By Ray Birch
ARLINGTON, Va.—Credit unions that have instituted “convenience fees” as a means of generating additional revenues could find themselves on the receiving end of a lawsuit or in the crosshairs of the CFPB, one legal and compliance expert is warning.
David Reed, partner at Reed & Jolly, PLLC, told CUToday.info that financial institutions are entering a new period of scrutiny on the fees they charge for services, and if the charges more than pass through the CU’s costs to the member the CFPB may be asking a lot of questions and possibly levying fines.
One area organizations should pay particularly close attention to now is collections, which may have lulled many credit unions into a “false sense of security” due to ultra-low delinquencies in recent years, Reed said.
“Collections department regulatory compliance, this is a growing area of concern,” said Reed. “I say this because we are staring down a now active CFPB, which just issued a pay to pay advisory. And, collections activity, with what is looming ahead in the economy, will likely be rising.”
Pay to pay fees, or convenience fees, are those which a financial institution charges consumers when they pay a bill, make a payment to the credit union, or pay for a service.
“Say the member is behind on a loan payment. Well, the collections department reaches out to the member and tells them they can make the payment over the phone, and charges them $25 for the courtesy,” said Reed, who expects this “convenience service” strategy to be used a lot more in the coming year. “If this charge represents only the credit union’s cost for the service, they should be fine. But if they are making money on this …”
‘Unofficial Profit Center’
Reed emphasized courtesy pay is widely used by consumers because it is a win for both the financial institution and the borrower, as it helps to avoid a late fee and the FI gets its money.
“In some cases these fees become an unofficial profit center for the credit union,” Reed said. “(CFPB Director Rohit) Chopra has made it very clear the Bureau has not been doing a whole lot to protect consumers the last four years. So, they're going to try to remedy that. As I noted, the CFPB issued an advisory on these pay to pay convenience fees. They are also called junk fees. What they said is that charging this fee is potentially a violation of the Fair Debt Collection Practices Act and potentially of other Federal statutes, because they're not authorized by the loan agreement. If the creditor is charging more than the cost of the service they may find themselves in trouble.”
David Reed
Reed believes the CFPB will use its authority to penalize the institutions it oversees—those of $10 billion or more in assets-and that its stance could influence federal and state regulators and lead to examination findings in credit unions of all sizes.
Consumer groups and legal firms, too, could begin focusing on these charges, leading to class-action lawsuits, suggested Reed.
The ‘Other Side’
“That is the other side of this,” stated Reed. “There was a class-action lawsuit that was just ruled on in the Court of Appeals of the Fourth Circuit, which is in the Mid-Atlantic. The ruling was very similar to this issue. It basically said these convenience fees that the institution was charging—and I think it may have been a mortgage servicer—can't be charged because they are not in the mortgage contract. The servicer didn't do any kind of secondary disclosure, or the persons did not give permission for the charges.
“(The attorneys) wanted those fees refunded and even possibly damages in accordance with the state’s Fair Debt Collection Practices Act, or the federal Fair Debt Collections Practices Act. This is becoming a real risk, and I expect it to grow in attention as these fees increase in number as delinquencies rise.”
Reed reminded the potential increase in the number of lawsuits filed over convenience fees will not be due to any payout the plaintiff/victims are likely to receive.
“Remember, a class-action requires a number of plaintiffs. And while the plaintiffs may each receive a check for $1.89, the law firm is still getting a check for millions of dollars,” said Reed. “Consumer protection statutes allow for attorney fees, even if the damages are low, the attorney fee is high.”
Time to Take Inventory
Reed said it’s time credit unions inventory their fees, look for places where they charge convenience fees, and make sure those fees are either in the members’ contracts or in secondary agreements. He added that with real estate fees shrinking as mortgage business wanes, CUs may look to other areas to add fees as a means of maintaining non-interest income.
“They also need to make sure that they're keeping up with the CFPB to see if it has issued an advisory in advance of a notice of proposed rulemaking,” Reed added. “There is an economic storm on the horizon, and there’s going to be more and more interactions between the collections departments and borrowers.”