The Biden Administration’s Campaign Against “Junk Fees” is Misguided and Misleading

The Biden administration’s campaign to wipe out “junk fees” is misleading and only further entrenches the federal government’s foothold in the private sector. Credit card late fees, overdraft fees, nonsufficient fund (NSF) fees, and securities and annuities commissions are all under assault. “Junk fees” are “junk” in name only. These are lawful fees. The executive branch wants to use the smoke and mirrors of pleasantly sounding terminology to hide the fact that this is just another way for unelected bureaucrats to determine how companies should operate.  

The following is an analysis of how the Biden administration’s “junk fees” initiative will negatively impact the U.S. financial sector, bank customers, credit union members, individual investors, and retirees.  

CONSUMER FINANCIAL PROTECTION BUREAU (CFPB)

The CFPB is launching a three-pronged attack in the war on “junk fees.” The agency is arbitrarily changing the regulatory rules for credit card late fees, overdraft fees, and NSF fees. This misguided initiative will cut access to credit. According to one article, “if the political class is able to secure price controls in the form of substantially reduced late-payment fees levied on cardholders, it will as a rule substantially reduce credit availability for high-risk, and occasionally late-paying borrowers.” Instead of helping Americans with lower income or lower credit scores, the CFPB is limiting credit availability in the form of price controls.  

Credit Card Late Fees 

The CFPB arbitrarily promulgated a proposed rule to impose restrictions on fees lenders can charge on delinquent credit card payments.  

Without any direction from Congress, the proposed rule (1) changes the safe harbor dollar amount for late fees from $30, or $41 for subsequent late payment violations, to a strict threshold of $8 while prohibiting any higher amount for future delinquencies; (2) removes the safe harbor late fee adjustment to account for inflation; and (3) caps late fees at 25 percent of the total payment due.   

Eighty-two percent of U.S. adults own at least one credit card. Hamstringing lenders from being able to charge late fees that are commensurate with the level of delinquency could drastically reduce the availability of credit. It may also incentivize borrowers to neglect their payments, which results in financial institutions having to increase loan loss reserves.  

The CFPB has arbitrarily determined that the changes in the proposed rule are “reasonable and proportional.” In reality, these changes further empower the federal government to expand its reach into contracts between private parties while simultaneously circumventing the representatives that are elected by Americans who will be directly harmed by these adjustments. If delinquencies overtake loan loss reserves it will lead to instability in the banking sector, which is what is starting to appear in the commercial real estate market.  

The proposed rule’s lack of clear authority from Congress and its failure to produce a thorough economic analysis to “cogently explain why it has exercised its discretion in a given manner” could violate the Administrative Procedure Act (APA) and be deemed arbitrary and capricious. The rule also likely fails the major questions doctrine, especially in the wake of the seminal ruling in West Virginia v. EPA. The CFPB is also taking advantage of its “double-insulated” funding structure, which has already been ruled unconstitutional by the U.S. Court of Appeals for the Fifth Circuit, to unilaterally control the direction of the credit card market. A final ruling is pending following oral arguments in the U.S. Supreme Court.  

To deter duplicitous behavior, current regulations require specific disclosures and limits on credit card fees. The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) currently requires disclosures and heavily regulates fees charged on deposit accounts and cards. Restrictions already exist on credit card fees. The lack of evidence and need for additional regulation of credit card fees remains to be seen. The CFPB fails to prove that there is an existing problem under the current regulatory framework. 

Overdraft Fees 

The CFPB is arbitrarily expanding the application of the Truth in Lending Act (TILA) and Regulation Z to overdraft services charged by banks, credit unions, and savings associations with more than $10 billion in assets. Overdraft fees are opt-in services where a financial institution charges a consumer for covering debit card transactions and ATM withdrawals in the event a consumer lacks sufficient funds to complete the transaction.  

Financial institutions’ overdraft fees that maintain a finance charge, are “payable by written agreement in more than four installments,” or are profitable charges would be subjected to enhanced disclosures and restrictions under Regulation Z. This would essentially regulate overdraft fees like credit cards. Regulation Z already exempts checking account overdraft fees from the finance charge definition. Now, the CFPB is arbitrarily changing this by adding a checking account overdraft to the definition of finance charge. This is akin to forcing a square peg in a round hole. 

The proposed rule would not apply Regulation Z rules to overdraft fees that are “at or below costs and losses.” The CFPB is “considering setting the benchmark fee at $3, $6, $7, or $14” or banks could “[c]alculate the fee by analyzing their own costs and losses.” This will assuredly coerce banks, credit unions, and savings associations to lower their overdraft fees to avoid the requirements in Regulation Z. The punitive rule is manipulating financial institutions’ operations and distorting revenue streams. The CFPB is justifying these changes by trying to convince the public that they do not understand how overdraft fees work—this is governmental paternalism at its finest.  

Congress has not directed the CFPB to make this change. Other rules have been vacated because an agency “failed adequately to justify departing from its own prior interpretation.” Additionally, the CFPB should take note that regulators may not expand their authority merely because they believe their “preferred approach would be better policy.” Moreover, the CFPB acknowledges it lacks the data to conduct a thorough cost-benefit analysis. The proposed rule states that “the data and research are insufficient to fully quantify the potential effects of the proposal for consumers and very large financial institutions.” For example, the CFPB admits it does not know how financial institutions will reallocate resources in response to the proposed rule: 

the CFPB believes there is little reliable quantitative evidence available on the cost and effectiveness of steps financial institutions might take to facilitate clients’ money management or timely repayment on overdrawn accounts; reprice any of their services; remunerate their staff, suppliers, or sources of capital differently; or enter or exit any or all segments of the checking account market. 

The rule should not have been proposed without first taking the time to understand all the prospective effects of the rule.  

The CFPB claims to be shedding light on overdraft fees. Rather, the ultimate outcome of this proposed rule is the CFPB will be better able to dictate how financial institutions draft contracts with their customers. For example, the CFPB directly dictates the terms and conditions by prohibiting financial institutions from conditioning overdraft “on consumers agreeing to automatic debits from their checking account.” The proposed rule is a prime example of government intervention and a gratuitous use of the unfair, deceptive, or abusive acts or practices (UDAAP) standards.  

NSF Fees 

The CFPB is arbitrarily banning NSF fees for transactions that are declined “instantaneously” or “near-instantaneously” (e.g., in real time). The CFPB claims that the application of NSF fees for debit card transactions, peer-to-peer transactions, or ATM withdrawals constitutes an abusive practice. Like overdraft fees, NSF fees are charged when a consumer overdraws their account. Unlike overdraft fees, NSF fees are charged when the bank does not cover the transaction.  

The CFPB has arbitrarily determined that NSF fees, like overdraft fees, are not always charged commensurately with the amount of the transaction and the cost to cover a transaction. This justification belies the fact that the CFPB may not arbitrarily dictate the terms of service between a bank and its customers. Moreover, banks are for-profit entities that do not strive to only breakeven—they aim to create shareholder value and maximize returns for investors. Bank directors owe a fiduciary duty to investors. By simply breaking even could expose bank directors to liability for failing to uphold their duties of loyalty and care to bank shareholders. Proposed regulations from the Federal Reserve (Fed), Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) are making it more imperative that banks maintain enough equity capital from shareholders. Eliminating revenue streams for banks makes it harder for banks to find opportunities to create shareholder value, which in turn makes it harder for banks to comply with the government’s bank capital regulations. The CFPB is wrongly removing options for banks to raise revenue and making it more difficult to follow the law.  

NSF fees are charged for the cost of doing business. The CFPB’s claim that NSF fees are not service fees is conveyed ipse dixit.  

Like the overdraft fee rule, the NSF rule lacks a sufficient cost-benefit analysis. The impact on small community banks and credit unions is uncertain. The CFPB acknowledges that “[e]xisting data do not clearly indicate whether there would be specific impacts of the proposed rule on depository institutions and credit unions with $10 billion or less in total assets.” Additionally, the CFPB acknowledges that: 

quantifying the benefits, costs, and impacts of the proposed rule requires quantifying future consumer and covered financial institution behavior both with and without the proposed changes, and the CFPB is not aware of available data that could be used to generate reliable predictions about such future behavior. 

The rule should not have been proposed without first taking the time to understand all the prospective effects of the rule.  

Rectifying UDAAP Act (H.R. 6789) 

Legislation is needed to codify clarifications on how to interpret what constitutes unfair, deceptive, or abusive acts or practices (UDAAP) under the Consumer Financial Protection Act. In December 2023, Rep. Andy Barr (R-Ky.) introduced a bill to rectify UDAAP standards. The bill contains five notable provisions: (1) any final rule relating to UDAAP is required to include a cost-benefit analysis, (2) the CFPB may not interpret UDAAP to include discriminatory practices, (3) an act or practice may only be abusive if it falls under strict parameters, (4) there must be a specific opportunity for an entity to acknowledge and rectify practices that violate UDAAP, and (5) CFPB enforcement actions under UDAAP may not simultaneously claim that an activity is unfair or deceptive and abusive, it is one or the other. The bill is primarily designed to ensure that the CFPB does not pursue gratuitous enforcement actions.  

Airline Rewards Programs  

Sens. Dick Durbin (D-Ill.) and Roger Marshall (R-Kan.) sent a letter calling on the Department of Transportation (DOT) and the CFPB to investigate airlines’ loyalty programs. Consequently, DOT announced it would scrutinize the airlines for potentially unfair or deceptive practices. The unsubstantiated claims made by the senators will do nothing to help consumers, but it will empower the federal government to control how airlines service their loyalty programs.  

This assault on airline co-branded cards and loyalty programs parallels President Biden’s partisan political agenda to wipe out “junk fees.” Just like the letter, President Biden uses words such as “unfair” and “deceptive.” If deception or fairness was truly an issue, consumers would simply drop enrollment in these programs since the costs would exceed the benefits. There are transaction costs associated with using points to purchase services, but airlines are already transparent about this and make it clear to consumers. Notably, many Republicans have been opposed to President Biden’s agenda. Senate and House Republicans have sent multiple letters to the CFPB opposing the vilification of legal service fees. It is disconcerting to see members of Congress target the airlines solely because they publicly denounced legislation that ultimately harms their businesses and the thousands of Americans they employ across the country. 

The government should not be in the business of micromanaging airlines’ loyalty programs. One Senate aide told Breitbart News that: 

This entire investigation is happening only because the Durbin credit card bill isn’t passing, so this is his revenge. Durbin and his allies are using the administrative state as a weapon, just like the Biden regime has weaponized every agency against Elon Musk for failing to toe the line.  

As part of this investigation, and to exact vengeance on the airlines that publicly oppose the Credit Card Competition Act (CCCA), Sen. Durbin is calling for a hearing in April to promote his big-government CCCA. It is notable that the hearing would be taking place in the Senate Judiciary Committee and not the committee where the bill was referred—Senate Banking Committee. Sen. Durbin is abusing his governmental power as chairman of the Senate Judiciary Committee to attack private sector business entities over a specific legislative squabble that is not germane to his committee’s jurisdiction because the bill’s sole directive is to have the Fed issue new regulations to regulate credit card routing.  

The senators are clearly attempting to antagonize airlines for their public opposition to Sen. Durbin and Sen. Marshall’s misguided CCCA—a bill that hands more power to the Fed. The investigation and hearing are nothing more than vacuous political retribution. 

DEPARTMENT OF LABOR (DOL)

The U.S. DOL should not mimic European regulators and wantonly antagonize investment firms for charging fees that the regulator deems unwarranted. For example, the United Kingdom’s Financial Conduct Authority (FCA) is scrutinizing fees charged by certain investment firms. Regulators should not be in the business of micromanaging fee structures without clearly proving the legal threshold for culpability has been breached.  

In the U.S. the legal threshold for culpability depends on the type of firms and service being offered. Broker-dealers, which facilitate buying and selling securities for clients and their own proprietary operations are subject to the standards of conduct under Regulation Best Interest (BI). Registered investment advisers (RIAs) are subject to a strict fiduciary duty of loyalty and prudence. 

In November 2023, the Department of Labor (DOL) issued a proposed rule to expand the definition of a fiduciary to apply to broker-dealers and activities that have not conventionally counted as necessitating a fiduciary duty. Regulation BI was crafted to mitigate conflicts of interest while also ensuring that broker-dealers could still offer their services to clients at an affordable price. To unnecessarily heighten standards of conduct would compel broker-dealers to institute costly new safeguards that would assuredly be passed down to Americans’ 401(k)s and individual retirement accounts (IRAs). As evidenced by one recent lawsuit, Reg BI requires disclosure of material information and holds broker-dealers accountable when they do not put their clients’ best interests ahead of their own. Arbitrarily applying fiduciary standards unnecessarily would make it prohibitively expensive for lower-income individuals.  

There is bipartisan opposition to DOL’s proposed rule. In January, House Republicans and Democrats sent a letter to DOL underscoring the detrimental effects of the proposed rule: 

In moving forward with this proposal, DOL has unreasonably dismissed the extensive research and real world experience decisively demonstrating the 2016 DOL fiduciary rule significantly harmed lower- and middle-income workers before being vacated in federal court. The proposed fiduciary definition goes further than the 2016 fiduciary rule that was invalidated by a federal appeals court ruling. 

… 

A study of the 2016 fiduciary rule found that more than 10 million smaller retirement account owners lost the ability to work with financial professionals. A more recent analysis found that if DOL adopts a new rule that is similar to the 2016 rule, the retirement savings of 2.7 million individuals with incomes below $100,000 would plummet by $140 billion over ten years. The analysis also found that people of color, particularly Black and Latino retirement account owners would be among the hardest hit, increasing the racial wealth gap by 20 percent. 

Additionally, Rep. Rick Allen (R-Ga.) has committed to introduce a joint resolution of disapproval to repeal the rule once it is finalized. If the resolution is signed into law, the final rule and any future substantially similar rule would be considered null and void.  

The Biden administration is specifically targeting annuity sales. The proposed rule expands the application of fiduciary duty to investment professionals who are conducting activities that do not traditionally fall under the definition of a fiduciary. The rule justifies this new application because unless an annuity is considered a security, they are generally “not covered by the Federal securities laws.” As “an insurance contract sold by insurance companies,” annuities are primarily regulated at the state level. The rule acknowledges, “all annuity products are subject to state regulation,” but also opines that the state regulations are “a lower standard.” DOL does not trust that state regulators can hold bad actors accountable but offers no evidence to support this claim. In fact, DOL uses examples of state regulators identifying instances of misconduct. So, it calls into question why DOL needs to apply a new fiduciary standard when state regulators are already regulating and supervising all annuities. Moreover, the common law supporting state and not federal regulation of insurance is abundant. This was bolstered by Congress’s enactment of the McCarran-Ferguson Act in 1945, which states that: 

No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance. 

In 1999, the Gramm-Leach-Bliley Act “once again affirmed that states should regulate the business of insurance by declaring that the McCarran-Ferguson Act remained in effect.” Even the Dodd-Frank Act kept “the primary state insurance regulatory functions” intact.  

Under the proposed rule, an investment professional would have a fiduciary duty when making a single recommendation “for rollovers from 401(k) plans to annuities.” Applying fiduciary status to insurance agents would eliminate the option for insurance agents to earn commissions unless they “use exemptions under the proposed changes.” However, this can be costly. DOL should not be in the business of dictating how insurance companies and their agents charge for their services. This classic example of government interventionism is a back-door price control. Commissions are not “junk fees,” they are the price for providing a service. DOL’s proposed application of fiduciary status is just another way for the Biden administration to control how fixed-indexed annuities may be charged.  

DOL is also refusing to allow the Advisory Council on Employee Welfare and Pension Benefit Plans (ERISA Advisory Council) to review Interpretive Bulletin No. 95-1. Potential political pressure to ignore the study of annuity contracts for ERISA-regulated pension plans is in direct contravention of Congress’s intent in SECURE 2.0 Act of 2022 to consult industry stakeholders when making changes to regulatory guidance. This is a perfect example of DOL’s politically charged arbitrary decision-making.  

NORTH AMERICAN SECURITIES ADMINISTRATORS ASSOCIATION (NASAA)

NASAA is proposing changes to rules that would increase costs and consequently lower returns for retirees and individual investors. These amendments would comprehensively alter the market structure for providing cost-effective brokerage account investment options for the $33 trillion U.S. retirement market. NASAA’s proposal is the state level version of DOL’s proposed rule. The ultimate goal is for the government to wrongly dictate how broker-dealers and investment professionals may charge clients for the services they offer.   

NASAA, which “represents state and provincial securities regulators in the United States, Canada and Mexico,” is proposing changes to its broker-dealer Business Practices Rule. The proposed rule significantly diverts from the principles of the Securities and Exchange Commission’s (SEC) Regulation BI. The amendments would wrongly apply traditionally fiduciary requirements, which are normally applied to RIAs, to broker-dealers. 

RIAs and broker-dealers provide fundamentally different services. Broker-dealers buy and sell securities for their customers and themselves. RIAs offer advice to their customers and are strictly obligated to comply with their fiduciary duties of loyalty and care. Broker-dealers are paid a commission for conducting securities transactions, while RIAs are paid a fee for providing advice or managing assets. 

Under the proposed rule, if a broker-dealer places “the financial or other interest of the broker-dealer or agent ahead of the interest of the retail customer” or “recommend[s] an investment strategy or the sale or purchase of any security without a reasonable basis to believe that the recommendation is in the best interest of the retail customer,” the broker-dealer could be liable for dishonest or unethical business practices. The amendments also state that these new obligations cannot be “satisfied through disclosure alone,” but fail to explicate how else broker-dealers may convey that they are following the rules. Without any substantive justification, NASAA is arbitrarily amending these rules in a way that conflicts with federal law and introduces prohibitively expensive reporting requirements for broker-dealers. These new mandates will ultimately pass cost increases down to investors in the form of higher fees, fewer services, or lower returns.  

The proposed rule will also strictly regulate how broker-dealers can pay for their services and operations. The rule automatically assumes that a broker-dealer has placed its financial interest ahead of an individual investor if it partakes in: 

(i) sales contests; (ii) sales quotas; (iii) bonuses; or (iv) any other non-cash compensation that are based on the sales of specific securities or specific types of securities within a limited period of time, or rewards the broker-dealer or agent with additional cash or non-cash compensation beyond the sales commission as the result of that recommendation. 

Broker-dealers should comply with Regulation BI and act in the best interest of individual investors and retirees while eliminating conflicts of interest. However, the proposed amendments to the Business Practices Rule go beyond Regulation BI and would significantly increase costs for broker-dealers by altering the structure for collecting fees, and consequently raise costs for retirement plans and funds offered to individual investors through brokerage accounts. If the proposed rule is adopted, all forms of broker-dealer compensation, except for commissions, would likely be illegal.  

In September 2023, the Massachusetts Supreme Judicial Court issued a ruling that would compel broker-dealers registered in Massachusetts to comply with Regulation BI and state fiduciary laws. The Massachusetts ruling in combination with NASAA’s proposed rule would lead to a “patchwork of inconsistent state-level standards.” According to a statement made by former SEC chairman Jay Clayton, this patchwork “will increase costs, limit choice for retail investors and make oversight and enforcement more difficult.” This would be in direct contravention to the goals of nationwide policy uniformity as enacted in the National Securities Markets Improvement Act of 1996 (NSMIA). If a state were to adopt NASAA’s proposed rule, it would likely be found as “an obstacle to the accomplishment and execution of the full purposes and objectives of Congress” because it conflicts with NSMIA. 

CONCLUSION

The Biden administration’s “junk fee” crusade is a façade for the federal government to intervene in the everyday operations of private businesses. Ultimately, this raises costs for businesses, which will be passed down to consumers and retirees. Unelected bureaucrats can only enforce the law—they do not create. The job of making the law rests with the elected representatives in Congress. It would behoove the executive branch to remember this as they continue their wild goose chase to protect consumers from themselves.