What was once a new federal agency, the Consumer Financial Protection Bureau (“CFPB”), has made its presence known – and feared, in a very short period of time.  By way of background, in the wake of the financial crisis that struck our nation in the late 2000s, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in July of 2010 – Dodd-Frank created the CFPB.  Thereafter, the CFPB formally began operations on July 21, 2011.  Since that time, it has become a key advocate for protecting consumers from overzealous financial institutions – and its name is now feared by them.

Of most recent impact, the CFPB has decided to take on banks and the overdraft charges consumers tend to be charged.  However, its approach on this issue is subtle.  Some (not all) banks engage in a practice known as “transaction ordering.”  Although debit cards, electronic and mobile payments have made life easier for millions, they also injected some “gray” area that banks have taken advantage of for their own benefits – they simply record such transactions in various different ways that can lead to costly overdrafts.  Some banks simply record transaction as they come in, in the order receive.  Makes sense, right?  On the other hand, other banks commingle all transactions and post them high to low.  Yet others group transactions into subcategories by transaction type, and then process them as batches.  Many more different mutations of the game exist, but in the end, it results in uncertainty for consumers, and more profits for the banks.

So why does this matter?  It comes down to overdraft fees.  If a bank can arrange (or rearrange) the order in which you make your transactions, it can impact how many overdraft fees you can be charged, should you overdraw your account.  This is big for banks, as in the billions of dollars big.

If you are like me, you can visualize how this works best with a real life example.  So, let’s say you are a struggling family with only $100 in your account.  You then make three separate transactions in the following order: 1) you put $20 of gas in your car to get to work; 2) you buy $5 of groceries to feed your children; and 3) you pay your $110 water bill online so they do not shut off your water.  When you pay your water bill, you know that you are going to get hit with a $35 overdraft fee, but you are okay with it because it is cheaper than having your water shut off and having to pay the $50 reinstatement fee.   Imagine your shock when you get your bank statement only to find $105 in overdraft fees because the bank processed the transactions not in the order they occurred, but as follows:  1) $110; 2) $20; 3) $5.

Of course, this is not a happy day for you, but it is a grand total of $70 in fees that you were not expecting.  Are you going to sue the bank over $70?  Unlikely.  But what if you wanted to join forces with others like you to bring a class-action lawsuit and prevent such issues from occurring.  Up until this time, you probably would not make it very far due to arbitration provision and other limitations the bank has imposed upon you as terms of maintaining an account with them.  That is until now.

Just recently the CFPB has begun the rule making process to prohibit banks and others under its control from using arbitration clauses/restrictions in class-action lawsuits.   This could potentially allow consumers to bad together and file class action lawsuits to prevent banks from nefarious practices like transaction ordering.  So in the end, simply allowing a consumer’s day in court may in fact keep the banks honest in their business practices.  Imagine that.

To be clear, the CFPB’s proposed rules that would allow this to occur are just in the beginning stages of the rule making process.  They are not yet the rules, and you can be guaranteed that any such rules will be opposed by the banks.  Only time will tell what will happen.  Until then, thank you CFPB for looking out for consumers.

I am a bankruptcy attorney.  Should you have any questions about the different types of bankruptcy, or what bankruptcy is right for you, please feel free to contact Matthew White of Udall Shumway at 480-461-5334 to schedule a free consultation.


This blog should be used for informational purposes only. It does not create an attorney-client relationship with any reader and should not be construed as legal advice. If you need legal advice regarding Consumer Financial Protection Bureau, or any other Bankruptcy matters, please feel free to contact Joel E. Sannes at 480.461.5307, or log on to udallshumway.com,  or contact an attorney in your area. Udall Shumway PLC is located in Mesa, Arizona and is a full service law firm. We assist Individuals, families, businesses, schools and municipalities in Mesa and the Phoenix/East Valley.