Fees for Instantaneously Declined Transactions (NSF fees)

CFPB Summary re: Fees for Instantaneously Declined Transactions (NSF fees)

12 CFR Part 1042

The CFPB issued a proposed rule that would prohibit covered financial institutions from charging fees, such as nonsufficient funds fees, when consumer initiate payment transactions that are instantaneously declined.  Charging such fees would constitute an abusive practice under the Consumer Financial Protection Act’s prohibition on unfair, deceptive or abusive acts and practices.

Comments on the proposal are due by March 25, 2024.  The proposal can be found here.

Summary

The Bureau is proposing to prohibit covered financial institutions from charging non-sufficient funds (NSF) fees to prevent abusive practices related to such fees.  The CFPB is preliminarily concluding that charging NSF fees in instances where a consumer’s transaction is declined instantaneously would constitute an abusive practice under the Consumer Financial Protection Act’s UDAAP provisions.  The proposal would prohibit financial institutions from engaging in this practice across all instantly declined transactions, regardless of transaction method (debit card, ATM, person to person).

The proposal notes that the amount of an NSF fees is typically not pegged to the transaction’s processing cost or the transaction’s amount; institutions generally charge a fixed amount per declined transaction.  The Bureau notes that when NSF fees are charged, they are almost always charged in exclusively in connection with noncash payments (such as ACH, cards, mobile application payments and checks) and the use of these payment methods have grown rapidly due in large part to technological and regulatory changes.  The costs of declining such payments is trivial.

Definitions

The proposals include the following definitions:

  • Account
    • Checking, savings or other consumer asset account held by a financial institution (directly or indirectly) including certain club accounts established primarily for personal, family or household expenses.
    • An account would not include:
    • An account held by a financial institution under a bona fide trust agreement;
    • An occasional or incidental credit balanced in a credit plan;
    • Profit sharing and pension accounts established under a bona fide trust agreement;
    • Escrow accounts such as for payments of real estate taxes, insurance premiums, or complexion of repairs or improvements; or
    • Accounts for purchasing US savings bonds.
  • Covered Financial Institution
    • The proposal provides that a “covered financial institution” would mean a bank, savings association, credit union or other person that directly/indirectly holds an account belonging to a consumer or that issues an access device and agrees with a consumer to provide electronic funds transfer services. There is no asset threshold requirement for such institutions.
  • Covered Transaction
    • Defined as an attempt by a consumer to withdraw, debit, pay or transfer funds from their account that is declined instantly or near instantly by a covered financial institution due to insufficient funds. Transactions that are declined or rejected due to insufficient funds hours or days after the consumer’s attempt would not be included in this definition.
    • Based on this definition, checks and ACH transactions would not be covered.
  • Insufficient Funds
    • Refers to the status of an account that does not have enough money to cover a withdrawal, debit, payment or transfer transaction.
  • Nonsufficient Funds Fee or NSF Fee
    • Refers to a charge that is assessed by a covered financial institution for declining an attempt the a consumer to withdraw, debit, pay or transfer funds from their account due to insufficient funds. This definition also clarifies that the name used by the financial institution for a free is not determinative of whether it is considered a “nonsufficient funds fee.”

Abusive Conduct

  • Under the CFPA, the Bureau may declare an act or practice to be abusive in connection with the provision of a consumer financial product/service if the act or practice takes unreasonable advantage of a lack of understanding on the part of the consumer of the material risks, costs or conditions of the product/service. The Bureau is preliminarily determining that charging an NSF fee in connection with a covered transaction would take unreasonable advantage of consumers’ lack of understanding of the material risks, costs or conditions associated with their deposit accounts and thus would be abusive.
  • The Bureau notes that the statutory text of the prohibition does not require a finding that the consumer’s lack of understanding was reasonable to demonstrate abusive conduct. And, the statutory text does not require that the covered financial institution caused the person’s lack of understanding through untruthful statements or other actions/omissions.  The Bureau concludes that consumers initiating covered transactions that incur NSF fees would generally lack awareness of their available account balance or other information about the material risks, costs, or conditions regarding their account.
  • The proposal notes that covered financial institutions rarely charge NSF fees on covered transactions and that the Bureau is proposing this rule primarily as a preventive measure. The CFPB is proposing to preempt imposition of new fees that would harm consumers in the future.

Unreasonable Advantage Taking

  • The proposal notes that a practice is abusive if it takes unreasonable advantage of consumers’ lack of understanding of the material risks, costs, or conditions of a consumer financial product/service. The CFPB generally considers it unreasonable for a financial institution to benefit from, or be indifferent to, negative customer outcomes resulting from a consumer’s lack of understanding. For example, the proposal notes that NSF fees are not fees for a service and charging such fees where the consumer receives no service in return may be considered unreasonable advantage-taking.

Proposed Effective Date

  • The Bureau is proposing that this rule have an effective date of 30 days after publication of the final rule in the Federal Register.