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Heightened Risk for Banks as Account Fees Land on “Junk Fee” Agenda

Banks and financial institutions beware: an increased focus on so-called “junk fees” has litigants and regulators alike taking aim at checking and deposit account fees. Although recent political focus on “junk fees” has been aimed more squarely at the entertainment, travel, and other related industries, bank fees are in the crosshairs and the landscape is rapidly changing. Banks and financial institutions ought to heed recent developments and take renewed steps to review account agreements and current practices to minimize risk in the collection of routine fees.

Recent Lawsuits

Over the past year, a spate of class action lawsuits have been filed in state and federal courts targeting checking and deposit account fees. Plaintiffs have generally challenged “Authorize Positive, Settle Negative” (“APSN”) fees, representment fees, and other overdraft or account fees.

APSN fees are incurred when a transaction is authorized when the account balance is positive but then posted at a later time after intervening transactions have caused the balance to become less than the authorized amount (or negative). Representment fees are incurred when a third party attempts more than once to make a withdrawal from an account because the withdrawal was previously declined due to insufficient funds. The consumer is generally charged a fee each time the item is re-presented by the third party.  Although certain banks have revised or altered the type of account fees they collect, APSN, representment fees, and other fees have been commonly used for many decades and continue to be used in the financial industry for account maintenance.

The recent lawsuits generally attack these account fees on two grounds. First, the plaintiffs allege that the defendant bank breached its own account services agreement by imposing undisclosed fees (i.e., fees that were not set forth in the agreement). Second, plaintiffs allege that these types of fees violate state and/or federal laws regarding unfair, deceptive, or abusive acts or practices, typically on the theory that customers cannot anticipate or avoid such fees. These allegations and legal theories share many similarities with the early-2000s wave of litigation concerning overdraft fees.

Bank Regulators Weigh In

Although the White House and the Federal Trade Commission have been leading the charge against “junk fees,” bank regulators are now joining center stage.  On April 26, 2023, the Office of the Comptroller of the Currency (“OCC”) released a bulletin warning banks that certain practices associated with overdraft protection programs risk violating consumer protections against unfair or deceptive acts. In the bulletin, the OCC specifically highlighted APSN fees and representment fees as potential sources of problems.  The same day, the Federal Deposit Insurance Corporation (“FDIC”) published supervisory guidance similarly cautioning banks regarding the compliance risks associated with APSN fees. The FDIC warned that by charging APSN fees, a bank may risk violating Section 5 of the Federal Trade Commission Act due to consumers’ inability to anticipate or avoid these fees. The FDIC therefore encouraged banks to review their fee policies. 

Additionally, on May 10, 2023, the Consumer Financial Protection Bureau (the “CFPB”) weighed in with Circular 2023-02. The CFPB addressed account reopening practices, including those in which overdraft fees, non-sufficient fund fees, and account maintenance fees are imposed, and concluded that, “if a financial institution unilaterally reopens those accounts to process debits or deposits, it can constitute an unfair practice.” The CFPB further warned that “government enforcers should consider whether a financial institution has violated the prohibition against unfair acts or practices in the CFPA if they discover that a financial institution has unilaterally reopened accounts that consumers previously closed.”

Banks Should Take Steps to Review Practices and Procedures

The scrutiny of so-called “junk fees” is not likely to ebb any time soon and, if anything, litigation and regulatory risk is on the rise for banks and other financial institutions. In light of the current landscape, banks should review account agreements and current practices and take steps to mitigate risks. A close eye should also be kept on future developments, especially with respect to bank regulators and the outcome of pending lawsuits attacking account fees. We will continue to monitor this area and provide future updates.

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Keith M. Kollmeyer is a Member at Mintz who advises financial institutions in complex litigation and regulatory matters involving structured financial products and consumer financial products, with a particular emphasis on matters involving asset-backed securities (ABS). He represents clients in high-stakes cases in state and federal courts in New York and Delaware.

Alyssa C. Scruggs

Caroline B. Enright is an Associate at Mintz who focuses her practice on complex commercial litigation. She works with companies in a variety of industries, including financial services and real estate.