ARTICLE
8 February 2024

Declined: CFPB Proposes Rule To Limit Non-Sufficient Funds Fees

One week after the CFPB published its proposed rule restricting overdraft fees, the CFPB proposed yet another rule prohibiting nonsufficient funds fees (NSF fees)...
United States Finance and Banking
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One week after the CFPB published its proposed rule restricting overdraft fees, the CFPB proposed yet another rule prohibiting nonsufficient funds fees (NSF fees) on transactions like declined debit card purchases and attempted ATM withdrawals, among others.

This is the latest CFPB effort to curb what it views are "junk fees." Although often discussed together, NSF fees are different from overdraft fees because NSF fees are charged only after a declined transaction. Using the CFPB's abusiveness authority, the proposed rule would prohibit fees for declining a transaction where the financial institution is able to decline the transaction in real time or within seconds after the payment request is initiated. Unlike the proposed overdraft rule, the proposed NSF fees rule would apply broadly to financial institutions, not merely to financial institutions with assets over a certain threshold. Comments on the proposed rule are due March 25, 2024.

Affected Companies

The proposed rule would apply to "financial institutions," as defined in Regulation E, which includes banks, savings associations, credit unions, or any other person that directly or indirectly holds a consumer account or that issues an access device to a consumer to provide electronic fund transfer services. The proposed rule would also cover "accounts," as defined in Regulation E, such as demand deposit (checking), savings, or other consumer asset accounts held directly or indirectly by a financial institution and established primarily for personal, family, or household purposes. Accounts held by a financial institution under a bona fide trust agreement, profit-sharing and pension accounts established under a trust agreement, escrow accounts, and accounts for accumulating funds to purchase U.S. savings bonds would be excluded from coverage, as these accounts are not "accounts" under the definition in Regulation E.

Covered Transactions

The proposed rule would prohibit NSF fees on all "instantaneously or near-instantaneously" declined transactions. The CFPB explained this happens "when the transaction is processed in real time and there is no significant perceptible delay to the consumer when attempting the transaction." For example, NSF fees due to declinations on ATMs or point-of-sale (POS) debit transactions would be prohibited.

In contrast, transactions that are declined or rejected hours or days after the attempt because of insufficient funds would not be covered. The proposed rule would not include, for example, NSF fees on checks and ACH transactions, since these payment methods must go through a clearing process, which typically takes one to two days.

Abusiveness Authority

The CFPB relies on its Dodd-Frank Act authority to declare certain acts or practices as "abusive" to promulgate this proposed rule. Under that authority, an act or practice can be abusive if a person takes unreasonable advantage of the lack of understanding on the part of a consumer of the material costs, risks, or conditions of the product or service.

In the proposed rule, the CFPB states that NSF fees are abusive in covered transactions because "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." In the CFPB's view, this is true even if consumers are given fee disclosures when a transaction is attempted. Note that Regulation DD and Regulation E already require fee disclosures upon account opening and before the consumer first uses electronic fund transfer services.

The CFPB characterizes NSF fees as something "paid without any service being received," which appears to be a newly articulated criterion for abusiveness. Per the CFPB, "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." Put another way, if "consumers would be paying something or taking a risk but receiving nothing in return[,]" the CFPB might consider that an abusive practice.

The CFPB has gone after similar concerns in the past, using its unfairness authority to fine companies for charging consumers for services without providing the benefit of those services, such as for identity protection or credit monitoring services. Perhaps the CFPB decided to use its abusiveness authority instead of its unfairness authority in this rulemaking because, under abusiveness, the CFPB need not analyze whether NSF fees are "reasonably avoidable" by the consumer, as might be required under the unfairness definition. The CFPB may also be using this rulemaking to restate how its abusiveness authority should be applied, departing from how it had been applied in prior rulemakings under previous leadership.

Closing a Potential Loophole?

It is no coincidence that the CFPB chose to publish this proposed rule one week after it published its proposed overdraft rule. In the NSF fee proposed rule, the CFPB explained that part of the reasoning for the proposal was prophylactic.

According to the CFPB, NSF fees are rarely charged on ATM or POS debit transaction declinations, although the CFPB is also aware that NSF fees are currently being charged in connection with prepaid accounts and transactions declined at ATMs that are outside a depository institution's ATM network.

Yet, the CFPB states that it is proposing the rule primarily as a preventive measure. "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." The CFPB fears that if the overdraft proposed rule is finalized and it reduces overdraft fee revenue, companies might shift to NSF fees instead.

Financial institutions that could be subject to either the overdraft proposed rule or this NSF fee proposed rule will need to consider how the rules may affect their business and their ability to provide financial products and services to consumers. Additionally, because the NSF fee proposed rule would apply only to some transactions and not others, companies will need to ensure their systems can properly distinguish between declinations occurring from a covered transaction and those from non-covered transactions

**Special thanks to Glen Hisani for their assistance with this article.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

ARTICLE
8 February 2024

Declined: CFPB Proposes Rule To Limit Non-Sufficient Funds Fees

United States Finance and Banking

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