Regulators Push to Eliminate "Junk Fees"

Lawmakers and regulators announced plans to eliminate “junk fees” – overdrafts and other charges consumers pay on deposit accounts.

Is your institution charging junk fees? What happens if regulators limit (or even eliminate) the amount you can charge for overdrafts and insufficient fund fees? Does your business model rely on the income generated from these fees?

The Consumer Financial Protection Bureau (CFPB) recently lowered the late fees credit card companies can charge from $32 to $8, which is a pretty sizable cut. Now, they’re coming after banks, credit unions, and mortgage lenders.

Can you keep your overdraft program? What happens if this fee income disappears? Read on to find out.

What are junk fees?

First things first: What exactly is a junk fee?

The CFPB’s proposed rule on overdrafts and junk fees defines them as fees that don’t align with costs. While the CFPB has been leading the charge on eliminating these fees, it’s important to note that other agencies aren’t fond of them either.

The FDIC, OCC, and NCUA joined the CPPB, arguing that “authorize positive, settlement negative” (APSNs) should be eliminated. ASPNs are fees charged when a consumer’s account shows a positive balance at the time of the transaction, but late posting payments push it into the red.

Even though surveys show that consumers desire access to overdraft services, the days of institutions generating revenue from them might be numbered.

While financial institutions of less than $10 billion aren’t included in the CFPB’s proposed rule, regulators have indicated that they want to curb all revenue from overdrafts, bounced checks, representments (when a consumer incurs multiple overdrafts from a single merchant), and account fund information fees.

And junk fees aren’t just about deposit accounts. In March 2024, the CFPB set its sights on mortgage closing costs, claiming that the fees borrowers pay for appraisals, credit reports, etc., artificially inflate the price of homeownership. Mortgage lenders need to watch this situation closely. As the CFPB weighs its options, these lenders should determine if the additional fees they charge homeowners align with costs.

What will happen to my overdraft program?

The CFPB offers two solutions for banks, credit unions, and other lenders when it comes to charging overdrafts and other fees:

• They must prove overdrafts and other fees only cover the costs of their program and are revenue-neutral
• These fees can be set at much lower amounts – the CFPB has suggested overdrafts as low as $3.

Financial institutions and other lenders might begin to meet this regulatory challenge by conducting risk assessments on overdrafts and other fee income. They should calculate the actual costs of mailing statements to consumers, overdraft protection, and other fees to see if they align with what they’re charging.

Armed with this information, they can determine if the CFPB’s benchmark rates are the best way to go or if they should spend more time cost-calculating.

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