Fees are prolific across financial products and services. Whether it is credit card late fees, overdraft and nonsufficient fund (NSF) fees, or mortgage servicing fees, junk fees have become far too commonplace in our financial marketplace. Junk fees can inflate the price of banking and credit products, obscure the true cost of these products making comparisons near impossible, and prove particularly challenging and damaging for certain consumers.
Junk fees in the financial services marketplace drain tens of billions of dollars per year from American households. The Consumer Financial Protection Bureau (CFPB) found that credit card companies imposed $12 billion in late fee penalties on consumers in 2020 and financial institutions charged consumers more than $15 billion in overdraft and NSF fees in 2019. As discussed in our first blog post in this series, these fees disproportionately harm consumers of color and low-income consumers, and prove particularly challenging for limited English proficient consumers. In addition, by obscuring price transparency for consumers, junk fees diminish consumer choice and impede competition.
Penalty and late fees often cost the consumer far more than the expense the provider incurs to cover the service provided and have increasingly become a profit center for financial services providers. For example, overdraft fees accounted for two-thirds of reported fee revenue for financial institutions that charged them in 2019, and credit card late fees account for 99 percent of penalty fee volume on credit cards. Lucrative penalty fee revenue entices providers to manipulate and create systems that set consumers up to fail. The true cost of penalty fees is often hidden from consumers, hindering price comparison and competition.
Although the CFPB has a long history of fighting exploitative and harmful fee practices in the financial marketplace, it launched a new junk fees initiative in early 2022— the goal of which was to save American households billions of dollars per year. The initiative began with a Request for Information (RFI) about junk fees, and specifically consumer and small business experiences with:
- Fees considered to be a part of the baseline price of a product or service
- Unexpected fees for a product or service
- Inflated fees beyond the cost to the provider
- Opaque or hidden fees, where the purpose of the fee is unclear
In response to this RFI, Consumer Federation of America worked with the National Consumer Law Center, Center for Responsible Lending, and Americans for Financial Reform Education Fund on lengthy comments. The comments affirmed that the CFPB has clear and robust authority to regulate these fees and outlined the many junk fees that proliferate our financial services marketplace:
- Deposit account fees, including overdraft and nonsufficient fund fees; prepaid card and banking app evasions of consumer protection laws;
- Credit card and open-end credit fees, including late fees, fees excluded from APR, fee harvester credit cards, and the varied Buy Now, Pay Later fees;
- Earned Wage Advance fees, including inflated expedite fees and hidden, multiplying fees;
- Nonbanking and cash advance apps fees, including “tips,” inflated expedite fees, and monthly or subscription fees;
- Junk fees related to insurance;
- Mortgage servicing fees, including property inspection, bankruptcy, foreclosure, and attorneys’ fees;
- Auto financing fees, including add-ons, early termination fees for leases, doc fees, prep fees, delivery and handling fees;
- Pay-to-pay fees across marketplaces;
- Remittance fees, including undisclosed third-party fees, inflated exchange rates, and
- Junk fees in debt collection.
The CFPB received at least 50,000 public comments in response to their RFI. Although there is plenty more work to be done to protect consumers from often exploitative junk fees, the CFPB has taken many important steps in the right direction.
- Rulemaking:
- After the CFPB found that credit card companies drained $12 billion from consumers in late fee penalties, it published an Advanced Notice of Proposed Rulemaking (ANPR), signaling a review of penalty policies across the marketplace. CFA again joined forces with the National Consumer Law Center and Americans for Financial Reform Education Fund in response to the ANPR.
- Advisory Opinions and Guidance:
- Pay-to-pay fees, often dubbed by industry as “convenience fees,” are charged to consumers who opt to pay their bill in a certain way (i.e. by phone or by mailing a check). The CFPB issued an advisory opinion clarifying that pay-to-pay fees charged by debt collectors are illegal. In an interpretation of the Fair Debt Collection Practices Act (FDCPA), the CFPB affirmed that debt collectors are prohibited from “collecting any amount that is not expressly authorized by the underlying agreements.”
- The CFPB issued guidance on facially false data in consumer credit reports, affirming the credit reporting companies’ obligation to take sufficient action to detect and remove consumer credit report data that is inconsistent or impossible. The CFPB laid out common examples of facially false data, including inconsistent account information like a bill that is shown as both paid in full and having a balance, and impossible information like a tradeline preceding the consumer’s birth.
- Surprise Depositor fees (often $10 to $19) are charged to a consumer that tries to deposit a check that bounces. In contrast, surprise overdraft fees (often as high as $36) are charged to consumers who cannot reasonably anticipate them. Both of these fees are unavoidable for consumers, even when the consumer does everything in their ability to do so. The CFPB’s guidance affirmed that both of these fees more than likely violate the Consumer Financial Protection Act, and laid out how financial institutions can ensure that their practices follow the law.
- Research:
- Over the last two years, the CFPB has issued various research on overdraft and nonsufficient (NSF) fees, showing that financial institutions rely heavily on this revenue. The 2021 research found that consumers were charged an estimated $15.47 billion in 2019, which accounted for two-thirds of reported fee revenue. This research accompanied earlier reports finding that under 9% of accountholders were burdened with 80% of all overdraft revenue. Along with continued pressure on the marketplace from advocates and Congressional leaders, the CFPB’s research proved helpful in spurring market changes to overdraft and NSF fee policies. These voluntary changes will save about $3 billion annually; however, many banks and credit unions still charge inflated overdraft fees. Enforcement actions like the one against Regions Bank (discussed below) illustrate that financial institutions continue to employ deceptive practices and charge exorbitant overdraft fees in order to maximize profits. We have encouraged the CFPB to utilize its rulemaking authority to enact long-term, positive marketplace reform.
- In addition, the CFPB issues an annual report to Congress on College Banking and Credit Card Agreements. This year’s report found that 668,000 students paid almost $15.5 million for bank accounts offered in partnership with their colleges and universities. Students were charged monthly service fees, overdraft fees, inactivity fees, and out-of-network ATM fees. The prevalence of fees among college students again illustrates the need for widespread, legally binding reform.
- Supervision and Enforcement:
- Regions Bank: An Alabama-based, repeat offender, Regions Bank was ordered to pay $50 million towards the victims relief fund and to refund at least $141 million to harmed consumers. Regions exploited consumers with overdraft fees by manipulating systems and creating obstacles for consumers to anticipate and, thus, avoid overdraft fees. Overdraft fees were also authorized when consumers had a positive balance in their account and therefore would not reasonably expect to be charged an overdraft fee (commonly referred to as an authorized positive fee). In 2015, Regions Bank was ordered to refund $49 million to consumers and pay $7.5 million into the civil penalties fund for charging overdrafts to consumers who had opted out of overdraft coverage.
- ACTIVE Network: The CFPB sued the ACTIVE network for tricking consumers into its annual subscription discount club and signing up for other events. The network operates a payment system that is used by charity races and YMCA camps, among others. The CFPB alleges that the ACTIVE network used dark patterns to hammer consumers with fee increases and hidden charges, as well as to trick consumers into club memberships. The CFPB’s action followed enforcement actions and settlements in Iowa and Vermont.
- The CFPB’s semiannual report of Supervisory Highlights revealed that mortgage servicers had charged costly pay-to-pay fees to consumers who had opted to pay over the phone. The servicers were required to reimburse those fees they had failed to disclose properly.
The actions outlined above are essential steps towards limiting exploitative junk fees in the financial marketplace. We look forward to working with the CFPB on all of its future endeavors towards ensuring a fair, transparent marketplace.