Deputy Director Martinez’s Prepared Remarks at the Consumer Law Scholars Conference

MAR 03, 2023

Good morning.

It’s a pleasure to be back in the Bay area and here with you today. I was in San Francisco two weeks ago for meetings with local community groups who are doing important work on the ground on behalf of their clients and communities.

I want to extend a special thank you to Ted Mermin, who has engaged the Bureau since its inception, and has provided significant thought leadership to the CFPB. Ted has also mentored many legal aid attorneys who the CFPB looks to for on-the-ground information about client experiences, emerging trends in consumer finance, and bad actors.

And I have to say, I am encouraged by this type of convening because the CFPB gains much from its engagement with academics, researchers, and thought leaders like you – who over the course of our agency’s history have shared their expertise in consumer financial protection with CFPB leadership and subject matter experts. We are grateful for it.

Your field work and scholarship have informed the CFPB’s thinking on how best to tackle many complex problems in the market and what tools to deploy most effectively to ensure consumer finance markets are fair, transparent, and competitive.

Today, I will focus on a key priority for the CFPB – reining in junk fees.

Specifically, I want to provide an overview of our efforts to increase competition and reduce junk fees, the related rules and guidance that we have published, enforcement efforts aimed at stopping companies that charge unlawful versions of these fees, as well as an open data rulemaking that may decrease the incentives financial institutions have to charge junk fees.

I’ll close by highlighting the important role that academic and scholarly communities can play in helping us, including to put an end to junk fees and spotting future risks.

Overview of Junk Fees and Competition

A junk fee is any unnecessary, unavoidable, or surprise charge that inflates a product or service’s price, while adding little value to no value. Junk fees have become a prevalent cost of life in many areas, such as overdraft fees, resort fees, and ticket fees.

Banks, credit card companies, and others have come to realize that such fees are highly profitable and can be hidden from the competitive process. Junk fees allow companies to layer extra charges on top of the expected market price for a product or service.

These fees ignore consumer preferences, take away financial flexibility, distort markets, and increase costs.

They also disproportionately impact specific populations. A report by the Federal Reserve Bank of Boston found a higher percentage of Black Americans pay overdraft, non-sufficient funds, and credit card late fees than white Americans. The report also found that low-income Americans are more likely than high-income Americans to pay overdraft fees.¹

In July 2021, President Biden launched an effort to promote competition across the U.S. economy. For our part of the effort, the CFPB has three goals in mind.²

First, issuing new rules and guidance that drive competition and transparency – including reviewing fee-structure rules that we inherited from other agencies more than a decade ago.

Second, identifying the reasons financial institutions choose not to compete on certain types of fees. Having an understanding of why certain fee structures exist enhances our supervision and enforcement work.

Third, promulgating new rules to provide consumers more control over their own financial data and more opportunities to talk with their feet. When enough consumers can walk away from bad service and uncompetitive pricing, they can force an institution to compete for their business.

Rules and Guidance to Spur Competition and Transparency

The infiltration of junk fees into consumer financial markets did not occur overnight. Many of these fees started out as a normal means of providing popular services or covering incurred costs.

Understanding how many of these fees devolved into their current forms ensures that we respond appropriately in exercising our rulemaking authorities, including issuing guidance in various forms to industry directly or through our federal and state agency partners.

This is an area we have begun to do significant thinking and work on and one in which your scholarship and research has proven extremely valuable. We welcome more of it.

I’ll discuss two recent instances of our work. The guidance issued in October 2022 related to surprise overdraft fees and a notice of proposed rulemaking issued in February related to credit card late fees.³

Overdraft Fees

As you know, in the 1990s, overdraft protection became popular with banks and accountholders alike⁴ because we all wrote checks. Many people wanted to make sure that their checks were honored, not returned due to an overdraft. Overdraft protection had the promise of being an excellent service that saved time and money for both the check writer and the check casher.

Over time, what began as a nominal fee for a service devolved into a model of squeezing profit from the checking accounts of customers who are often least able to absorb the fees.

As we began our work in this area, we identified the prevalence and magnitude of banks’ reliance on overdraft fees and related non-sufficient funds fees.

In 2019, bank revenue from overdraft and NSF fees surpassed $15 billion with the average cost of each charge between $30 and $35.⁵

Instead of charging a fee for the occasional overdraft, we found that many banks were charging customers with overdraft fees that often came as a surprise.

We released guidance in October of 2022 to protect consumers from these illegal practices,⁶ and we have held two major financial institutions accountable for breaking the law.⁷^,⁸

We have warned companies about overdraft fees that occur when a bank displays that a customer has sufficient available funds to complete a debit card purchase at the time of the transaction, but the consumer is later charged an overdraft fee.

We noted that, often, when these surprise fees are charged, financial institutions rely on complex back-office practices to justify charging the fee. For instance, after the bank allows one debit card transaction when there is sufficient money in the account, it nonetheless charges a fee on that transaction later because of intervening transactions.

We will continue to monitor how banks use overdraft, and we are eager to hear from you about how banks continue to use tricks and traps like these to harm consumers.

Overall, our efforts to identify, as well as to warn institutions and enforce against, these practices are seeing results.

Specifically, for overdraft fees, as of today, 20 of the country’s largest banks, which hold 62 percent of the volume of consumer deposit accounts and are subject to the CFPB’s supervisory authority, now do not charge surprise overdraft fees.

In fact, our research has shown that between Quarter 1 of 2019 and Quarter 1 of 2022, some of the country’s largest banks saw double-digit percentage drops in overdraft and NSF fee revenue – with one institution seeing a drop of over 50 percent.⁹

Perhaps, most notably, especially for this audience, the loss in overdraft and NSF fee revenue is not being made up through charging customers other fees. In short, and perhaps the most important point that we are seeing in the data, is that junk fees are not inevitable.

We will keep tracking the data to better understand how our policy interventions are helping consumers. Here too, is an area that would certainly benefit from your continued scholarship.

Credit Card Late Fees

Next, I want to turn to a fee that has skyrocketed from a small corner of the market to the top of everyone’s most hated junk fee list: credit card late fees.

While credit card late fees did not start out as a popular service among credit users, this fee has nevertheless increased over time.

In 2009, Congress overwhelmingly voted to pass the Credit CARD Act to reform the credit card industry and clean up widespread abuses. Importantly, Congress banned unreasonable penalty fees.

At the time, the Federal Reserve Board of Governors was responsible for writing the rule to implement the law. The Credit CARD Act allowed for fees that were reasonable and proportional, and for credit card late fees, that meant fees that covered credit card companies’ collection costs for missed payments.

In 2010, the Federal Reserve Board included a credit card late fee immunity provision in its rules that permitted credit card companies to escape enforcement scrutiny of reasonable and proportional fee requirements even if a company charged credit card late fees beyond collection costs. The Federal Reserve Board also allowed credit card companies to hike the fees annually for inflation.¹⁰

The inflation provision permitted a maximum late fee to jump from $34 in 2009 to $41 now – a nearly 21 percent increase.¹¹ And the immunity provision has allowed this increase with no change in scrutiny of the fees.

The CFPB inherited the Federal Reserve Board’s credit card late fees rule, and last month, we published a proposed rule that re-imposes the reasonable and proportional guardrails that Congress passed.¹²

We proposed lowering the immunity provision to $8 – which is what our research showed to be the average collection cost. We also proposed that late fees would not be able to exceed 25 percent of the required minimum payment. And, we’re proposing to end the automatic inflation hike.

Here’s an important point to highlight: The proposed rule would still permit credit card companies to charge late fees above $8 – but credit card companies would have to prove that their fees are in line with their collection costs.

The credit card late fee NPRM demonstrates how we are approaching this problem. Here is a fee that consumers are paying billions for, every year, that was created and sanctioned by a government agency. Here too, we welcome your findings uncovering similar creatures of government making.

Supervision and Enforcement Efforts Against Junk Fees

While we are seeing many changes among financial institutions – with a push towards increased competition and fewer junk fees – there are other institutions that have chosen the route of continuing to charge unlawful junk fees. And to be clear, these extend beyond just surprise overdraft and credit card late fees.

The CFPB’s supervisory efforts help us identify and ensure companies remediate the practices that lead to those fees. And our enforcement efforts target egregious and unlawful activities or practices.

Often junk fees are charged to consumers on the backend after consumers are already locked into contracts or have little choice in the firm, provider, or processor with which they must do business.

For example, the CFPB has identified many instances of firms charging “pay-to-pay” fees, and CFPB examiners have found that mortgage servicers violated federal consumer financial protection law by charging sizable phone payment fees – even though consumers were not made aware of these pay-by-phone penalties.¹³

In another instance, Regions Bank was forced to pay more than $190 million in customer redress and penalties for surprise overdraft fees. The fee assessment practices that Regions used were so convoluted even the bank’s own employees could not explain to affected customers the reasons for the overdraft fees.¹⁴

We are going to continue to identify the practices that enable unlawful junk fees and the reasons financial institutions implement these processes instead of choosing to compete on fair terms.

Open Banking

I also want to make sure I cover another critical piece of the Bureau’s efforts to drive competition in the financial markets for the benefit of consumers.

For far too long, too many firms have taken their customers for granted, which has enabled such firms to rely on junk fee revenue streams.

However, around the world and here at home, financial services are slowly moving toward open banking and open finance. A more decentralized and neutral consumer financial market structure has the potential to reshape how companies compete for customers and render junk fee revenue models obsolete.

In October 2022, Director Chopra announced that we were launching a process to activate our authority under Section 1033 of the Consumer Financial Protection Act that will accelerate the shift to open banking and open finance.¹⁵

While exercising this authority is not an explicitly open banking or open finance rule, a rule proposed under Section 1033 will move us closer to it, by obligating financial institutions to share consumer data upon consumer request, empowering people to break up with the banks that provide bad service, and unleashing more market competition.

A natural consequence of open banking and open finance will be that institutions’ reliance on junk fees will become less tenable.

We expect the new, competitive market will be defined by:

Individuals and nascent firms possessing greater autonomy.
Personal financial data secured through both stronger data protection and data privacy practices.
Consumers switching financial institutions as they search for improved products and services.
And firms incentivized to serve, instead of take advantage of, their customers.

As this process moves forward, we are the first to recognize the stakes at issue and the importance of getting this rulemaking right. We look forward to your comments as this process proceeds.

Further Research

When we began our junk fee initiative by publishing a Request for Information,¹⁶ we asked for comments about, and experiences with, junk fees. We received thousands of comments, including comments and complaints about unnecessary banking fees and charges for things that were not in their control.

We learned about many harmful fees and practices, and we have made progress by issuing guidance, through our supervisory and enforcement work, and by using the bully pulpit.

Despite our work, there’s a long way to go. Further research to identify deeply imbedded obstacles to full competition and consumer choice are paramount, as is research to identify the future forces that will pose risks to consumers and markets.

Our vision is a marketplace where consumers are treated fairly, where it’s easier to switch, where prices and risks are clear upfront, and where companies compete to win their customers’ business.

Conclusion

Before I close, I would be remiss not to mention the litigation involving the CFPB, which is before the U.S. Supreme Court in connection to the Bureau’s payday payment provision rulemaking.

As the solicitor general lays out in our cert petitions, which I encourage you to read, the CFPB’s funding mechanism is not novel or unusual. As it did for the Federal Reserve Board and other federal banking regulators, Congress authorized the CFPB’s funding through legislation other than annual spending bills.

This type of funding is a vital part of the nation’s financial regulatory system, providing stability and continuity for the agencies and the system as a whole.

Perhaps more importantly, Congress has appropriated the majority of the overall federal budget, including Medicare and Social Security, through non-discretionary or mandatory spending that, like the CFPB’s budget, does not go through the annual spending bill process. So, the potential ramifications of this case extend well beyond the CFPB.

The CFPB will continue to work closely with the Department of Justice as the Supreme Court prepares to hear the case.

In the meantime, the CFPB will continue the vital work Congress charged it to carry out on behalf of the American people.

Thank you. And thank you for inviting the CFPB to be a part of this year’s Consumer Law Scholars Conference.