How junk fees have changed since Biden's last State of the Union

March 6, 2024 5:30 AM

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What will the 2024 State of the Union address say — and will banking policy and "junk fees" once again play a starring role?

On March 7, President Biden will follow tradition and deliver his State of the Union address to a joint session of Congress. In last year's speech, Biden discussed his administration's commitment to tackling "junk fees" — hidden financial-services fees and surcharges including penalties for late payments, nonsufficient funds and account maintenance — urging Congress to pass the Junk Fee Prevention Act.

"Junk fees may not matter to the very wealthy, but they matter to most folks in homes like the one I grew up in," he said. "They add up to hundreds of dollars a month. They make it harder for you to pay the bills or afford that family trip. I know how unfair it feels when a company overcharges you and gets away with it."

In the year since, his administration has demonstrated support of the Consumer Financial Protection Bureau (CFPB) as it continues efforts to regulate away junk fees, even as bankers protest these efforts. As recently as this week, the CFPB finalized its proposal to cut credit card late fees to $8 from $32, which would save save consumers $10 billion a year in credit card late fees.

In early 2022, CFPB director Rohit Chopra began a review of extraneous charges from banks, credit unions, mortgage lenders and fintechs with a goal to increase competition for consumers. The agency initially found that in many instances, the amount of fees charged to customers exceeded the financial institutions' cost of providing the services, meaning that companies are imposing fees to increase profits. Chopra criticized banks for earning billions in revenue each year through these "junk fees."

"Large banks haul in huge sums in fees from retail customers," Chopra said at the start of this process on a call with reporters. "When markets become dependent on these back-end fees, it makes it harder for families to realize the benefits of competition. Today with our request for public comment on junk fees, we are beginning the process of breaking banks' reliance on these exploitative income streams and making prices and features clear upfront."

Bankers have opposed these efforts and expressed concern over the past two years. Debra Stamper, general counsel of the Kentucky Bankers Association, said there is no data to support the CFPB's position that "junk fees'' are a significant source of complaints from consumers. She and others oppose the CFPB's broadly lumping all fees on consumer financial products as junk fees given that roughly 5% of the agency's complaints in 2021 concerned checking and savings accounts.

"What consumer is going to write that they love being charged a fee?" Stamper wrote in a 2022 letter opposing the CFPB's broad request for information. "With all due respect to Director Chopra, banks are different. Banks are highly regulated."

The American Bankers Association (ABA) echoed Stamper's sentiment, noting that the CFPB's request about fees incorrectly implies that most fees are hidden, that markets are not competitive and that consumers cannot switch institutions to avoid paying the charges.

"As the Bureau well knows, congressionally-mandated disclosure frameworks require detailed, upfront cost and fee disclosures for virtually all consumer financial products and services," wrote Kitty Ryan, the ABA's vice president and senior counsel and a former deputy assistant director at the CFPB, in a letter signed by 51 state bankers associations, including Puerto Rico's.

The CFPB, however, has continued its work on "junk fees," even releasing proposals that would alleviate these fees in January of this year. President Biden, similarly, has continued to address the issue, slamming junk fees as a cause of Americans' dwindling retirement savings at an Oct. 31 event at the White House.

This year's State of the Union address comes as the president is ramping up his reelection campaign while many Americans are struggling with the effects of inflation, higher interest rates and other economic uncertainties. It is expected that Biden will address a number of financial topics including the Affordable Care Act, student debt relief and increased taxes for billionaires.

Catch up on the latest developments of the Biden administration's war on "junk fees" below.

CFPB proposal cuts credit card late fees to $8

The Consumer Financial Protection Bureau has finalized its proposal to cut credit card late fees to $8 from $32, part of a wide-ranging effort by the administration to crack down on unfair fees ahead of President Biden's State of the Union address later this week.

"Late fees have gotten out of control," said CFPB Director Rohit Chopra on the White House call Monday with reporters to announce the final rule to reduce credit card late fees.

Read more:

CFPB $8 credit card late fee rule comes amid White House fee crackdown

Proposed rule from CFPB considers NSF fees unlawful

In January, the CFPB proposed a rule that would consider nonsufficient funds fees to be unlawful — and an "abusive practice" under the Consumer Financial Protection Act — if the fee is charged on a debit, ATM or peer-to-peer payment that is declined immediately.

The CFPB acknowledged in its proposal that financial institutions rarely charge NSF fees for ATM or debit transactions that get declined at what the bureau called "the swipe, tap, or click." But as real-time payments become ubiquitous, the CFPB said it "believes that [it] is important to proactively set regulations to protect consumers from abusive practices," American Banker's Kate Berry reported in January.

NSF fees — also known as returned-item fees, because they typically were charged for returned or bounced checks — are largely a thing of the past among the top 20 banks. But the CFPB said that it recently found through its market monitoring that some large banks with more than $10 billion in assets are still charging NSF fees with a median fee of $32.

Read more:

CFPB proposes 'proactive' rule to halt NSF fees on real-time payments

CFPB plans to change overdraft fee calculation in new proposal

A proposal released in January addresses the way the CFPB plans to radically change how overdraft fees are calculated and charged by financial institutions that have more than $10 billion in assets. Banks and credit unions with less than $10 billion in assets would be exempt from the proposed rule.

Two years after many large banks eliminated or dropped overdraft and nonsufficient fund fees, the CFPB wants overdraft services to be classified as an extension of credit, subject to the same consumer protections as credit cards under the Truth in Lending Act that requires disclosures of annual percentage rates.

"We're proposing a rule that would establish clear, bright lines and ensure customers know what they are getting when it comes to overdraft," CFPB Director Rohit Chopra said on a recent conference call with reporters. "Right now, overdraft lending is one of the only types of consumer loans where consumers are not told an APR or given lending disclosures."

Read more:

CFPB proposes setting maximum overdraft fees at $14 for largest banks

CFPB report reveals consumers use overdraft, NSF services as credit

After many large banks eliminated or dropped overdraft and nonsufficient fund fees, the CFPB issued a report in December that paints a broad financial profile of consumers' experiences with such fees. They found that frequent overdrafters — households that pay more than 10 overdraft fees a year — use overdraft services as a form of credit, even though more than half have access to a lower-cost credit card.

"Some consumers appear to use overdrafts often and intentionally as a source of credit, even with their high cost," the report stated.

Low-income households are hit hardest by overdraft and NSF fees and about half do not have access to credit or a lower-cost option. Just 10% of households making $175,000 a year were charged either fee, the report found, while 34% of households making less than $65,000 paid a fee. The average credit score of frequent overdraft and NSF fee consumers is 637 compared with 744 for those who never get assessed the fees.

Read more:

CFPB report finds overdraft, NSF services are used as a type of credit

CFPB reviews "junk fees" in report

In a 20-page report released in March 2023, the CFPB described a number of junk fees that examiners found during an eight-month period ending February 1, 2023. The CFPB said some banks continue to assess what it called "surprise" overdraft fees — also known as "authorized-positive, settle-negative fees" — in which a consumer's account has a positive balance when a debit is authorized but then an overdraft fee gets charged because the debit is processed after other transactions are settled.

"One of the things we want to see in our economy is companies competing by offering the best product at the best price," said CFPB Director Rohit Chopra at an event at the White House last March. "What you end up seeing is a lot of firms looking at ways to obscure that price, to tuck in a fee late in the game."

Most states have a prohibition on "unfair and deceptive practices," and Chopra urged state lawmakers to strengthen laws that "go after some of these fees."

Read more:

CFPB issues special report on so-called "junk fees"

Biden takes on 'junk' fees in his 2023 State of the Union address

In 2023's State of the Union address, President Biden touted the work his administration has done to address "junk fees" and urged Congress to pass the Junk Fee Prevention Act. In early 2023, the Consumer Financial Protection Bureau proposed a rule that would drop credit card fees to $8 from $30, threatening $9 billion a year in fees for banks and credit card companies.

He said that his administration had "reduced exorbitant bank overdraft fees," which he said amounted to more than $1 billion a year.

Read more:

Biden calls for crackdown on 'junk' fees in State of the Union address