CFPB Supervisory Highlights Special Edition Looks at “Junk Fees” Charged in Connection With Deposits, Auto Servicing, Mortgage Servicing, Payday and Small-Dollar Lending, and Student Loan Servicing

Continuing its (and the White House’s) “junk fees” rhetoric, on March 8, 2023, the CFPB released a new issue of Supervisory Highlights that carries the title “Junk Fees Special Edition.”  The report discusses the Bureau’s examinations involving fees in the areas of deposits, auto servicing, mortgage servicing, payday and small-dollar lending, and student loan servicing that were completed between July 1, 2022 and February 1, 2023.  

The report’s release coincided with a virtual White House event for state legislators on state efforts to address “junk fees.”  According to media reports about the event, White House officials encouraged state lawmakers to take their own actions to address junk fees.  The White House also released a “Guide for States: Cracking Down on Junk Fees to Lower Costs for Consumers” that discusses approaches states have taken to address junk fees through enforcement and legislation.  CFPB Director Chopra, who spoke at the event, is reported to have offered the CFPB as a resource for state junk fees initiatives and indicated that state lawmakers have sought the CFPB’s advice on potential changes to state consumer protection laws.

Key findings by CFPB examiners include:

Deposits

The Bureau cited institutions for unfair acts or practices based on overdraft fees charged on transactions that authorized against a positive balance, but settled against a negative balance (APSN overdraft fees).  Such fees were the subject of a 2022 Circular issued by the Bureau.  APSN overdraft fees can occur when a bank assesses overdraft fees for debit card or ATM transactions where the consumer had a sufficient available balance at the time the bank authorized the transaction, but the account is insufficient at the time of settlement.  Examiners found instances in which unfair APSN overdraft fees were charged using a consumer’s available balance for fee decisioning, as well as when the consumer’s ledger balance was used.  According to the CFPB, consumers could not reasonably avoid the injury irrespective of account-opening disclosures.  The institutions were directed to stop charging APSN overdraft fees and to issue remediation to consumers who were charged such fees.  

The Bureau also issued matters requiring attention to correct problems that occurred when institutions had enacted policies intended to eliminate APSN overdraft fees  but such fees were still charged.  This occurred where institutions attempted to prevent APSN overdraft fees by not assessing overdraft fees on transactions that authorized positive, as long as the initial authorization was still in effect at or shortly before settlement. Some transactions, however, settled outside of this time period.  Examiners found inadequate compliance management systems where institutions failed to maintain records of transactions sufficient to ensure overdraft fees would not be assessed, or failed to use another solution not to charge APSN overdraft fees.

With regard to non-sufficient (NSF) fees, examiners found institutions had engaged in unfair acts or practices based on the assessment of multiple NSF fees when the same transaction was presented multiple times for payment against an insufficient balance in the consumer’s account.  The institutions agreed to cease charging NSF fees for unpaid transactions entirely and were directed to make refunds to consumers.  The Bureau reported that”[v]irtually all institutions that Supervision has engaged with on this issue reported plans to stop charging NSF fees altogether.”

Auto servicing  

Examiners found that servicers engaged in unfair acts or practices by:

• Assessing late fees in excess of the amounts allowed by consumers’ contracts.
  
  
• Assessing late fees not allowed by consumers’ contracts where, as a result of acceleration of the loan balance, the consumers’ contractual obligation to make further periodic payments was eliminated and the servicers’’ contractual right to charge late fees on such periodic payments was also eliminated.  Servicers had continued to collect late fees even after repossession of the vehicle on periodic payments scheduled to occur after the date of acceleration.
  
  
• Charging estimated repossession fees that were significantly higher than the costs they purported to cover, even where the servicers returned the excess amount to the consumers after they received the invoice for the actual costs.

Examiners also found that auto servicers engaged in unfair and abusive acts or practices by charging payment processing fees that “far exceeded” the servicers’ costs for processing payments.  Servicers only offered two free payment options-preauthorized recurring ACH and mailed checks-which were only available to consumers with bank accounts.  Approximately 90 percent of payments made by consumers incurred a pay-to-pay fee, with servicers receiving over half the amount of the fees from the servicers’ third-party payment processor.

Mortgage servicing  

Examiners found that servicers engaged in unfair acts or practices by:

• Assessing late fees in amounts in excess of the amounts allowed by the borrowers’ loan agreements.  This was the result of the servicers’ failure to input late fee caps into their systems where the borrowers’ loan agreements included a maximum permitted late fee.  Servicers were also found to have violated Regulation Z by including inaccurate late fee payment amounts in periodic statements (since the amounts exceeded the late fees permitted by the loan agreements).
  
  
• Charging consumers for repeat property inspection visits to known bad addresses.
  
  
• Failing to waive certain late charges, fees, and penalties accrued outside of CARES Act forbearance periods where required by HUD for a consumer entering into a permanent COVID-19 loss mitigation option.

Examiners found that servicers engaged in deceptive acts or practices by:

• Sending periodic statements and escrow statements that included monthly private mortgage insurance (PMI) premiums that consumers did not owe.  These consumers’ loan had lender-paid PMI which should not be billed directly to consumers.  
  
  
• Sending periodic statements to consumers in their last month of forbearance that incorrectly listed a $0 late fee amount for the subsequent payment, when a late fee was in fact charged if the subsequent payment was late.

Examiners found that servicers violated the Homeowners Protection Act by failing to terminate PMI on the date the principal balance of the mortgage was first scheduled to reach 78 percent loan-to-value on a mortgage loan that was current.

Payday and small-dollar lending 

Examiners found that lenders in connection with payday, installment, title, and line-of-credit loans engaged in unfair acts or practices by:

• After unsuccessful debit attempts, without consumers’ authorization, splitting missed payments into as many as four sub-payments and simultaneously or near-simultaneously representing to consumers’ banks for payment by debit card.
  
  
• Charging borrowers unexpected fees to retrieve personal property from repossessed vehicles and to cover servicer charges, and withholding the personal property and vehicles until the fees were paid.
  
  
• Failing to stop vehicle repossessions before title loan payments were due as-agreed, and then withholding the vehicles until consumers paid repossession-related fees and refinanced their debts.

Student loan servicing  

Examiners found that servicers engaged in unfair acts or practices by initially processing credit card payments that were subsequently reversed, leading to additional late fees and interest.  Where servicers’ policies did not allow payments to be made using a credit card, customer service representative had erroneously accepted and processed credit card payments.  These payments were subsequently reversed, causing consumers to become delinquent on their accounts.  Servicers did not consistently send notices explaining the reversals or give consumers an opportunity to use another method for making the payments before reversing the credit card payments.

The CFPB’s press release describes the “Junk Fees Special Edition” as a report “on unlawful junk fees.”  However, it appears that all of the violations cited by CFPB examiners that are  discussed in the report did not involve fees that the supervised entity could not lawfully charge.  Rather, there were various errors in how or when the fees were assessed that caused them to be “unlawful.”  The CFPB’s use of the loaded term “junk fees” to describe the fees discussed in this issue of Supervisory Highlights appears intended to further a political agenda rather than further what the CFPB has always described the goal of Supervisory Highlights to be–namely assisting supervised entities in complying with federal consumer financial law.  In recent remarks to the Consumer Law Scholars Conference, CFPB Deputy Director Martinez described credit card late fees as “a fee that has skyrocketed from a small corner of the market to the top of everyone’s most hated junk fee list.”  The CFPB’s continued indiscriminate use of the term “junk fees” to describe what in most cases are heavily regulated, clearly disclosed fees for services used by consumers or that consumers incur as a result of avoidable behaviors serves neither the interests of consumers nor those of industry.