New CFPB Guidance: Surprise Overdraft Fees and Returned Check Fees Are Likely Unfair and Unlawful

On October 26, 2022, the Consumer Financial Protection Bureau (CFPB) issued guidance stating “surprise overdraft fees” and “returned deposited item fees” generally violate the federal Consumer Financial Protection Act’s prohibition on “unfair practices” when consumers cannot avoid such fees. In its analysis, the CFPB emphasized that an act or practice is unfair under the law when: (i) it causes or is likely to cause substantial injury to consumers that is not reasonably avoidable by consumers; and (ii) the injury is not outweighed by countervailing benefits to consumers or to competition.

Surprise Overdraft Fees

The CFPB’s guidance (Circular 2022-06) focuses on “unanticipated” overdraft fees: those arising from transactions that a consumer would not reasonably expect to result in an overdraft fee. In particular, the guidance addresses debit card transactions where the available balance when the consumer initiates the transaction is displayed as sufficient to cover the transaction, but is insufficient at the time of settlement, resulting in an overdraft fee. Since consumers can easily assess their available balance through mobile apps, online, ATMs, or by phone, they reasonably may not expect to incur an overdraft fee in this situation, according to the guidance.

In addition, the guidance states a consumer is likely to reasonably expect that if a debit card transaction is authorized at the point of sale, he or she will not later incur an overdraft fee. The guidance notes that consumers cannot reasonably be expected to understand and account for delays between authorization and payment, nor can they control the methods by which a financial institution settles other transactions that could affect the imposition of overdraft fees.

The guidance concludes that the injury from unanticipated overdraft fees likely is not outweighed by any countervailing benefits to consumers or to competition.

Returned Deposited Item Fees

The CFPB’s guidance (Circular 2022-06) states that blanket policies of charging returned deposited item fees to consumers for all transactions no matter the circumstances of the transaction or patterns on the account are likely unfair. The guidance emphasizes that consumers are not reasonably able to avoid such fees, since a depositor generally has no control over whether a deposited check will be paid or not and has no reason to anticipate that a deposited check will be returned.

The guidance states that returned deposited item fees cause substantial injury to consumers and that such injury is not likely outweighed by countervailing benefits to consumers or to competition.

It's important to note the guidance focuses on financial institution policies that broadly impose returned deposited item fees under circumstances where consumers do not know that checks will be returned. Policies with fees that are targeted to behavior a consumer could avoid, such as repeatedly depositing bad checks from the same originator or depositing checks that are unsigned, would not violate the prohibition under the guidance.

Complying with the New CFPB Guidance

Depository institutions are encouraged to review their practices and procedures, and make appropriate adjustments, to avoid any legal or regulatory risk as a result of this guidance.

If you have questions or concerns about your institution’s policy, contact Jay Spruill or a member of the Banking & Financial Services practice team.