CFPB Puts Banks on Notice for Reopening Closed Accounts

On May 10, 2023, the Consumer Financial Protection Bureau ("CFPB" or the "Bureau") published guidance warning banks that they risk violating federal law if they unilaterally reopen a customer's previously closed deposit account, particularly if they collect fees on the account.[1]

The guidance demonstrates the CFPB's continued efforts to target what is characterized as unreasonable or "junk" fees imposed on consumers, which the Bureau considers as likely illegal.[2] "When a bank unilaterally chooses to open an account in someone's name after they have already closed it, this is a fake account," CFPB Director Rohit Chopra said in a statement on the guidance. "The CFPB is acting on all fronts to halt the harvesting of illegal junk fees."[3]

This is not the first time the CFPB has warned banks against unilaterally reopening accounts. In 2019, the CFPB ordered a bank to pay $15 million for the practice of reopening closed deposit accounts, which caused some account balances to become negative and potentially subjected consumers to various fees.[4] Previously, in 2016, the CFPB fined another bank $100 million for opening unauthorized accounts and signing customers up for products without their consent, stating the bank was engaged in unfair, deceptive, or abusive acts or practices.

Reopening Closed Accounts May Constitute an Unfair Act or Practice

Under the Consumer Financial Protection Act ("CFPA"), an act or practice is unfair when:

• it causes or is likely to cause consumers substantial injury,
• the injury is not reasonably avoidable by consumers, and
• the injury is not outweighed by countervailing benefits to consumers or to competition.[5]

According to the CFPB, banks reopening accounts without a consumer's consent or knowledge likely constitutes an unfair act or practice in violation of the CFPA,[6] particularly when significant fees can be triggered, individually or across a bank's customers. As a result of such fees, engaging in such activity would constitute an unfair act or practice where the activity triggers the three-prong test above: (i) substantial injury to consumers, (ii) that cannot reasonably be avoided, and (iii) that is not outweighed by the benefits to consumers or competition.

Substantial injury

According to the CFPB, a significant risk of harm is sufficient to qualify as substantial injury; actual injury is not required. In this regard, monetary harm caused by fees paid by consumers due to the unfair practice qualifies as substantial injury.

When a consumer closes an account and a bank unilaterally reopens that account upon receiving a debit or deposit (i.e., merchant attempts to debit the account for a transaction so the bank reopens it), the consumer may face monetary harm, particularly with respect to fees charged by the bank itself.

Banks often charge various fees when an account is reopened, such as monthly maintenance fees or penalties for certain actions. If an account has a zero balance, which is often the case after account closure, this could lead to insufficient funds or overdraft fees if the account is reopened after receiving a debit or deposit. It's also possible for recurring transactions to resume upon account reopening and overdraw the account without the consumer's knowledge. If an account remains overdrawn for too long, the bank may furnish negative information to consumer reporting companies, which may make it harder for the consumer to obtain a deposit account in the future.

Reopening an account without a consumer's knowledge also increases the chance of a third party gaining unauthorized access to the account. A fraudster can pull funds into the account under the consumer's name or take funds that were deposited due to the account being reopened.

Thus, the CFPB notes "[b]ecause reopening an account that a consumer closed gives rise to the risk of monetary harm, this practice may cause substantial injury."[7]

The injury cannot be reasonably avoided

With respect to the second prong of the unfair act or practice test, the CFPB notes that "an injury is not reasonably avoidable when a consumer cannot make informed decisions or act to avoid the injury."[8] An injury is also not reasonably avoidable if the injury occurs without a consumer's knowledge or consent, if the injury cannot be anticipated, or even if anticipated, the consumer cannot avoid it.

For example, as the CFPB guidance notes, consumers cannot control when a third party attempts to debit or deposit funds to an account they think they closed. A third party, such as a payroll provider inadvertently attempting to make a deposit to a closed account, is beyond the consumer's control, especially if the consumer notified the provider. Nor can a consumer change or modify the process and timing of account closure. The guidance further notes that these are processes controlled by the banks, and a consumer is generally unaware of when their account is actually closed out by the bank. Moreover, even if an account agreement discloses such information, consumers have no negotiating power over these agreements. Thus, the CFPB concludes that consumers have no ability to control whether a closed account may be reopened and to avoid fees and other monetary harms.

No countervailing benefit

Finally, the CFPB asserts that the practice of reopening accounts does not provide any benefit to consumers or competition. In fact, the CFPB found that honoring the account closure would likely provide more benefits to consumers than reopening the account.

According to the CFPB guidance, while a bank may find that reopening an account provides a benefit to consumers, such as for accepting an incoming deposit, it does not outweigh the potential injury, particularly when there are safer methods to achieve the same goals. If an account closure is honored, the consumer is provided an opportunity to be notified if a debit or deposit transaction fails due to the account being closed. This allows the consumer to update their information with any merchant or provider attempting to make a deposit to or debit from a closed account and avoid fees and other monetary harms.

Conclusion

CFPB circulars are issued to a broad set of government agencies responsible for enforcing federal consumer financial law.[9] Thus, the Bureau makes a call to action for government enforcers to consider whether a bank has been engaging in unfair acts or practices by reopening accounts that a consumer has already closed.

It should be reiterated that consumers also have a responsibility to inform third parties, particularly direct depositors and billers, that they will be closing their accounts and indicate the new accounts that they will be using. And it is important to note that most banks already remind consumers of this duty which, if followed, could avoid potential injury. Putting all the responsibility on banks will not solve the issues that arise when an account is closed. Moreover, there may be times when a consumer may fault a bank for not reopening the account if the consumer is later denied a direct deposit, forced to wait for a paper check or a subscription becomes cancelled due an inability to access an account. Arguments like this could rebut the notion that there is no countervailing benefit to reopening an account. It would simply depend on the consumer's take of the situation they find themselves in, which is very subjective. The CFPB should continue to provide consumers best practices for managing their accounts and outline potential consequences when an account is closed (and remains closed) so all parties are aware of their duties.

Action Plan

With the Bureau's continued actions against junk fees, banks should expect increased scrutiny related to account closures and any practices that allow for unilateral account reopening. Accordingly, in order to avoid potential claims or enforcement actions, banks should review their processes and procedures to ensure they effectively close accounts and do not engage in impermissible account reopening activities.

Similarly, banks should review existing account closing procedures for clarity to avoid any potential customer confusion regarding what an account closing means and what process, if any, a former customer must follow to open or reopen a closed account (if that option is available to and can be initiated by the customer).

We will continue to monitor updates in this space as they develop.

*Michael Buckalew is a regulatory analyst with Davis Wright Tremaine LLP.