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Testimony of CFPB Senior Advisor Brian Shearer on Junk Fees Before the Pennsylvania House of Representatives Consumer Protection, Technology, and Utilities Committee

Thank you, Chair Matzie, Chair Member Marshall, Representative Pisciottano, and committee members for inviting me to speak today about the important issue of junk fees in the US economy. My name is Brian Shearer, and I serve as a Senior Advisor to the Director of the federal Consumer Financial Protection Bureau (CFPB), Rohit Chopra. I oversee the CFPB’s work on regulations, guidance, bulletins, and policy statements on a number of federal consumer financial protection laws. I am also the CFPB’s delegee on the White House’s Competition Council, an important body made up of federal agencies convened by President Biden to focus on issues of fair competition, including the junk fee problem.

The CFPB is an independent bureau of the Federal Reserve System that is responsible for policing the marketplace for consumer financial services, including mortgages, credit cards, student loans, car loans, credit reports, bank accounts, and other markets that touch how American families borrow money, store money, and make payments. Congress charged the CFPB with ensuring that the consumer-finance market is fair, transparent, and competitive. We pursue those goals by enforcing several federal consumer financial laws, including the Truth In Lending Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, and the prohibition on unfair, deceptive, or abusive acts or practices. My remarks today reflect only the views of the CFPB and not the rest of the Federal Reserve System.

A major focus of our recent work has been rooting out the many sorts of “junk fees” that people are routinely compelled to pay to access consumer financial services. In my testimony today, I will describe the CFPB’s work on junk fees, and I will discuss the important role that states can play in tackling these kinds of fees.

Before I turn to junk fees, I want to say a few words about the role of states in consumer protection more generally. The federal government does not have a monopoly on protecting American families from unlawful and unscrupulous business practices. The federal and state governments can, do, and should work cooperatively on consumer protection. In fact, states are often the first—and in some cases the only—line of defense for consumers that are harmed by illegal business practices. States have unique insight into how they can protect their own citizens, and they can often tailor their laws and rules more precisely and act more swiftly than the federal government can.

To be candid, the federal government has not always been receptive to sharing these responsibilities. Most notably, in the lead-up to the financial crisis of 2007-2008, the states were first to recognize that predatory mortgage lending was causing immense harm to people all across the country. While the federal government was largely uninterested, many states tried to sound the alarm and Attorneys General across the country were focusing substantial attention to the problem of predatory mortgage lending. And some states tried to legislate. But instead of heeding this warning, federal officials did the opposite, often by using the tool of preemption to displace protective state laws. Studies have shown that this federal pushback against state efforts contributed to the depths of pain and harm that the financial crisis caused.

We at the CFPB have tried to learn from this history, and today we welcome the opportunity to work hand-in-hand with our state partners. For example, we have teamed up with state Attorneys General from across the country to enforce violations of federal consumer financial laws, and we have also encouraged states to bring such actions on their own, both under their own laws and under the federal Consumer Financial Protection Act. We have issued guidance explaining how state Attorneys General and bank regulators can use the Federal laws under our jurisdiction to stop illegal conduct in their states. And we also issued guidance in areas ranging from the credit reporting of medical debt to Truth In Lending disclosures for small businesses explaining that states have flexibility to enact legislation that is more protective than federal consumer financial law.

On that note, I appreciate the opportunity to testify about junk fees. As I mentioned, junk fees have been at the forefront of our work at the CFPB. The term “junk fees” is a phrase used to describe any unnecessary, unavoidable, or surprise charge that inflates prices while adding little to no value. These charges go by many names— “service fees,” “convenience fees,” or “processing fees,” for example—but what they have in common is that they are part of the price of the product masquerading as fees in order to shield it from the competitive process. These junk fees, often buried in fine print or never disclosed at all, can obscure the true price of products and dilute market competition. Sometimes a junk fee purports to be a fee for an “add-on,” but the add-on is useless, the add-on is something that everyone needs to pay for, or the fee far exceeds the value of the add-on. In some cases, the total amount of junk fees for a good or service can be comparable to, or even exceed, the advertised price.

The CFPB has found that junk fees are prevalent in banking and consumer finance and can take many forms: to name a few, consumer finance companies commonly charge high late fees, overdraft fees, returned deposited item fees, and pay-to-pay fees. These kinds of fees arise outside the financial sector too. Some well-known fees, for example, are “resort fees” to stay at hotels and “service fees” to buy concert tickets.

Junk fees are a threat to fair competition. Competitive markets depend on fair and transparent pricing, where consumers can easily compare prices among several different providers. But junk fees make it difficult, if not impossible, for consumers to make these kinds of comparisons. Companies have become adept at hiding the true price of their products by funneling more and more costs into junk fees. As a result, consumers are often enticed to pay more for a product than they expected or planned. And because junk fees are an easy way to inflate prices and maximize profits, companies have a strong incentive to innovate new fees rather than to compete on price and quality.

We at the CFPB have been using every tool at our disposal to fight illegal junk fees, including rules, guidance, enforcement, and supervision. To name some recent examples, we have proposed a rule that would reduce credit card late fees by $9 billion a year, we took an enforcement action in which we ordered a bank to pay nearly $200 million in relief for charging its customers illegal surprise overdraft fees, and we released a report on our findings of junk fees in confidential examinations. We have also released guidance explaining how the law prohibits certain surprise overdraft fees, pay-to-pay fees, and returned deposited item fees.

Our work is part of a broader federal effort against junk fees. This administration has prioritized fair competition in the economy, as evidenced by the creation of a Competition Council in 2021. Junk fees have been a focus of many members of that council. For example, the Federal Trade Commission recently issued a proposed rule to address junk fees that are deceptive or unfair, the Federal Communications Commission adopted a rule requiring broadband companies to provide consumers with an easy-to-understand label disclosing the costs and fees of their service, and the Department of Transportation proposed a rule that would require airlines to make upfront disclosures of common fees, including baggage and cancellation fees.

As I mentioned, however, states are integral to consumer protection, and that is particularly true with respect to combating junk fees. Because junk fees have crept into all aspects of the economy, it will take an all-out effort from all levels of government to protect consumers. We’d be interested in hearing from you about ways that we can strengthen our partnership, and in particular about opportunities for the federal government to help or at least avoid hindering state efforts. For example, our recent work to explain how state truth-in-lending laws involving small businesses were not preempted by federal law received valuable input from the state of California in the public comment process.

I want to highlight one important measure that states can take on junk fees. Many states, including Pennsylvania, have enacted statutes that generally prohibit unfair or deceptive acts or practices (UDAP). Because many junk fees are likely to be unfair or deceptive under these laws, states can attack junk fees under existing statutes.

However, state UDAP statutes commonly also include an enumeration of specific acts or practices that are prohibited. These lists of illegal practices convey bright line prohibitions that may already fall within the general standard. But they can have more deterrent effect, provide more useful guidance to industry, and are often easier to enforce by private plaintiffs and government enforcers. In the CFPB’s view, it is prudent for states to include junk fees in these lists of prohibited practices. These kinds of laws would make explicit what is often already illegal under the general UDAP statutes, and they could make it easier for state attorneys general, state regulators, and consumers to enforce these statutes against junk fees.

We need both federal and state efforts to address the rising junk fee problem in the US. State legislation is a powerful tool to protect American families. The CFPB is ready to help Pennsylvania in any way it can.

Thank you. I would be happy to answer any questions.