On January 24 the Consumer Financial Protection Bureau (CPFB or bureau) proposed a rule with request for comment to prohibit covered financial institutions from charging nonsufficient funds (NSF) fees, when consumers initiate payment transactions that are declined “instantaneously or near-instantaneously.” The proposal would prohibit financial institutions from charging fees for instantaneously declined transactions, regardless of transaction method (e.g., debit card purchases, ATM withdrawals, person-to-person payments). The CFPB considers charging such fees to constitute an abusive practice under the Consumer Financial Protection Act’s prohibition on unfair, deceptive, or abusive acts or practices (UDAAP).
The CFPB recognizes that many financial institutions have stopped charging NSF fees in recent years and when they do charge such fees, it is on checks or Automated Clearing House (ACH) transaction declines, which are not instantaneous. However, the bureau is aware of limited instances where such fees might be charged on Automated Teller Machine (ATM) or point-of-sale (POS) debit transactions, or online transfer and in-person teller transactions. As technology advances, financial institutions may have increased capability to decline transactions in real time. The proposed rule is intended as a proactive approach to prevent the practice from becoming prevalent and harming consumers.
The CFPB points out that the combined costs of overdraft and NSF fees to consumers is higher than the combined costs of periodic maintenance fees and ATM fees. In the proposed rule, the bureau states:
“Generally, an overdraft fee is charged when a transaction (debit, payment, transfer, or withdrawal) that exceeds the consumer’s account balance is paid (covered) by the accounting-holding financial institution. An NSF fee is charged when a transaction (debit, payment, transfer, or withdrawal) that would exceed the account balance if it were paid is instead returned unpaid by the account-holding financial institution. Despite this distinction, the CFPB believes that surveys, reports, and studies often group these two types of fees together.”
The proposed rule maintains that the NSF and overdraft fees tend to impact more financially vulnerable consumers such as those with lower incomes, lower average credit scores, lower account balances, and those less likely to have a general-purpose credit card. A CFPB study showed that 9 percent of all accounts in the study paid nearly 80 percent of combined overdraft and NSF fees. The bureau asserts that incurring these fees also contributes to a consumer’s perception of whether the banking system is fair and transparent. According to a Federal Deposit Insurance Corporation (FDIC) survey, almost thirty percent of unbanked households in 2021 stated a main reason for not having an account was related to fees or minimum balance requirements.
The proposed rule also discusses how this new proposal interacts with another recent proposed rule from the bureau:
“…whether there are specific impacts on depository institutions and credit unions with $10 billion or less in assets may also depend on interactions with the Overdraft Proposed Rule. The Overdraft Proposed Rule only applies to depository institutions with more than $10 billion in total assets. If financial institutions impacted by the Overdraft Proposed Rule are those most likely to charge NSF fees on covered transactions under the [current approach], it would imply that depository institutions and credit unions with $10 billion or less in total assets may be less likely to be impacted by [NSF] proposed rule. Thus, whether there are specific impacts on depository institutions and credit unions with less than $10 billion in total assets will depend on which institutions opt to start charging NSF fees on covered transactions and, possibly, on interactions between the proposed rule and the Overdraft Proposed Rule.”
The CFPB notes that “banks’ overdraft/NSF fee revenue declined significantly compared to pre-pandemic levels (predominantly due to changes in bank policies), and nearly two-thirds (65 percent) of banks with over $10 billion in assets have eliminated NSF fees, representing an estimated 97 percent of annual NSF fee revenue earned by those institutions. However, 80 percent of credit unions with over $10 billion in assets still charge NSF fees.”
Comments on the proposed rule must be received on or before March 25, 2024. America’s Credit Unions’ Regulatory Advocacy team has prepared this summary of the NSF proposed rule.
We previously covered the bureau’s overdraft proposed rule in a recent post in the Compliance Blog.