CFPB Warns Banks that Unilaterally Opening Closed Bank Accounts Could Be a Federal Law Violation

On Monday May 10, 2023, the Consumer Financial Protection Bureau (CFPB or the Bureau) released a circular regarding the Bureau’s newest guidance that if a “financial institution unilaterally reopens [deposit] accounts to process debits or deposits, it can constitute an unfair practice under the [Consumer Financial Protection Act of 2012] CFPA.”  12 U.S.C. § 5531.

The Bureau explained that reopening a closed account could result in concrete negative financial consequences to the consumer, including the charging of various fees. The Bureau highlights two primary scenarios under which this may occur.

First, after a consumer closes an account with zero funds, as required by many financial institutions, and the institution subsequently receives a debit request for that account, this can create the opportunity for the institution to reopen the account, attempt the debit, and then impose overdraft and non-sufficient (NSF) fees. Conversely, sometimes an institution may receive a request for a deposit to a closed account, and in turn reopen the account and then charge a maintenance fee. In either situation, the CFPB calls these “illegal junk fees” and Director Rohit Chopra commented that this guidance is another step in targeting financial institutions who try to “harvest” these types of fees.

In the circular, the Bureau further explains how it interprets this conduct as meeting the three elements of an unfair practice.  The relevant statute defines an unfair practice as one that causes or is likely to cause substantial injury to consumers that is not reasonable avoidable and is not outweighed by countervailing benefits to consumers or to competition.  See 12 U.S.C. § 5531.  

According to the Bureau, reopening a closed account unilaterally can cause fees to accrue resulting in a substantial injury.  The Bureau explains that this substantial injury cannot be avoided by consumers because consumers do not have any control over  (1) the actions of the third parties in trying to debit or deposit money; (2) how long of a waiting period there is to close the account; or (3) the terms of the deposit agreement.  And, as to the last prong, the Bureau notes that any minimal harm to the consumer in not receiving a deposit is outweighed by all the potential substantial harms discussed supra.  More importantly, the funds could be deposited elsewhere quite easily in a method that the customer would prefer, and a different method is clearly preferable because the consumer closed the prior deposit account. Id.

Pursuant to this guidance, banks and other financial institutions may consider examining their practices related to the processing transactions on closed accounts, as this topic may be raised in future CFPB examinations.