Unanticipated fees trigger UDAAP concerns

CFPB guidance on overdraft and returned deposited item fees doesn’t impose new requirements. It raises questions.

February 8, 2023

The Consumer Financial Protection Bureau (CFPB) issued guidance on two fee practices in October 2022 that could potentially trigger liability under the Consumer Financial Protection Act (CFPA):

  1. Unanticipated overdraft fee assessment practices (circular 2022-06).
  2. Unfair returned deposited item fee assessment practices (bulletin 2022-06).

According to the CFPB, certain overdraft and returned item fees likely violate the CFPA’s prohibition on unfair practices when consumers can’t reasonably avoid them. It’s important to note that these releases are general policy statements the CFPB issued as part of its “junk fee initiative” (“CFPB’s ‘junk fee’ initiative,” p. 38). 

They don’t impose new federal regulatory requirements on credit unions.

CUNA has pushed back against the CFPB’s broad classification of many financial services fees as “junk fees,” including in recent letters to Congress. 

CUNA President/CEO Jim Nussle notes, “credit unions are the original consumer protectors, but we have strong concerns about the White House and CFPB’s classification of certain financial services fees as ‘junk fees.’ Credit unions offer these services as a member accommodation and benefit, and design their programs to meet the needs of their individual memberships.”

Unanticipated overdraft fees are likely to impose substantial injury on consumers that they can’t reasonably avoid.

‘Unfair’ practice under Dodd-Frank 

Under the Dodd-Frank Act, it’s unlawful for any provider of consumer financial products or services to engage in any unfair, deceptive, or abusive act or practice. 

An act or practice is unfair when:

  • It causes or is likely to cause substantial injury to consumers, and isn’t reasonably avoidable.
  • The injury isn’t outweighed by countervailing benefits to consumers or to competition.

A “substantial injury” generally means monetary harm, such as fees or costs consumers pay because of the unfair act or practice. An injury isn’t reasonably avoidable when consumers can’t make informed decisions or take action to avoid that injury. 

An act or practice isn’t unfair if the injury it causes or is likely to cause is outweighed by its consumer or competitive benefits. Note that the CFPB rejects any contention that the “back-end” fees its circular cites provide any countervailing benefits to consumers or competition. 

NEXT: Unanticipated overdraft fees

Unanticipated overdraft fees 

The CFPB’s circular on overdraft fees posed this question: Can the assessment of overdraft fees constitute an unfair act or practice under the CFPA even if the entity complies with the Truth in Lending Act (TILA) and Regulation Z, and the Electronic Fund Transfer Act (EFTA) and Regulation E?

The answer: yes. Overdraft fee practices must comply with TILA, EFTA, and the prohibition against unfair, deceptive, and abusive acts or practices (UDAAP) in Section 1036 of the CFPA. 

In focusing on the unfairness prong of UDAAP, the CFPB asserts, “overdraft fees assessed by financial institutions on transactions that a consumer would not reasonably anticipate are likely unfair.”

Unanticipated overdraft fees are likely to impose substantial injury on consumers (i.e., fees) that they can’t reasonably avoid, and that isn’t outweighed by countervailing benefits to consumers or competition.

APSN transactions

According to the CFPB, “unanticipated overdraft fees” often occur on “authorize positive, settle negative” (APSN) transactions. This is where the consumer is charged an overdraft fee even though the person’s available balance was positive at the time the debit card transaction was authorized at the point of sale. 

Consumers may reasonably assume that when they have a sufficient available balance in their account at the time they entered into the transaction, they will not incur overdraft fees for that transaction. 

However, they generally can’t “reasonably be expected to understand” the delay between authorization and settlement, or can’t control the methods by which a financial institution will settle other pending transactions.

The CFPB asserts that, even though financial institutions provide disclosures related to their transaction processing and overdraft assessment policies, “these processes are extraordinarily complex, and evidence strongly suggests that, despite such disclosures, consumers face significant uncertainty about when transactions will be posted to their account and whether or not they will incur overdraft fees.”

In other words, regardless of having clear and readily understandable disclosures, the average consumer still couldn’t have reasonably anticipated and/or avoided the fee.

Therefore, imposing the fee could be deemed an unfair practice under the CFPA.

Ledger balance vs. available balance

Per the circular, the account balance that isn’t reduced by any holds from pending transactions is often referred to as the ledger balance. The available balance is generally the ledger balance plus any deposits that haven’t yet cleared but are made available less any pending (i.e., authorized but not yet settled) debits.

In certain APSN situations, financial institutions assess overdraft fees at the time of settlement based on the consumer’s available balance reduced by debit holds rather than the consumer’s ledger balance. The CFPB asserts that this practice often leads to the assessment of multiple overdraft fees when consumers may reasonably have expected only one, “exacerbating the injury” from unanticipated overdraft fees.

By contrast, the consumer may not have been charged the additional overdraft fee if the financial institution used ledger balance. The circular provides two lengthy examples of how these scenarios purportedly play out.

‘Surprise’ depositor fees 

Blanket policies of charging returned deposited item fees to consumers for all returned transactions, regardless of the circumstances or patterns of behavior on the account, are likely unfair under the CFPA, according to the CFPB. 

A consumer depositing a check would normally be unaware of and have little to no control over whether a check originator has funds in their account, will issue a stop-payment instruction, or has closed the account. 

Nor would a consumer normally be able to verify whether a check will clear with the check originator’s depository institution before depositing the check, or be able to pass along the cost of the fee to the check originator. 

Therefore, the consumer wouldn’t be able to reasonably avoid the “substantial monetary injury” imposed by an unanticipated returned item fee. An injury isn’t reasonably avoidable unless consumers are fully informed of the risk and have practical means to avoid it.

What about the argument that imposing such fees deters bad check deposits?

According to the bulletin, deterrence can only be accomplished through the collection of fees in circumstances where the consumer anticipates that a check will be returned but deposits it anyway, such as where a consumer knowingly deposits a counterfeit check.

Unless fraud is involved, the average consumer would likely be unaware that a check would bounce and, therefore, would be unable to avoid being charged a fee.

Although blanket, one-size-fits-all policies seem to trigger the CFPB’s concerns, the agency notes, “it is unlikely that an institution will violate the prohibition if the method in which fees are imposed are tailored to only charge consumers who could reasonably avoid the injury.”

For example, if an institution only charges consumers a fee if they repeatedly deposit bad checks from the same originator, or only charges consumers a fee when checks are unsigned, those fees would likely be reasonably avoidable. 

Credit unions may want to review their existing returned item fee policies in light of this clarification.

VALERIE Y. MOSS is CUNA’s senior director of compliance analysis. Contact CUNA’s compliance team at