How banks are navigating a multi-pronged assault on customer fees

The financial services industry is no stranger to regulatory oversight or litigation. However, recent developments in both arenas, particularly relating to customer fees, are causing banks to reevaluate their practices and gear up for an election-year fight.

Last month, as part of the Biden administration’s push to eliminate so-called “junk fees” to consumers, the Consumer Financial Protection Bureau (CFPB) finalized a rule to limit late fees on credit card payments to $8. The rule, which is scheduled to go into effect on May 14, 2024, will apply to “large issuers” with 1 million or more open accounts, representing more than 95% of the outstanding credit card debt in the U.S. according to CFPB estimates. The pinch on banks does not end there. The CFPB appears poised to soon finalize another rule—proposed in January and currently in the public comment phase—placing limits on banks’ overdraft lending services and capping overdraft fees as low as $3.

The CFPB’s rules follow a sweeping new rule proposed by the Federal Trade Commission (FTC) in October 2023 that would apply to virtually all consumer-facing businesses. In its own effort to promote transparency around fees, the FTC is looking to require businesses to disclose (1) the “total price” to consumers, including all mandatory fees, up front, and (2) the true nature and purpose of any fees being charged. Significantly, the FTC’s proposed rule would provide broad enforcement power to other regulatory agencies, including federal financial regulators (such as the CFPB) and state attorneys general.

An uptick in litigation

Not surprisingly, increased regulatory scrutiny of customer fee practices has led to an increase in private litigation, including consumer class actions, against banks. Chase Bank, Citibank, and Wells Fargo, among others, have been hit with class action lawsuits over the last few months alleging “unfair” and “deceptive” business practices in connection with bounced check fees, overdraft fees, and credit card late fees. The proliferation of cases like these, combined with the likely uptick in regulatory enforcement actions coming down the pike, is forcing banks and other financial institutions to take a closer look at their fee practices and customer relationships.

This begs the question: how are banks managing the growing litigation and exposure risk from increased scrutiny of fees? Here are some critical ways:

Going on the Offensive

Days after the CFPB’s final rule limiting credit card late fees was announced last month, the U.S. Chamber of Commerce, American Bankers Association, Consumer Bankers Association, and several Texas business associations sued the CFPB in the U.S. District Court for the Northern District of Texas. The lawsuit asserts that the CFPB exceeded its legal authority and seeks to ultimately vacate the rule. Similar cases challenging actions by the CFPB are currently pending across the country, including one before the U.S. Supreme Court, and banks are expressing their support for these lawsuits through lobbying efforts, amicus filings, and strong public statements.

Compliance review and adjustment

In anticipation of the various new rules being finalized and going into effect, banks are conducting internal reviews of their fee practices and taking proactive steps to address potential compliance gaps. This includes auditing the actual costs associated with late payments and similar customer defaults to be able to demonstrate to regulators the reasonableness of fees being charged. Some banks are also preemptively adjusting their fees to decrease the risk of individual or class action lawsuits.

Increased transparency and better communication

Many banks are reviewing their disclosures to consumers and evaluating changes to make them clearer and more concise. The hope is that by being more transparent about fee structures, associated triggers, and ways in which fees can be avoided, banks may be able to engender greater customer trust and mitigate customer grievances and animus.

Enforcing arbitration agreements and other legal protections

Typically, banks include arbitration agreements in their customer contracts. If implemented properly, these agreements offer a powerful tool that banks can leverage to push back against public lawsuits and class actions, in particular. In light of external pressures stemming from the CFPB and FTC, an ever-increasing number of banks are working with counsel to (1) ensure that they have enforceable arbitration agreements with their customers and (2) evaluate other potential legal protections, including proper insurance coverage and robust customer complaint procedures.

A challenging regulatory and legal landscape

A difficult regulatory and legal landscape for banks is likely to become even more fraught as we approach the election this coming November. Without question, banks must closely monitor related developments to ensure compliance with a patchwork of rules and legal decisions at both the federal and state levels. They will also have to carefully balance the need to generate fee revenue against the risk of high-exposure litigation and work to mitigate the latter by providing fair, transparent, and defensible fee structures to consumers. It is a given that banks that are most proactive and strategic in evaluating current fee practices will place themselves in the best position to deal with the multi-pronged assault on their industry.