Overdraft penalties charged by credit unions could be affected.
The Consumer Financial Protection Bureau (CFPB) clearly has the authority to regulate so-called “junk fees” and should take a hard stance in limiting them, a coalition of consumer advocates told the agency Monday.
“We urge that the CFPB examine all penalty fees to ensure [they] are reasonably related to the actual damages sustained by the covered entity, Americans for Financial Reform, the Consumer Federation of America, the Center for Responsible Lending and the National Consumer Law Center, said in a joint, 86-page document filed with the agency.
They continued, “Fees that exceed such amounts inevitability lead to unfair, deceptive and abusive tactics by banks and other financial services providers to trigger violations and breaches, because the providers are too tempted by the large profits generated by out-of-proportion penalty fees.”
The CFPB has been soliciting public comment on fees that financial institutions and others charge consumers, which include overdraft penalties charged by credit unions.
Republican lawmakers have questioned whether the agency even has the power to regulate the fees and have derided use of the term “junk fees.” The Senate Banking Committee is scheduled to hold a hearing on overdraft charges on Wednesday.
Fees Often Imposed Furtively, Advocates Say
Consumer advocates however strongly maintain the agency must rein in use of such fees, claiming it has become increasingly common for businesses to deceptively increase the cost of services through ancillary charges. These fees, they contend, may be hidden in the fine print of advertisements or complex contracts, imposed at the last minute or even after a consumer has signed up for a service or with a frequency consumers do not anticipate.
The groups noted the fees levied “almost universally” vastly exceed the cost of the service itself or activity triggering them. Companies know they can get away with the charges because they are imposed in such a way that people either do not focus on them or cannot comparison-shop, they added.
An Outsized Impact on Certain Communities
“Junk fees push consumers out of mainstream financial products into fringe financial services and predatory financial products,” the groups wrote. “High-cost lenders are heavily concentrated in Black and Latino communities.”
Further, the groups claimed, overdraft and insufficient funds fees have become profit centers for financial institutions while also disguising the true cost of a bank account. “They push some consumers out of the banking system, with a disproportionate impact on communities of color,” they also noted.
The groups did acknowledge some institutions have either limited or eliminated such fees recently, but still called on the CFPB to regulate what they consider to be widespread abuses across the country.
“Depending on the amount and context, modest penalty fees may provide a reasonable compensation to the creditor for the costs caused by violation,” the groups said. “But penalty fees should never be a profit center.”