Update 668 — What’s that Fee For?
Biden Boosts Battle Against Junk Fees
Americans have watched in recent years as financial and other services come with a proliferation of fees and penalties, adding costs that make the services unaffordable for many consumers. In his State of the Union address this week, President Biden took aim at hidden and surprising service or convenience charges, aka “junk” fees, costing consumers $29 billion a year, according to the CFPB.
“Junk fees may not matter to the very wealthy, but they matter to most folks in homes like the one I grew up in. They add up to hundreds of dollars a month,” Biden said, introducing his proposal, the Junk Fee Prevention Act. Financial firms have begun moving to cut or eliminate some fees, generating a competitive virtuous cycle, but the Biden proposal is designed to, well, finish the job. What would the Act do? Can it pass? See below.
Good weekends all,
Junk fees made headlines this week after President Biden dedicated a section of his State of the Union address to the issue. “My administration is also taking on ‘junk’ fees, those hidden surcharges too many businesses use to make you pay more,” the President said before calling on Congress to pass his administration’s proposed Junk Fee Prevention Act.
The Junk Fee Prevention Act is the latest facet of the Biden administration’s whole-of-government effort to promote competition in the American economy. The White House Competition Council’s focus on junk fees is based on a simple argument: junk fees are anti-competitive. Hidden fees make it difficult for consumers to see the full cost of a service up-front and often act as penalties rather than payment for the provision of a service. Effectively, junk fees make it harder for consumers to afford the best service and in many cases target the most vulnerable.
Bipartisan Support For The Junk Fee Prevention Act?
While the legislation has not yet been introduced, the White House has outlined four types of junk fees the bill is designed to address. Takentogether, these fees cost consumers billions every year. The act seeks to address excessive online concert, sporting event, and entertainment ticket fees, airline fees for family members to sit with young children, early termination fees for TV, phone, and internet service, and surprise resort and destination fees.
Although the Republican House majority is set to oppose an administration agenda aimed at increasing regulation, the Junk Fee Prevention Act strategically focuses on areas already proven to have garnered bipartisan interest, and whose impact on Americans’ everyday lives is clear. For instance, the proposal targets Ticketmaster/Live Nation, the venue owner, ticket sale platform and promoter whose vertical integration and market dominance were the target of bipartisan ire at last month’s Senate Judiciary Committee hearing.
In his address, Biden stated, “We’ve written a bill to stop (junk fees).” Although a text may exist, a bill has yet to be introduced and a path to passage is yet unclear.
Junk Fees in the Banking Industry
The administration’s focus on junk fees extends to the banking sector, where regulators and advocates have long been pushing to break banks’ reliance on exorbitant fees that often extract profits from the most vulnerable. A sizable portion of work to eliminate exploitative bank fees has been done by the Consumer Financial Protection Bureau (CFPB) whose director, Rohit Chopra, has pushed for regulation since the beginning of his term. The agency has gathered tens of thousands of public comments on junk fees and established that junk fees have become huge income streams for banks.
Banks acted proactively to reduce fees and protect themselves from the scrutiny of regulators in 2022. In January of last year, Wells Fargo, Bank of America, and Regions Bank announced plans to eliminate NSF fees. Regions also said that it would cap overdraft fees at three a day, while Bank of America announced that it would reduce overdraft fees from $35 to $10 among other changes. In June, Citibank eliminated all fees associated with overdrafts and non-sufficient funds and in August, PNC Bank eliminated NSF fees for all consumer deposit account customers.
Rather than eliminate these fees, some banks have tweaked overdraft protection plans or begun offering and extending overdraft grace periods. Without a combined strategy of legislation and regulation, banks will continue to adjust the mechanisms they’re accustomed to using to extract profits from its customers and continue making millions from rebranded junk fees.
Monitoring a Moving Target
Recent action against the worst offending banks by regulators and the revived threat of legislative action by Congress have driven banks to proactively reduce or eliminate fees. The junk-fee landscape is evolving, and regulators and legislators seeking to act will have to continuously reassess the size of banks’ income from specific fees and the harm they continue to pose to consumers.
- Overdraft, NSF and Depositor Fees
In December 2021, the CFPB released a report estimating that in 2019, bank revenue from overdraft and non-sufficient fund fees exceeded $15 billion, with the average cost of each charge ranging between $30 and $35. The report’s release followed a legislative effort to crack down on overdraft and NSF (Non-Sufficient Funds) fees by Senators Cory Booker and Elizabeth Warren, who introduced the Stop Overdraft Profiteering Act of 2021 which sought to reduce the use of overdraft fees by banning them from being applied to debit card transactions and ATM withdrawals. Representative Carolyn Maloney also reintroduced the Overdraft Protection Act. By the end of the year, Citi and Capital One ended the use of overdraft fees and 15 of the 20 largest banks in the United States eliminated the use of non-sufficient funds fees.
Last October, the CFPB issued guidance against surprise overdraft fees, which include overdraft fees charged when consumers had enough money in their account to cover a debit charge at the time the bank authorized it and depositor fees charged to people who deposit checks that bounce. The agency referred to these junk fee practices as “likely unfair and unlawful under existing law.” According to the White House, CFPB guidance banning surprise overdraft fees and surprise depositor fees will save consumers over $1 billion annually. The CFPB has also stated that it is considering new rules for overdraft fees and NSF fees.
The agency has issued substantial fines to the worst offending banks. In September, the Bureau ordered Regions Bank to pay $191 million for illegal surprise overdraft fees. The CFPB’s $3.7 billion order against Wells Fargo Bank in December 2022 also included surprise overdraft fees among other violations.
- Credit Card Late Fees
Last week, the CFPB proposed a rule to curb excessive credit card late fees that could reduce fees by as much as $9 billion per year by cutting the 75 percent of current late fees the Bureau has found to have no purpose beyond expanding banks’ profit margins. If finalized, the rule would lower to $8 the safe harbor presumptive legal standard for late fees, which can be as high as $41 today; end the automatic annual inflation adjustment which currently allows card companies to continuously increase late fees; and cap late fees, which can be as high as 100 percent of the required minimum payment, at 25 percent.
Threats to Progress
Despite strong regulation and enforcement by the CFPB, the continued power of the Bureau in the fight against junk fees is not certain. The Bureau continues to face an existential challenge to the constitutionality of its funding. The Supreme Court will likely grant cert. to hear Community Financial Services Association of America v. Consumer Financial Protection Bureau this year. Given the Court’s conservative majority, the Court may rule to uphold the Fifth Circuit Court’s ruling, which found that the Bureau’s funding scheme violates the Constitution’s Appropriations Clause, which establishes Congress’s power of the purse.
The Supreme Court’s ruling in the CFPB case may threaten not only the CFPB, but also the stability and independence of the Federal Reserve Board and the entire financial system, and even the funding mechanism that Congress enacted for Social Security and Medicare.
The CFPB has faced many threats from Republicans and the entities it regulates. Congress must support the Consumer Financial Protection Bureau, not only as it continues to address junk fees, but to preserve the stability it provides to the financial system. The Biden administration’s fight against junk fees will continue to push forward the national conversation and has the potential to build momentum for legislation that goes beyond the goals of the Junk Fee Prevention Act to protect consumers, especially those most vulnerable to and affected by these fees.