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[Federal Register Volume 90, Number 8 (Tuesday, January 14, 2025)]
[Proposed Rules]
[Pages 3044-3046]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-31385]

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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 90, No. 8 / Tuesday, January 14, 2025 / 
Proposed Rules

[[Page 3044]]

CONSUMER FINANCIAL PROTECTION BUREAU

12 CFR Part 1042

[Docket No. CFPB-2024-0003]
RIN 3170-AB16

Fees for Instantaneously Declined Transactions; Withdrawal of 
Proposed Rule

AGENCY: Consumer Financial Protection Bureau.

ACTION: Withdrawal of proposed rule.

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SUMMARY: The Consumer Financial Protection Bureau (CFPB) is withdrawing 
its proposed rule to prohibit banks and other financial institutions 
from charging certain nonsufficient funds (NSF) fees, such as those for 
declined debit card purchases, Automated Teller Machine (ATM) 
withdrawals, and some person-to-person payments. The CFPB will 
determine whether a more comprehensive approach to also prohibit NSF 
fees charged for additional types of transactions will better protect 
consumers from potentially unlawful fees.

DATES: The proposed rule published January 31, 2024, at 89 FR 6031 is 
withdrawn as of January 14, 2025.

ADDRESSES: The docket for this withdrawn proposed rule is available at 
https://www.regulations.gov/docket/CFPB-2024-0003.

FOR FURTHER INFORMATION CONTACT: George Karithanom, Regulatory 
Implementation and Guidance Program Analyst, Office of Regulations, at 
202-435-7700 or https://reginquiries.consumerfinance.gov/. If you 
require this document in an alternative electronic format, please 
contact [email protected].

SUPPLEMENTARY INFORMATION:

I. Summary

    On January 31, 2024, the Consumer Financial Protection Bureau 
(CFPB) published in the Federal Register a notice of proposed 
rulemaking in which it proposed to prohibit covered financial 
institutions from charging fees, such as nonsufficient funds fees, when 
consumers initiate payment transactions that are instantaneously 
declined. The proposed rule preliminarily determined that charging such 
fees would constitute an abusive practice under the Consumer Financial 
Protection Act's (CFPA) prohibition on unfair, deceptive, or abusive 
acts or practices. For the reasons stated below, the CFPB is exercising 
its discretion to withdraw the notice of proposed rulemaking and 
terminate this rulemaking proceeding.

II. Background

A. Market Background and Proposed Rule

    When a consumer attempts a withdrawal, debit, payment, or transfer 
that exceeds the available funds in their depository account, a 
financial institution will sometimes decline the transaction and charge 
the consumer a fee, often called a nonsufficient funds (NSF) fee. 
Normally, these fees are only charged on check or Automated Clearing 
House (ACH) transactions that take days to clear, under the theory that 
a fee could deter consumers from intentionally attempting payments that 
will be declined in order to obtain a product or service from a 
merchant before the transaction is declined. Financial institutions 
have historically not charged NSF fees on ATM and debit transactions 
because declinations on these types of transactions are instant and 
effectively costless to the financial institution, and, because there 
is no chance that the transaction is successful for the consumer, there 
is no moral hazard to deter. However, financial institutions' fee 
practices have been rapidly changing in recent years, and some nonbank 
prepaid card providers have started charging NSF fees on instantly 
declined transactions despite the lack of a meaningful justification 
for the fee.
    The proposal preliminarily concluded that it is an abusive practice 
to charge an NSF fee on a transaction that is instantaneously declined 
because such fees take unreasonable advantage of consumers' lack of 
understanding of the risks, costs, or conditions of their accounts at 
the time they are initiating covered transactions. In making this 
preliminary conclusion, the CFPB observed that, unlike the CFPA's 
unfairness prohibition, the statutory text for the abusive conduct 
prohibition does not require any inquiry into reasonable avoidability. 
Although the CFPB preliminarily found that consumers' lack of 
understanding that they would be charged an NSF fee in the 
circumstances addressed in the proposal is generally reasonable, the 
proposal noted that the statutory text of the prohibition does not 
require a finding that the consumer's lack of understanding was 
reasonable to demonstrate abusive conduct.
    The CFPB preliminarily determined that consumers charged NSF fees 
on covered transactions would lack understanding of the material risks, 
costs, or conditions of their account at the time they are initiating 
covered transactions. The proposed rule stated that the ``costs'' 
associated with a covered transaction that would result in an NSF fee 
would primarily be the amount of the fee itself. The proposal further 
stated that the amount of funds in the account and whether they are 
sufficient for a given transaction at the time the consumer is 
initiating that transaction are relevant ``conditions'' of the 
consumer's deposit account. At the time a consumer considers initiating 
a request to withdraw, debit, pay, or transfer funds from their 
account, the proposed rule explained, the relevant risks to the 
consumer would include the possibility the transaction will be declined 
and result in an NSF fee.
    The CFPB preliminarily declined to characterize consumers' lack of 
understanding in the proposal as either ``specific'' or ``general'' 
because that binary framework--used in the 2020 partial rescission of 
the CFPB's 2017 rulemaking on Payday, Vehicle Title, and Certain High-
Cost Installment Loans \1\-is unhelpful for determining whether 
consumers understand the material risks, costs, or conditions of a 
consumer financial product or service, which is the statutory 
requirement. As discussed in the proposal, a consumer's lack of 
understanding can be based on one or the other, or a mixture of both, 
and each can inform one another. Indeed, a person's understanding of 
their personal risk may be intertwined with their understanding of the 
general risk to all consumers--if one knows that

[[Page 3045]]

many are harmed, they are more likely to understand that they are 
likely to be harmed.
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    \1\ See 85 FR 44382, 44421 (July 22, 2020).
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    The CFPB preliminarily concluded in the proposed rule that the 
practice of charging NSF fees on covered transactions takes 
unreasonable advantage of consumers' lack of understanding of the 
above-referenced material risks, costs, or conditions of their accounts 
when they initiate those transactions. The CFPB explained that a 
determination of unreasonable advantage-taking involves an evaluation 
of the facts and circumstances that may affect the nature of the 
advantage and the question of whether the advantage-taking was 
unreasonable under the circumstances.\2\ The proposal also stated that 
such an evaluation does not require an inquiry into whether the 
advantage-taking is typical or not--that even a relatively small 
advantage may be abusive if it is unreasonable, and that one may rely 
on qualitative assessment rather than an investigative accounting of 
costs and benefits to determine whether a covered financial institution 
takes an unreasonable advantage.\3\
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    \2\ See Statement of Policy Regarding Prohibition on Abusive 
Acts or Practices (Abusive Policy Statement), 88 FR 21883, 21886 
(Apr. 12, 2023). Cf., e.g., Swift & Co. v. Wallace, 105 F.2d 848, 
854-55 (7th Cir. 1939) (```[U]nreasonable' is not a word of fixed 
content and whether preferences or advantages are unreasonable must 
be determined by an evaluation of all cognizable factors which 
determine the scope and nature of the preference or advantage.'').
    \3\ Abusive Policy Statement, 88 FR 21883 at 21886.
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B. Statutory History

    Congress passed the prohibition on abusive conduct after the 2007-
2008 financial crisis, recognizing that the unfairness and deception 
prohibitions were insufficient to prevent predatory mortgage 
lending.\4\ The statutory authority to regulate abusive conduct was 
explicitly added as a new standard of fair dealing, and Congress 
crafted the prohibition as separate and distinct from unfairness and 
deception.\5\
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    \4\ See generally 2023 Abusive Policy Statement (in discussing 
background and legislative history regarding CFPB's authority to 
address abusive conduct, stating ``. . . Congress concluded that the 
manner in which agencies had enforced the prohibitions on unfair and 
deceptive acts or practices was too limited to be effective at 
preventing the financial crisis, and once again amended existing law 
to better meet new challenges).
    \5\ As the 2023 Abusive Policy Statement noted, in 2007, then-
FDIC Chairwoman Sheila Bair explained in congressional testimony 
that unfairness ``can be a restrictive legal standard'' and proposed 
that Congress consider ``adding the term `abusive,' '' which she 
noted existed in the Home Ownership and Equity Protection Act, and 
which ``is a more flexible standard to address some of the practices 
that make us all uncomfortable.'' Improving Federal Consumer 
Protection in Financial Services: Hearing Before the H. Comm. on 
Fin. Servs., 110th Cong. 40 (2007) (statement of Hon. Sheila C. 
Bair, Chairman of the Federal Deposit Insurance Corporation), 
https://www.govinfo.gov/content/pkg/CHRG-110hhrg37556/html/CHRG-110hhrg37556.htm; An act or practice need fall into only one of the 
enumerated conditions under CFPA section 1031(d) to be abusive, but 
an act or practice could satisfy more than one of those 
conditions.\5\
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    The prohibition, section 1031(b) of the CFPA provides the CFPB with 
the authority to ``prescribe rules applicable to a covered person or 
service provider identifying as unlawful unfair, deceptive, or abusive 
acts or practices in connection with any transaction with a consumer 
for a consumer financial product or service, or the offering of a 
consumer financial product or service.'' \6\ CFPA section 1031(b) 
further provides that rules under section 1031 may include requirements 
for the purpose of preventing such acts or practices.\7\
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    \6\ CFPA section 1031(b), 124 Stat. 2005-2006 (12 U.S.C. 
5531(b)).
    \7\ Id.
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    Under CFPA section 1031(d), the CFPB ``shall have no authority . . 
. to declare an act or practice abusive in connection with the 
provision of a consumer financial product or service'' unless the act 
or practice meets at least one of several enumerated conditions.\8\ 
CFPA section 1031(d)(2) provides, in pertinent part, that an act or 
practice is abusive when it takes unreasonable advantage of a 
consumer's lack of understanding of the material risks, costs, or 
conditions of the product or service.
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    \8\ 12 U.S.C. 5531(d). For a more detailed discussion of the 
CFPB's authority under the abusive conduct prohibition, see Abusive 
Policy Statement, 88 FR 21883.
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Comments Received
    The CFPB received nearly 8,000 comments on the proposed rule. 
Commenters supported and opposed the proposed rule on various grounds. 
A coalition of consumer advocacy groups and a number of think tanks, 
individuals, financial institutions, financial institution employees, 
and State and local governmental agencies supported the proposed rule. 
Some comments supporting the rule stated that: NSF fees (including 
those not covered by the proposal) have a particular impact on 
financially vulnerable populations; the proposal would simply codify 
the existing practice of most financial institution that do not charge 
NSF fees for instantaneously declined transactions; the proposal 
correctly described the CFPB's statutory abusive conduct authority; and 
the proposal properly applied that authority to prohibit NSF fees for 
covered transactions. A number of commenters supporting the proposal 
asserted that the discussion of lack of understanding in the proposal 
was consistent with that of the 2023 Abusive Policy Statement, agreed 
that the abusive conduct prohibition was a separate and distinct 
statutory tool from unfairness and deception and asserted that the 
insertion of a reasonable person standard in the lack of understanding 
prong of the abusive conduct prohibition would be statutorily 
inappropriate.
    A number of the supportive comments stated that the proposed rule 
would help to protect consumers from abusive conduct, but cited 
evidence of current harm to consumers from NSF fees beyond the scope of 
the proposed rule, such as the impact on consumers of NSF fees for 
check, ACH and recurring debit fee transactions. One commenter stated 
that 87% of Americans surveyed believe that NSF fees of any kind--
including fees not covered by the proposed rule--are unfair. Others 
reasoned that financial institutions generally should not profit from 
consumer misfortune. One commenter highlighted the impact of NSF fees 
charged for recurring debit transactions, especially for those on fixed 
incomes. Similarly, several other commenters inquired as to whether the 
proposed abusive conduct analysis of the rule, focused as it was on NSF 
fees for instantaneously declined transactions, might not also apply to 
NSF fees for other transactions not covered by the rule, including 
check and ACH transactions.
    A number of trade groups, financial institutions (including banks, 
credit unions, and non-depositories), employees of financial 
institutions, individuals, a group of law students, and others opposed 
the proposed rule. Their comments challenged provisions such as: the 
scope of the rule; the background analysis of the CFPB's statutory 
abusive conduct authority; the application of that authority to NSF 
fees for covered transactions; the lack of prevalence of NSF fees 
covered by the rule; the preventive nature of the rule; the alleged 
potential impact to innovation in the industry; and the alleged 
potential cost of the rule, even to the institutions that do not charge 
NSF fees covered by the rule.
    Although the CFPB is not finalizing the proposed rule, it affirms 
its interpretation of the CFPA with respect to its authority as 
discussed in the 2023 Policy Statement and disagrees with the comments 
that argued against it. As a general matter, the CFPB received comments 
about the agency's reading of its abusive authority and the application

[[Page 3046]]

to instantaneous NSF fees. Commenters discussed the CFPB's reading of 
the abusive standard, but those comments raised mostly policy-based 
concerns and did not seriously grapple with the CFPB's interpretation 
of the statutory language. For example, commenters did not give a 
plausible, much less superior, alternative textual readings of the 
abusive standard that justified imputing the ``reasonable consumer'' 
test for unfair practices to the statutory lack of understanding 
standard. Commenters did not suggest that lack of understanding of 
``costs'' or ``conditions'' require, as a textual matter, an assessment 
of probabilities or likelihood or magnitude of harm. And commenters did 
not raise specific counter-arguments supporting the notion that the 
CFPB should, statutorily, only pursue regulations under its abusive 
authority if consumers lack understanding of ``general'' risk, as 
opposed to when consumers lack understanding of individual risks, 
costs, or conditions.
    Commenters did suggest that the CFPB's reading of the statute as 
prohibiting practices distinct from those prohibited by the unfairness 
and deception standards would have broad policy consequences. However, 
Congress has already spoken on these issues of policy; the legislative 
history and statutory text make clear that Congress intended the 
existence of an additional and distinct standard prohibiting abusive 
practices. Furthermore, the CFPB does not agree that law-abiding 
companies have to be allowed to take unreasonable advantage of 
consumer's lack of understanding in order to operate in a fair market 
economy. While consumers may not be expected to understand every 
element of a financial transaction, law-abiding companies do not take 
unreasonable advantage of a lack of understanding to profit 
unreasonably. For that reason, the CFPB continues to operate with an 
understanding of the abusive conduct standard consistent with the 2023 
Abusive Policy Statement as well as the clarifications with respect to 
the payday rule discussed in the proposal.

III. Withdrawal of the Proposed Rule

    The proposed rule would have applied the analysis summarized above 
in section II.A. only to NSF fees charged for transactions that were 
instantaneously or nearly instantaneously declined. The stated purpose 
for this limited-scope proposal was that because technological advances 
might eventually make instantaneous payments ubiquitous, it was 
important to proactively set regulations to protect consumers from 
abusive practices that could emerge.
    However, as explained above, a number of comments highlighted that 
NSF fees for transactions not covered by the rule could also be 
abusive, such as fees for recurring Automated Clearing House (ACH) 
transactions. These fees are much more common under current market 
conditions than fees on instantaneous payments. Some comments suggested 
that the proposed abusive conduct analysis be extended to transactions 
not covered by the proposed rule.
    In light of the comments received and upon further consideration, 
the CFPB has reason to believe that practices involving the charging of 
NSF fees on other types of transactions may also be abusive for reasons 
similar to those discussed in the proposal. However, the prevalence, 
nature, and extent of harms from these non-instantaneous NSF fees were 
outside of the scope of the proposal and were not the focus of the 
proposed rule's evidence or analysis. Accordingly, the CFPB has 
determined that it would be a prudent use of its rulemaking and market 
monitoring resources to withdraw this rulemaking and to consider 
whether consumers similarly lack understanding of other NSF fees to 
determine whether a broader rulemaking would be appropriate.

IV. Applicable Date

    The notice of proposed rulemaking published in the Federal Register 
at 89 FR 6031 on January 31, 2024, is withdrawn as of January 14, 2025.

Authority and Issuance

    For the reasons set forth above, the CFPB uses its discretion to 
withdraw the proposed rule on NSF fees for instantaneously declined 
transactions published in the Federal Register on January 31, 2024.

Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2024-31385 Filed 1-13-25; 8:45 am]
BILLING CODE 4810-AM-P
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