The Consumer Financial Protection Bureau (“CFPB”), on March 8, 2023, issued a “Special Edition” Supervisory Highlights focusing primarily on “junk fees.” The CFPB has been focused on junk fees for a while. As you may recall, the CFPB issued a Request for Information on this issue in February 2022, which we wrote about here. In this latest missive on junk fees, because this is a Supervisory Highlights issuance, the CFPB describes examination findings related to so-called junk fees from its examinations of financial institutions involving the areas of deposits, auto servicing, mortgage servicing, payday and small dollar lending, and student loan servicing. We will key in on and briefly summarize the mortgage servicing findings in this blog post. 

Before we dive in, it is useful to look at the CFPB’s statements about its legal authority to regulate junk fees.  In the introduction to this Special Edition, the CFPB explained that it believes the agency’s focus on “junk fees” is “consistent with its legal authority,” and cited to laws that “may touch on fees,” such as the CARD Act, Regulation Z, and the prohibition against unfair, deceptive, or abusive acts or practices (“UDAAP”).  The CFPB stated that, “junk fees are unnecessary charges that inflate costs while adding little to no value to the consumer,” and that such fees are “often hidden or disclosed only at a later stage in the consumer’s purchasing process or sometimes not at all.”

Mortgage Servicing Findings

The CFPB reported examiners found mortgage servicers violated UDAAP and Regulation Z by wrongfully charging late fees, property inspection fees, and fees and charges associated with private mortgage insurance (“PMI”) that should have been billed to the lender.  Servicers also failed to waive certain charges when consumers entered permanent loss mitigation options and failed to refund PMI premiums.

Late Fees – The CFPB reported that examiners found two issues with late fees. First, examiners found that servicers assessed late charges in excess of the amount set forth in the loan agreements. The servicers did not enter the maximum late fees in each loan agreement into their servicing system, which resulted in the servicers assessing the maximum late fees permitted under state law. The CFPB stated that this was unfair under UDAAP.  This also caused the periodic statements to be incorrect, because they reflected the wrong maximum late fee amount, resulting in a Regulation Z violation as well.

Second, examiners found servicers disclosed a late charge of $0 in the periodic statements for consumers in their last month of forbearance when in fact the late charge would be in the amount agreed to by the consumer in the loan agreement. The CFPB stated that this was deceptive under UDAAP.

For both of these findings the CFPB indicated the servicers refunded money to the consumers and updated their processes and controls.

Property Inspection Fees – On delinquent loans, servicers are generally required to complete monthly property inspections, the fees for which are charged back to the consumer. The CFPB found that in some cases property inspectors were unable to complete the inspection due to a “bad address” or were otherwise unable to find the property, but the servicers still repeatedly hired the inspectors for these bad addresses, and charged the consumers the full amount of the property inspection fee.  The CFPB stated that this was unfair under UDAAP.

PMI – The CFPB found errors in the administration of PMI in two distinct ways. First, the CFPB stated that servicers issued monthly periodic statements and escrow disclosures that indicated borrower-paid PMI premiums were due, but for loans originated with lender-paid PMI – which of course means the lender was responsible for paying for the insurance premiums – and not the consumer. As a result, the periodic statement never should have reflected an amount payable by the consumer for PMI. The CFPB stated that some consumers overpaid as a result, and that this was deceptive under UDAAP.

The CFPB also found that servicers were not cancelling borrower-paid PMI when required to under the Homeowners Protection Act.

For both of these PMI findings, the servicers refunded the excess funds actually collected from consumers and implemented additional procedures and controls in administering PMI.

Charging Waived Fees - Finally, the CFPB found servicers were charging consumers for fees that should have been waived pursuant to the Coronavirus Aid, Relief, Economic Security Act (CARES Act). Under the CARES Act, a consumer in forbearance should not be charged fees, penalties, or additional interest beyond the scheduled amount on the loan. For loans insured by the Federal Housing Administration, the servicer is required to waive certain late charges, fees and penalties OUTSIDE of the forbearance period. According to the CFPB, examiners found some servicers were charging consumers these fees and penalties for FHA loans when they should have been waived.  The CFPB stated that this was unfair under UDAAP.  The CFPB stated that for these findings, the servicers waived all improper charges, provided refunds to consumers, and improved their controls.

Non-Mortgage Findings

Below I also highlight a couple of the CFPB’s findings for non-mortgage products.  

·        NSF Fees – The CFPB also focused on the imposition of Non-Sufficient Funds (“NSF”) fees on represented transactions, which occurs when a consumer is assessed an NSF fee for a transaction that is returned to the payee, and then the payee represents the item to the financial institution for payment when the consumer still has insufficient funds, resulting in another NSF fee.  The CFPB stated that this practice is unfair under UDAAP, regardless of what the account opening disclosures state.  The CFPB also noted that “virtually all institutions that Supervision has engaged with on this issue reported plans to stop charging NSF fees altogether.”  The CFPB also reminded financial institutions about its responsible conduct bulletin, encouraging financial institutions to self-report violations.  The CFPB stated that the financial institutions provided refunds and stopped the practice.

·        Payday and Small-Dollar Lending – The CFPB found that certain small-dollar loan lenders presented delinquent payments as smaller, sub-payments to consumers’ bank accounts for payment via debit card. According to the CFPB, the practice of increasing the number of transactions without consumer authorization exposed those consumers to multiple adverse fees and charges (e.g., overdraft).  The CFPB stated that this was unfair under UDAAP.  The CFPB stated that the lenders were directed to provide remediation and to stop the practice.

 General Take-Aways

As always, CFPB Supervisory Highlights reports are written exclusively from the CFPB’s perspective. In addition, the details of the findings, because of this format, are few and far between. It is not certain that the CFPB applied the law correctly for some of its findings.  But these reports do provide the industry with a good picture of certain activities and fact patterns that may be considered a violation by the CFPB or other regulators.

It is notable that in many cases the findings were a result of the financial institution’s poor practices and controls in imposing the fee, and not a finding that the fee itself is “junk.” The opportunity here is to identify the improper practices that led to these findings, e.g., failure to match the maximum late charges and periodic statements to the loan agreements, and consider how these highlighted practices may exist at your company for other fees or products.

Please contact raymond@garrishorn.com if you would like to discuss.