CFPB proposes 'proactive' rule to halt NSF fees on real-time payments

Bloomberg News

The Consumer Financial Protection Bureau said it is taking "proactive steps" to stop banks, credit unions and peer-to-peer payment companies from charging fees when certain transactions are immediately declined due to insufficient funds.

On Wednesday, the CFPB proposed a rule that would consider nonsufficient funds fees to be unlawful — and considered an "abusive practice" under the Consumer Financial Protection Act — if the fee is charged on a debit, ATM or peer-to-peer payment that is declined immediately.

The CFPB acknowledged in its proposal that financial institutions rarely charge NSF fees for ATM or debit transactions that get declined at what the bureau called "the swipe, tap, or click." But as real-time payments become ubiquitous, the CFPB said it "believes that [it] is important to proactively set regulations to protect consumers from abusive practices." 

The CFPB provided an example of a $100 grocery purchase with a debit card that gets declined at the point of sale because the account only has $90. A financial institution currently does not assess an NSF fee on such a transaction because it was not processed through the Automated Clearing House system that clears electronic credit and debit transfers, the CFPB said. 

NSF fees — also known as returned-item fees, because they typically were charged for returned or bounced checks — are largely a thing of the past among the top 20 banks. But the CFPB said that it recently found through its market monitoring that some large banks with more than $10 billion in assets are still charging NSF fees with a median fee of $32. 

The proposed rule is part of the CFPB's effort to crackdown on what the agency calls "junk fees," that consumers have no control over but that the agency claims produce billions in income for financial institutions. 

CFPB Director Rohit Chopra said in a press release accompanying the proposal that he is trying to prevent "new junk fees from emerging in the future." The CFPB also claimed in the press release that "banks have previously increased fees when technology provided an opportunity."

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"Over the years, large banks and their consultants have concocted new junk fees for fake services that cost almost nothing to deliver," Chopra said in a press release. "Banks should be competing to provide better products at lower costs, not innovating to impose extra fees for no value."

The bureau said it "preliminarily concludes" that charging NSF fees for debit, ATM and person-to-person transactions runs afoul of the federal prohibition on unfair, deceptive or abusive acts or practices, known as UDAAP.

Lindsey Johnson, president and CEO of the Consumer Bankers Association, called the CFPB's proposal "misleading" because the vast majority of banks have removed or cut NSF fees without legislation or regulation. She also claimed the bureau is relying on data that is 10 years old.

"We will work with our members to understand what, if any, business practices would actually be impacted by the Bureau's rulemaking," Johnson said. "The CFPB's proposed rule is a marked departure from the agency's previous disclosures about the rulemaking, in that the proposal would only impact transactions that are declined 'instantaneously or near-instantaneously.' It would explicitly not cover check and ACH transactions."

Bankers say regulators never had a problem with NSF fees until the Biden administration took on the mantra of eliminating so-called "junk fees," and lumped all bank fees into the mix, including those that have been deemed legal.

The CFPB's proposed rule, which is open for public comment, is part of a broader regulatory crackdown on NSF fees generally. 

Last year, both the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency warned banks about the risks of charging multiple NSF fees for the same transaction. Acting Comptroller of the Currency Michael J. Hsu has said that charging NSF fees with a high limit, or without limits for multiple transactions on a single day, is an unfair practice. The FDIC has said it will consider enforcement actions if the banks it supervises are repeatedly charging NSF fees for the same transaction, and would consider NSF fee disclosures "deceptive" if a bank does not adequately disclose the charges to consumers.

The CFPB is seeking public comments on the proposal by March 25.