or Less in Total
Assets, As Described in Section 1026
Existing data do not clearly indicate whether there would be
specific impacts of the proposed rule on depository institutions and
credit unions with $10 billion or less in total assets that are
different from the impacts on other affected financial institutions. As
mentioned above, smaller financial institutions were less likely to
have eliminated NSF fees as of 2022. If these institutions are more
likely to have started charging NSF fees on covered transactions under
an NSF fee market projection, they may be more likely to see NSF fee
revenue decrease under the proposed rule relative to the baseline.
However, whether there are specific impacts on depository institutions
and credit unions with $10 billion or less in assets may also depend on
interactions with the Overdraft Proposed Rule. The Overdraft Proposed
Rule only applies to depository institutions with more than $10 billion
in total assets. If financial institutions impacted by the Overdraft
Proposed Rule are those most likely to charge NSF fees on covered
transactions under the baseline, it would imply that depository
institutions and credit unions with $10 billion or less in total assets
may be less likely to be impacted by the proposed rule. Thus, whether
there are specific impacts on depository institutions and credit unions
with less than $10 billion in total assets will depend on which
institutions opt to start charging NSF fees on covered transactions
and, possibly, on interactions between the proposed rule and the
Overdraft Proposed Rule.
G. Potential Specific Impacts of the Proposed Rule on Consumer Access
to Credit and on Consumers in Rural Areas
The CFPB does not anticipate that the proposed rule will have any
negative effects on consumer access to credit
[[Page 6050]]
under the baseline. To the extent that some financial institutions
respond to the proposed rule by increasing the likelihood that they
allow transactions to go into overdraft, the proposed rule could result
in increased credit access for some consumers.
The CFPB does not have depository account-level data with
geographic identifiers that would allow us to measure NSF fees assessed
on consumers in rural areas. However, existing research suggests that
consumers in rural areas are more likely to be unbanked \179\ and more
likely to live in a bank desert.\180\ This lower access to depository
accounts could mean consumers in rural areas are less likely than
consumers in other areas to pay NSF fees on covered transactions, which
could decrease the potential benefits to consumers in rural areas of
the proposed rule.
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\179\ See FDIC 2021 Survey.
\180\ See Consumer Fin. Prot. Bureau, Data Spotlight: Challenges
in Rural Banking Access, at 7-10 (Apr. 2022), https://files.consumerfinance.gov/f/documents/cfpb_data-spotlight_challenges-in-rural-banking_2022-04.pdf.
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The CFPB has also calculated the share of the unbanked in the
lowest fifth of the income distribution in ZIP codes that the U.S.
Census Bureau classifies as urban, rural, and mixed.\181\ Seventy-four
percent of consumers in the lowest income quintile in both urban and
rural ZIP codes have a bank account. This would suggest that lower-
income consumers in urban and rural areas have similar access to bank
accounts and may also see similar benefits from the proposed rule.
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\181\ See Natalie Cox et al., Financial Inclusion Across the
United States (Apr. 24, 2023), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3934498 (identified the unbanked in the
universe of tax records as those not listing an account for rebates
or payment over a ten-year period, focusing on the 50-59-old
population in 2019. The Census links ZCTAs to an urban area (or
none)).
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VII. Regulatory Flexibility Act Analysis
The Regulatory Flexibility Act (RFA) generally requires an agency
to conduct an initial regulatory flexibility analysis (IRFA) and a
final regulatory flexibility analysis of any rule subject to notice-
and-comment rulemaking requirements unless the agency certifies that
the rule will not have a significant economic impact on a substantial
number of small entities. The CFPB is also subject to specific
additional procedures under the RFA involving convening a panel to
consult with small business representatives before proposing a rule for
which an IRFA is required. An IRFA is not required for this proposal
because the proposal, if adopted, would not have a significant economic
impact on a substantial number of small entities.
Small institutions, for the purposes of the Small Business
Regulatory Enforcement Fairness Act (SBREFA) of 1996, are defined by
the Small Business Administration. Effective December 19, 2022,
depository institutions with less than $850 million in total assets are
determined to be small.
As mentioned above, the CFPB understands that covered persons
rarely currently charge NSF fees on covered transactions. As a result,
under current market practices the proposed rule should not have a
significant impact on a substantial number of small entities.
Moreover, even when combined with overdraft fees, total NSF fees
generally represent well under 2 percent of total revenue at the
smallest financial institutions that regularly report this information,
suggesting that any potential reduction in NSF fee revenue would not be
likely to have a significant impact on institutions with less than $850
million in total assets.\182\ As a result, the proposed rule should not
have a significant impact on a substantial number of small entities
even if NSF revenue were entirely comprised of NSF fees on covered
transactions.
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\182\ Calculations based on publicly available FFIEC Call Report
data from 2022 suggest that only 11.9 percent of reporting financial
institutions with total assets below $2 billion had combined revenue
from overdraft and NSF fees on depository consumer accounts that
exceeded two percent of their total revenue. In the past, the CFPB
has estimated that NSF fees make up less than 20 percent of combined
overdraft and NSF revenue. Since NSF fees on covered transactions
are likely to represent less than half of combined overdraft and NSF
revenue, this suggests that less than 12 percent of reporting banks
would expect a decline in revenue of even 1 percent, suggesting that
the rule would not have a significant impact on a substantial number
of small entities. The CFPB caveats that this calculation relies on
data from reporting financial institutions with between $1 billion
and $2 billion in total assets to make projections about financial
institutions with below $850 million in total assets.
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Accordingly, the Director hereby certifies that this proposal, if
adopted, would not have a significant economic impact on a substantial
number of small entities. Thus, neither an IRFA nor a small business
review panel is required for this proposal.
VIII. Paperwork Reduction Act
Under the PRA, the CFPB may not conduct or sponsor and,
notwithstanding any other provision of law, a person is not required to
respond to an information collection unless the information collection
displays a valid control number assigned by OMB.
The CFPB has determined that the proposed rule would not impose any
new information collections or revise any existing recordkeeping,
reporting, or disclosure requirements on covered entities or members of
the public that would be collections of information requiring approval
by the Office of Management and Budget under the Paperwork Reduction
Act.
The CFPB has a continuing interest in the public's opinions
regarding this determination. At any time, comments regarding this
determination may be sent to: Consumer Financial Protection Bureau
(Attention: PRA Office), 1700 G Street NW, Washington, DC 20552, or by
email to [email protected].
List of Subjects in 12 CFR Part 1042
Banks, banking, Consumer protection, Credit, Credit unions,
Electronic funds transfers, National banks, Savings associations, Trade
practices.
0
For the reasons set forth in the preamble, the CFPB proposes to add
part 1042 to chapter X in title 12 of the Code of Federal Regulations,
as follows:
PART 1042--NONSUFFICIENT FUNDS FEES
Sec.
1042.1 Authority and purpose.
1042.2 Definitions.
1042.3 Identification and prohibition of abusive practice.
Authority: 12 U.S.C. 5511, 5512, 5531(b) and (d).
Sec. 1042.1 Authority and purpose.
(a) Authority. The regulation in this part is issued by the
Consumer Financial Protection Bureau (CFPB) pursuant to the Consumer
Financial Protection Act of 2010 (CFPA), Public Law 111-203, title X,
124 Stat. 1955.
(b) Purpose. The purpose of this part is to identify certain
abusive acts or practices in connection with certain consumer
transactions by covered financial institutions.
Sec. 1042.2 Definitions.
For the purposes of this part, the following definitions apply:
(a) Account means an ``account'' as defined in Regulation E, 12 CFR
1005.2(b).
(b) Covered financial institution means a ``financial institution''
as defined in Regulation E, 12 CFR 1005.2(i).
(c) Covered transaction means an attempt by a consumer to withdraw,
debit, pay, or transfer funds from their account that is declined
instantaneously or near-instantaneously by a covered financial
institution due to insufficient funds.
(d) Insufficient funds refers to the status of an account that does
not have
[[Page 6051]]
enough money to cover a withdrawal, debit, payment, or transfer
transaction.
(e) Nonsufficient funds fee or NSF fee means a charge that is
assessed by a covered financial institution for declining an attempt by
a consumer to withdraw, debit, pay, or transfer funds from their
account due to insufficient funds. The label used by the covered
financial institution for a fee is not determinative of whether or not
it is a nonsufficient funds fee.
Sec. 1042.3 Identification and prohibition of abusive practice.
(a) Identification. It is an abusive practice for a covered
financial institution to charge a nonsufficient funds fee in connection
with a covered transaction.
(b) Prohibition. A covered financial institution must not assess a
nonsufficient funds fee in connection with any covered transaction.
Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2024-01688 Filed 1-30-24; 8:45 am]
BILLING CODE 4810-AM-P