The Consumer Financial Protection Bureau faces a constitutional reckoning when the Supreme Court hears arguments on Oct. 3 in CFPB v. Community Financial Services Association of America. Trade associations successfully argued at the Fifth Circuit Court of Appeals that the CFPB’s structure violates the Appropriations Clause because the CFPB does not receive appropriations from Congress, making the agency unaccountable.
Why should you care? Because until congressional oversight becomes a reality, the CFPB will continue to adopt and enforce inconsistent, unpredictable positions that harm consumers and financial institutions alike.
Nowhere is the CFPB’s fickle regulation-by-hindsight more evident than in the campaign against so-called “junk fees.” Nobody likes paying fees, but the CFPB’s quest for simple proclamations over studied solutions creates more problems than it solves, harming the very people the agency claims to protect.
Let’s say you buy lunch with your debit card. At the time you put down your card, your bank’s best estimate — without knowing about any outstanding checks, upcoming pre-authorized payments, or the amount of a tip you will leave, if any — is that you have the money available to cover the meal. But by the time the transaction is actually paid (typically a few days later), your account balance may have turned negative. Maybe checks you wrote cleared just after you ate. Maybe the tip on that meal put you into the red, or other pending charges settled.
If you’re not tracking your spending, when that debit-card lunch transaction from a few days ago is paid, you could end up overdrawing your account. If that happens, your financial institution may charge you an overdraft fee for covering that transaction when you lacked sufficient funds.
A few years ago, the CFPB cautioned consumers about exactly this scenario. “Just because your account has enough funds when you’re at the checkout counter doesn’t mean you’ll have the funds later when the transaction finally settles,” said the agency, noting that “overdraft fees can occur” in such a situation.
Fast forward to 2022, when the CFPB ordered Regions Bank to pay more than $140 million for charging what the agency now called “unlawful authorized-positive fees.” Regions “charged overdraft fees even after telling consumers they had sufficient funds at the time of the transactions,” said the CFPB press release. In a bizarre reversal, the CFPB now views it as unfair for banks to wait until someone actually overdraws their account to determine whether they have overdrawn their account.
Forgive the bank compliance officers straining to read these tea leaves.
The ironic result of the CFPB’s positional change will be an increase in overdraft fees for consumers. Financial institutions seeking to avoid CFPB scrutiny on overdraft fees must now determine whether an account is overdrawn when a card is swiped, rather than when the funds leave the account (that is, at the time of payment). This means consumers may get hit with overdraft fees on transactions that never overdraw the account, because funds arrive between authorization and payment, the customer transfers funds between accounts through a mobile app, or because an initial authorization hold (say, when you checked into a hotel or rented a car) is greater than the ultimate purchase amount.
We see the same counterproductive, anti-consumer effects in other CFPB policies. The CFPB prides itself, for example, on limiting or eliminating overdraft fees. But as counterintuitive as it may seem, data show that limiting overdraft fees harms low-income people’s access to banking services. The Federal Reserve Bank of New York recently examined what happened several years ago when national banks were exempted from state overdraft fee caps. Those banks did charge customers more for overdrafts, but they also used that revenue to reduce required minimum balance requirements. And minimum balance requirements “rank first among reasons unbanked households are without an account.”
As a result, the share of low-income households with a checking account rose by 10 percent, and the rate at which checks were returned due to insufficient funds declined by 15 percent. Capping overdraft fees, the report concluded, has the net effect of hampering, rather than fostering, “financial inclusion.”
So the road to hell really is paved with good intentions.
If the CFPB were subject to congressional oversight, or if it were engaged in formal rulemaking rather than coercive enforcement actions, it could learn these facts and examine the policy trade-offs that it currently refuses to consider.
Both consumers and bankers should hope the Supreme Court restores accountability to an agency that has none.
Fred Burnside is a partner in the national financial services practice at Davis Wright Tremaine LLP and regularly defends class action lawsuits challenging fees charged by banks and credit unions.