Lynn Woosley is a Senior Director with Treliant. She is a seasoned executive with extensive risk management experience in regulatory compliance, consumer and commercial credit risk, credit and compliance risk modeling, model governance, regulatory change management, acquisition due diligence, and operational risk in both financial services and regulatory environments.
- Source: ConsumerFinance.gov
On October 26, 2022 the Consumer Financial Protection Bureau (CFPB or Bureau) issued Compliance Bulletin 2022-06: Unfair Returned Deposited Item Fee Assessment Practices (Bulletin), which warned that certain practices associated with fees charged when a check deposited into a consumer’s account is returned by the check originator’s bank may be unfair acts or practices under the Consumer Financial Protection Act (CFPA). Treliant knows deposit compliance and consumer protection. If you need assistance assessing your institution’s risk of UDAAPs associated with deposit operations, we can help.
In this Bulletin, the CFPB focused on returned item fees. A depositor is charged a returned item fee when a check deposited into the consumer’s account is returned unpaid by the check originator’s bank. The CFPB concluded that blanket practices of charging returned item fees for all deposited items that are returned unpaid may be an unfair practice under the CFPA.
The CFPB noted that consumers have no control over whether or when a deposited check will clear, may be unable to verify available funds before depositing the check, do not know the check has been returned before a fee is assessed, and may be unable to recoup any fees charged by the depositor’s bank from the check originator.
In determining that disclosure of returned item fees may be insufficient to avoid unfairness under the CFPA, the CFPB compared returned item fees to certain creditor remedies prohibited by the Federal Trade Commission’s (FTC’s) Credit Practices Rule. In American Financial Services Ass’n v. F.T.C., the FTC argued that, although the creditor remedies were disclosed and included in contracts, consumers were not able to shop for alternative remedial provisions and default in typically the product of forces beyond a debtor’s control. The Court of Appeals for the District of Columbia Circuit agreed.
The Bureau also noted that Returned Deposit Item fees are not “well-tailored to recoup costs from the consumers actually responsible for the costs to depository institutions of expected losses s for the limited circumstances in which the institution cannot recoup funds made available to the depositor on a check that is later returned.”
The CFPB asserted that consumers and the public interest may benefit from deterring deposit of checks that will be returned if the “policy and practice are well-tailored to address the issue, do not harm consumers in some other way, minimize losses to the depository institution that would be passed through to consumers, bolster the integrity of the banking system through loss avoidance, and, in the case of fraud, prevent conduct that offends public policy as embodied in statutes and common law.” However, the CFPB stated such “deterrence can only be accomplished through the collection of fees in circumstances where a consumer anticipates a check will be returned but deposits it anyway, such as where a consumer knowingly deposits a counterfeit check.” In addition, the CFPB later notes that, “With respect to fraud, it is also not apparent that the nature or amount of the fees would result in deterrence beyond other available mechanisms, such as reviewing depositors’ accounts, criminal penalties, or more tailored Returned Deposited Item fee policies aimed at consumers who deposit bad checks intentionally or negligently,” citing F.T.C. v. Amazon.com.
Finally, the CFPB cited economic research indicating back-end penalty fees may reduce consumers’ ability to conduct competitive price shopping both because back-end fees lessen the transparency of front-end costs to consumers and because consumers do not typically shop on the basis of penalty fees they do not intend to incur.
The CFPB press release announcing the Circular was issued simultaneously with Consumer Protection Circular 2022-06, Unexpected Overdraft Fee Assessment Practices (Circular). In the Circular, the CFPB posited that assessing overdraft fees may be an unfair practice under the Consumer Financial Protection Act (CFPA) even if fee practices comply with Regulation E and Regulation Z. The Federal Deposit Insurance Corporation (FDIC) has also warned banks that charging additional NSF fees when represented ACH and check transactions are returned after the initial unpaid transaction was declined results in increased risk of unfair or deceptive acts and practices. It is clear that deposit account fees will remain under high levels of regulatory scrutiny. If your institution is concerned with UDAAP risk in deposit account practices, Treliant can help.