As person-to-person payments become mainstream, the proposal would proactively outlaw fees that financial institutions could assess on instantaneously declined transactions.
On January 24, 2024, the Consumer Financial Protection Bureau (CFPB) proposed a rule, Fees for Instantaneously Declined Transactions (the Proposal), that would prevent banks and other financial institutions from charging non-sufficient funds (NSF) fees on transactions declined in real time.
When a consumer initiates a withdrawal, debit, payment, or transfer transactions such as those processed on certain person-to-person (P2P) apps, and the amount requested exceeds the funds in their account, a financial institution may decline the transaction and charge the consumer an NSF fee. The Proposal would prohibit financial institutions from charging NSF fees on such instantaneously (or near-instantaneously) declined transactions, i.e., when the transaction is declined with no significant perceptible delay after the consumer initiates the transaction. The Proposal would not cover transactions declined or rejected due to insufficient funds hours or days after the consumer’s attempt, such as checking and ACH transactions.
Under the Proposal, charging such instantaneous or near-instantaneous NSF fees would constitute an abusive practice under the Consumer Financial Protection Act’s (CFPA’s) prohibition on unfair, deceptive, or abusive acts or practices (UDAAP). CFPA Section 1031(d)(2) (12 USC 5531) states that an act or practice may be deemed abusive when it “takes unreasonable advantage of a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service.” The CFPB asserts that charging NSF fees, which are not fees for a service, may constitute “unreasonable advantage-taking” that effectively makes them a penalty for consumers and a windfall for financial institutions.
The Proposal would adopt the term “covered financial institutions” as defined by Regulation E: “a bank, savings association, credit union, or any other person that directly or indirectly holds an account belonging to a consumer, or that issues an access device and agrees with a consumer to provide electronic fund transfer services.” It would apply to covered financial institutions of any size, and depository as well as non-depository institutions.
The Proposal acknowledges that “currently covered financial institutions rarely charge NSF fees” for transactions declined in real time on automated teller machine (ATM) or point-of-sale (POS) debit transactions. However, the CFPB has determined that it must act to prevent such fees from proliferating as P2P payments become mainstream, to “ensure an equal playing field” and protect “consumers with higher financial vulnerability.”
“As technological advancements may eventually make instantaneous payments ubiquitous,” the Proposal states, “the CFPB believes that [it] is important to proactively set regulations to protect consumers from abusive practices.” The CFPB is clear that the Proposal is being advanced “primarily as a preventive measure,” and “to preempt imposition of new fees that would harm consumers in the future.”
As NSF fees are hardly rampant (a fact the CFPB acknowledges), the Proposal seems to shed more light on how the CFPB is developing and implementing its UDAAP doctrine. Specifically, the CFPB will continue to develop rules addressing unfairness, deception, and abuse — whether actual or potential — in the context of offering and providing consumer financial products and services.
Note on Overdraft Fees
The Proposal does not apply to overdraft fees, although it follows the CFPB’s separate and recent proposal to limit overdraft fees. Under the overdraft proposal, financial institutions with over $10 billion in assets would have to comply with the disclosure requirements for overdraft products under Regulation Z (the implementing regulation of the Truth in Lending Act), unless the products were provided at or below costs (i.e., far lower than current market rates).
Public comments on the Proposal are due by March 25, 2024. The Proposal would become effective 30 days after publication of a final rule in the Federal Register.
Latham & Watkins will continue to monitor developments in this area.