By: Thomas Dee
February 2, 2022 — The Consumer Financial Protection Bureau (CFPB) announced on January 26th that it is launching a broad-based review of what it criticized as “back-end,” or “junk,” fees that banks and other consumer finance companies charge—an effort that could span bank overdraft fees, credit card fees, prepaid card inactivity fees, mortgage closing costs, installment loan fees, and beyond. In at least one area, bank overdraft fees, the CFPB’s request for information (RFI) on fees is yet another indication that regulatory reform is likely coming. In other areas, such as credit card fees, we believe the CFPB faces severe statutory limits on its ability to act, despite its aggressive rhetoric.
In the announcement, CFPB Director Rohit Chopra (D) said, “Many financial institutions obscure the true price of their services by luring customers with enticing offers and then charging excessive junk fees.” The review is broad, both in terms of the financial products covered (deposit accounts, credit cards, prepaid cards, remittances/payments, mortgages, and other loans/services) and the types of fees (the CFPB explicitly called out close to 20, including late fees, overdraft fees, convenience fees, and ancillary mortgage closing fees).
Specifically, the CFPB’s RFI seeks public comment on how what it termed “junk fees,” including those that were unexpected or are high relative to the service provided, have impacted consumers. The Bureau appears to be approaching its review from the perspective of competition, suggesting that back-end fees can make it harder for consumers to comparison shop than, say, a disclosed annual percentage rate (APR). The comment period closes March 31st, and the review could shape future enforcement, guidance, and rulemaking, according to the CFPB.
Industry quickly criticized the CFPB’s announcement, with eight leading trade associations releasing a joint statement calling the RFI a “misguided effort that paints a distorted and misleading picture of our country’s highly competitive financial services marketplace.” They will reasonably argue that the financial services industry generally moved away from non-transparent fees following the 2008 financial crisis.
Indeed, bank fees and non-bank fees are already subject to various laws and regulations including the Truth in Lending Act (TILA), the Electronic Fund Transfer Act (EFTA), and Dodd-Frank Act’s prohibition on unfair, deceptive, or abusive acts and practices (UDAAPs). For example, credit card fees, including any Bureau-coined “back-end” fees, must be clearly disclosed in card agreements and several types of fees enjoy existing statutory safe harbors.
The RFI could portend certain rulemaking and enforcement shifts. Most notably, we continue to believe the CFPB is likely to pursue rulemaking on bank overdraft fees in 2022 or 2023 that could include changes to the consumer “opt-in” process and/or limits on the frequency of fees (see “Bank Overdraft: CFPB Overdraft Rulemaking Still Likely, But Debt Collection, Small-Dollar Lending, Housing to Take Precedence” July 26, 2021).
More broadly, the review may suggest scrutiny of financial services business models that are heavily reliant on fees. We believe the CFPB could issue a compliance bulletin or guidance highlighting examples of UDAAPs or other violations that could come from back-end fees that could be paired with an enforcement focus on these issues. Less tangibly, the RFI is a sign the CFPB may use its unofficial power of the “bully pulpit” to encourage companies to move toward transparent and consumer-friendly fee models. Financial services companies and investors should monitor these developments for implications for companies across the consumer finance marketplace.
The CFPB’s “fee” review is one of two significant new initiatives to have launched in the first three-and-a-half months of Director Chopra’s tenure. The second covers the buy now, pay later (BNPL) industry: In December, the CFPB sent letters to large BNPL firms Affirm Holdings Inc. (AFRM), Afterpay Ltd. (APT on the Australian exchange), PayPal Holdings Inc. (PYPL), Klarna, and Zip, requesting broad-based information on their businesses. In January, the CFPB submitted a public request for comment on the industry, which could guide future rulemaking and enforcement priorities. We also believe the CFPB may designate the BNPL industry for supervision, which typically leads to an uptick in industry enforcement in the ensuing months and years.
We expect the CFPB’s list of new initiatives to grow in the coming months, as Director Chopra—widely expected to be an aggressive regulator—seeks to shape his legacy at the Bureau.