Alejandro Moreno

Partner, Sheppard Mullin

501 W Broadway Ste 1900
San Diego , CA 92101

Phone: (619) 338-6500

Email: amoreno@sheppardmullin.com

Harvard Univ Law School; Cambridge MA

Skylar Stoudt

Associate, Sheppard Mullin

The Biden administration has recently launched a rigorous campaign against so-called “junk fees.” From the corridors of car dealerships to the booking pages of hotels, no sector remains untouched by the government’s focus on additional charges for services or products, which the administration argues can obscure the true cost to consumers. While the effort is framed as a push for transparency and fairness, it forces business owners to navigate a fine line between operational necessities and regulatory compliance.

This article showcases how the crackdown on “junk fees” also presents an opportunity for businesses to reassess their practices, enhance transparency, and build trust with their customers. To get ahead of the curve, businesses should reevaluate fee structures and disclosures to consumers in a manner that reduces risk and maintains their competitive edge.

Understanding junk fees: The regulatory perspective

The Consumer Financial Protection Bureau (CFPB) generally defines “junk fees” as mandatory or quasi-mandatory charges that businesses impose after the initial price agreement, which according to the CFPB increase final costs without clear justification. Examples of the types of fees the CFPB has deemed “junk fees” include (among others) late fees, non-sufficient funds (NSF) fees, and processing fees that exceed the cost of the service they claim to cover.

The challenge of junk fee regulations

From a business perspective, so-called “junk fees” often cover legitimate operational costs and contribute to the overall quality of service. The sweeping categorization of such fees as ‘junk’ underestimates the complexity of business operations and overlooks the value these services may provide to the consumer. For example, independent studies have suggested that consumers see value in overdraft services that come with fees because they facilitate liquidity when finances are tight and have features that compare favorably to other emergency funding options.

The increasing regulatory scrutiny and the push for enforcement come at a time when many businesses are grappling with economic uncertainties. The one-dimensional portrayal of additional fees as inherently deceptive ignores businesses’ economic realities, such as rising operational costs and the need for financial agility.

Recent junk fee litigation: A closer look

The regulatory focus on alleged “junk fees” has also spurred private litigation. Many national banks have faced class-action lawsuits for allegedly imposing excessive overdraft and non-sufficient funds (NSF) fees. The plaintiffs typically argue these fees were not clearly disclosed and disproportionately high compared to the actual cost of service provided, a contention that echoes the concerns raised by regulatory bodies. Recent litigation has extended beyond financial institutions regulated by the CFPB to cover issues such as late payment fees on rental properties, service fees added to ticket purchases, and hotel resort fees. Accordingly, even where particular businesses are not regulated by the CFPB, various state consumer protection statutes provide a vehicle for plaintiffs’ attorneys to punish businesses. Any business that tacks on fees on top of upfront pricing may become the target of litigation and should be implementing the risk mitigation recommendations below.

California’s legislative response and national regulatory proposals

California has been at the forefront of legislative efforts to curb tacked-on fees. The state’s recent legislation bans undisclosed fees across various services. This law mandates businesses to clearly disclose any additional fees upfront. Furthermore, the Federal Trade Commission (FTC) has proposed a new rule aiming to eliminate hidden fees nationwide by requiring businesses to include all mandatory or quasi-mandatory charges in the advertised “Total Price” of a product or service. Such regulatory efforts, while aimed at enhancing consumer protection, pose new compliance challenges for businesses, necessitating a reevaluation of fee disclosure practices to avoid legal and financial repercussions.

Adopting best practices for transparent business conduct

In light of the regulatory challenges and the increasing scrutiny of the plaintiffs’ bar, businesses can seek to reduce risk by implementing the following recommendations:

1. Transparent disclosure: The principle of transparent disclosure is at the heart of regulatory guidance on junk fees. Business owners are encouraged to ensure that all fees are clearly and prominently disclosed to consumers at the outset of a transaction. This is particularly important when selling goods and services online, where many businesses bury the lead by not providing complete pricing information until a consumer has clicked through several layers of a webpage.

2. Fee rationalization: Businesses should critically assess the rationale behind each fee they charge and be prepared to explain that rationale to regulators. Often criticized fees, such as the fees consumers pay when they attempt to deposit third-party checks that bounce, actually serve a practical purpose by allocating responsibilities appropriately between businesses and consumers. The consumer, having direct knowledge and interactions with the check writer, is in a better position to evaluate the creditworthiness of the third-party issuing the check. The consumer can also protect herself by confirming with the checkwriter that the check will clear before attempting to deposit what could turn out to be a bad check. Imposing fees for bounced checks is reasonable because it encourages consumers to ensure the reliability of their transactions, thereby reducing the operational burden on banks and the risks associated with regulations that require banks to make certain amounts of deposited funds immediately available. In sum, a business will be in a better position to defend a particular fee if it can explain a reasonable basis for imposing the fee.

3. Regular review and documentation: Ensure that business practices strictly comply with current regulations regarding fee disclosure and justification. It is impossible to craft perfect disclosures that mitigate all risk. By remaining aware of trends in consumer litigation and regulatory guidance, businesses can stay ahead of the curve and enhance their disclosures proactively to reduce regulatory and litigation risk.

4. Strategic legal partnership: Given the intricacies of the regulatory environment and the potential for legal challenges, forging strategic partnerships with legal experts specializing in consumer protection laws and regulations is invaluable. Such partnerships can provide critical insights into compliance strategies, defensive postures against claims of unfairness, and best practices for transparent business conduct.

Conclusion

The regulatory environment may seem daunting, but it also offers businesses an opportunity to reassess their practices, innovate, and strengthen their engagement with customers. Through strategic adaptation, transparent communication, and regular review, business owners can navigate the complexities of junk fee legislation, finding a path that sustains both regulatory compliance and business growth.