Fees for Instantaneously Declined Transactions; Withdrawal of Proposed Rule

CONSUMER FINANCIAL PROTECTION BUREAU <CFR>12 CFR Part 1042</CFR> <DEPDOC>[Docket No. CFPB-2024-0003]</DEPDOC> <RIN>RIN 3170-AB16</RIN> <SUBJECT>Fees for Instantaneously Declined Transactions; Withdrawal of Proposed Rule</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Consumer Financial Protection Bureau. <HD SOURCE="HED">ACTION:</HD> Withdrawal of proposed rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> The Consumer Financial Protection Bureau (CFPB) is withdrawing its proposed rule to prohibit banks and other financial institutions from charging certain nonsufficient funds (NSF) fees, such as those for declined debit card purchases, Automated Teller Machine (ATM) withdrawals, and some person-to-person payments. The CFPB will determine whether a more comprehensive approach to also prohibit NSF fees charged for additional types of transactions will better protect consumers from potentially unlawful fees. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> The proposed rule published January 31, 2024, at 89 FR 6031 is withdrawn as of January 14, 2025. </EFFDATE> <HD SOURCE="HED">ADDRESSES:</HD> The docket for this withdrawn proposed rule is available at <E T="03">https://www.regulations.gov/docket/CFPB-2024-0003.</E> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> George Karithanom, Regulatory Implementation and Guidance Program Analyst, Office of Regulations, at 202-435-7700 or <E T="03">https://reginquiries.consumerfinance.gov/.</E> If you require this document in an alternative electronic format, please contact <E T="03">CFPB_Accessibility@cfpb.gov.</E> </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">I. Summary</HD> On January 31, 2024, the Consumer Financial Protection Bureau (CFPB) published in the <E T="04">Federal Register</E> a notice of proposed rulemaking in which it proposed to prohibit covered financial institutions from charging fees, such as nonsufficient funds fees, when consumers initiate payment transactions that are instantaneously declined. The proposed rule preliminarily determined that charging such fees would constitute an abusive practice under the Consumer Financial Protection Act's (CFPA) prohibition on unfair, deceptive, or abusive acts or practices. For the reasons stated below, the CFPB is exercising its discretion to withdraw the notice of proposed rulemaking and terminate this rulemaking proceeding. <HD SOURCE="HD1">II. Background</HD> <HD SOURCE="HD2">A. Market Background and Proposed Rule</HD> When a consumer attempts a withdrawal, debit, payment, or transfer that exceeds the available funds in their depository account, a financial institution will sometimes decline the transaction and charge the consumer a fee, often called a nonsufficient funds (NSF) fee. Normally, these fees are only charged on check or Automated Clearing House (ACH) transactions that take days to clear, under the theory that a fee could deter consumers from intentionally attempting payments that will be declined in order to obtain a product or service from a merchant before the transaction is declined. Financial institutions have historically not charged NSF fees on ATM and debit transactions because declinations on these types of transactions are instant and effectively costless to the financial institution, and, because there is no chance that the transaction is successful for the consumer, there is no moral hazard to deter. However, financial institutions' fee practices have been rapidly changing in recent years, and some nonbank prepaid card providers have started charging NSF fees on instantly declined transactions despite the lack of a meaningful justification for the fee. The proposal preliminarily concluded that it is an abusive practice to charge an NSF fee on a transaction that is instantaneously declined because such fees take unreasonable advantage of consumers' lack of understanding of the risks, costs, or conditions of their accounts at the time they are initiating covered transactions. In making this preliminary conclusion, the CFPB observed that, unlike the CFPA's unfairness prohibition, the statutory text for the abusive conduct prohibition does not require any inquiry into reasonable avoidability. Although the CFPB preliminarily found that consumers' lack of understanding that they would be charged an NSF fee in the circumstances addressed in the proposal is generally reasonable, the proposal noted 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. The CFPB preliminarily determined that consumers charged NSF fees on covered transactions would lack understanding of the material risks, costs, or conditions of their account at the time they are initiating covered transactions. The proposed rule stated that the “costs” associated with a covered transaction that would result in an NSF fee would primarily be the amount of the fee itself. The proposal further stated that the amount of funds in the account and whether they are sufficient for a given transaction at the time the consumer is initiating that transaction are relevant “conditions” of the consumer's deposit account. At the time a consumer considers initiating a request to withdraw, debit, pay, or transfer funds from their account, the proposed rule explained, the relevant risks to the consumer would include the possibility the transaction will be declined and result in an NSF fee. The CFPB preliminarily declined to characterize consumers' lack of understanding in the proposal as either “specific” or “general” because that binary framework—used in the 2020 partial rescission of the CFPB's 2017 rulemaking on Payday, Vehicle Title, and Certain High-Cost Installment Loans  <SU>1</SU> <FTREF/> -is unhelpful for determining whether consumers understand the material risks, costs, or conditions of a consumer financial product or service, which is the statutory requirement. As discussed in the proposal, a consumer's lack of understanding can be based on one or the other, or a mixture of both, and each can inform one another. Indeed, a person's understanding of their personal risk may be intertwined with their understanding of the general risk to all consumers—if one knows that many are harmed, they are more likely to understand that they are likely to be harmed. <FTNT> <SU>1</SU>   <E T="03">See</E> 85 FR 44382, 44421 (July 22, 2020). </FTNT> The CFPB preliminarily concluded in the proposed rule that the practice of charging NSF fees on covered transactions takes unreasonable advantage of consumers' lack of understanding of the above-referenced material risks, costs, or conditions of their accounts when they initiate those transactions. The CFPB explained that a determination of unreasonable advantage-taking involves an evaluation of the facts and circumstances that may affect the nature of the advantage and the question of whether the advantage-taking was unreasonable under the circumstances. <SU>2</SU> <FTREF/> The proposal also stated that such an evaluation does not require an inquiry into whether the advantage-taking is typical or not—that even a relatively small advantage may be abusive if it is unreasonable, and that one may rely on qualitative assessment rather than an investigative accounting of costs and benefits to determine whether a covered financial institution takes an unreasonable advantage. <SU>3</SU> <FTREF/> <FTNT> <SU>2</SU>   <E T="03">See Statement of Policy Regarding Prohibition on Abusive Acts or Practices (</E> Abusive Policy Statement), 88 FR 21883, 21886 (Apr. 12, 2023). <E T="03">Cf., e.g., Swift & Co.</E> v. <E T="03">Wallace,</E> 105 F.2d 848, 854-55 (7th Cir. 1939) (“`[U]nreasonable' is not a word of fixed content and whether preferences or advantages are unreasonable must be determined by an evaluation of all cognizable factors which determine the scope and nature of the preference or advantage.”). </FTNT> <FTNT> <SU>3</SU>  Abusive Policy Statement, 88 FR 21883 at 21886. </FTNT> <HD SOURCE="HD2">B. Statutory History</HD> Congress passed the prohibition on abusive conduct after the 2007-2008 financial crisis, recognizing that the unfairness and deception prohibitions were insufficient to prevent predatory mortgage lending. <SU>4</SU> <FTREF/> The statutory authority to regulate abusive conduct was explicitly added as a new standard of fair dealing, and Congress crafted the prohibition as separate and distinct from unfairness and deception. <SU>5</SU> <FTREF/> <FTNT> <SU>4</SU>   <E T="03">See generally</E> 2023 Abusive Policy Statement (in discussing background and legislative history regarding CFPB's authority to address abusive conduct, stating “. . . Congress concluded that the manner in which agencies had enforced the prohibitions on unfair and deceptive acts or practices was too limited to be effective at preventing the financial crisis, and once again amended existing law to better meet new challenges). </FTNT> <FTNT> <SU>5</SU>  As the 2023 Abusive Policy Statement noted, in 2007, then-FDIC Chairwoman Sheila Bair explained in congressional testimony that unfairness “can be a restrictive legal standard” and proposed that Congress consider “adding the term ‘abusive,’ ” which she noted existed in the Home Ownership and Equity Protection Act, and which “is a more flexible standard to address some of the practices that make us all uncomfortable.” <E T="03">Improving Federal Consumer Protection in Financial Services: Hearing Before the H. Comm. on Fin. Servs.,</E> 110th Cong. 40 (2007) (statement of Hon. Sheila C. Bair, Chairman of the Federal Deposit Insurance Corporation), <E T="03">https://www.govinfo.gov/content/pkg/CHRG-110hhrg37556/html/CHRG-110hhrg37556.htm;</E> An act or practice need fall into only one of t ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 19k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━