Image by Jp Valery on Unsplash
By Ivan Serrano
Published October 19, 2023
In today’s financial landscape, consumers are often bombarded with surprise fees whenever they buy things from travel to concert tickets to cars, or engage with financial institutions like banks and credit card companies. These fees, commonly known as “junk fees,” have raised many concerns regarding fairness, legality, and transparency.
This article will delve into junk fees to explore what they are and discuss whether or not they are technically legal. It will also explore the proposed Junk Fee Prevention Act and how it could heko federal agencies like the Federal Trade Commission (FTC) and the Federal Communications Commission (FCC) crack down on junk fees.
Junk fees are excessive charges or hidden fees that financial institutions, such as mortgage lenders, credit card companies, investment firms, and banks, impose on their customers. These institutions often do not disclose these fees, which can stack up significantly over time, costing consumers more than they may have initially anticipated. In recent years, non-financial companies have increasingly gotten into the act as well.
Financial institutions often charge service fees for tasks that consumers may assume are part of the business’s normal processes, including receiving customer support or printing account statements.
Banks may charge fees when your account balance falls below zero, which can lead to overdrafts. These fees can accrue with each transaction, which makes it challenging for customers to regain financial stability.
Using automated teller machines or ATMs that do not belong to your bank’s network can result in ATM usage fees. These fees can quickly stack up if you frequently make transactions like cash withdrawals from ATMs not affiliated with your bank.
Some banks may impose annual or monthly fees for maintaining your account with them, even when it remains inactive. These fees can significantly erode your account balance over time.
Credit card companies may levy various fees, including balance transfer fees, foreign transaction fees, late fees, and annual fees. These fees often surprise unsuspecting cardholders when they receive their statements.
When obtaining a mortgage, borrowers may encounter numerous fees, including loan origination, appraisal, and application fees. Some of these fees may be undisclosed or excessive until the closing process.
Even if you decide to be a renter, you are still not safe from other junk fees, such as maintenance fees, renewal fees, termination fees, and additional unnecessary mandatory fees.
Brokerage firms and mutual funds typically charge expense ratios and management fees affecting investors’ returns.
Consumers may encounter additional fees, such as convenience, processing, and delivery fees, when purchasing concert or other event tickets. These fees can significantly increase the total cost of ticket prices, and consumers may find them unfair, especially when they are not adequately disclosed upfront.
One example of a company that adds junk fees to the full price using their platform to purchase concert tickets is Ticketmaster.
To help understand how serious of a problem junk fees are for individuals and the broader economy, here are some of the most well known issues associated with junk fees.
One of the significant issues with junk fees is the lack of transparency. Consumers will often find themselves puzzled by the complexity of the fee structures and struggle to decipher the fine print in the agreements and contracts.
The common practice of these institutions is to obscure them in vague language or bury them in lengthy documents. These practices make it challenging for the average individual to understand the costs they will incur ultimately.
One excellent example of this problem is overdraft fees from banks. Consumers are often unaware of the specific conditions that can trigger these fees or their cumulative impact. This lack of clear and concise disclosure makes it challenging for people to manage their finances effectively.
Additionally, the absence of standardized fee structures across various service providers and financial institutions further compounds the issue. Consumers who attempt to compare options often find it difficult to make informed decisions because of the varying hidden charges and fee schedules.
One of the most notorious examples of this issue is credit card fees. Credit card companies often impose many costs, including late payment fees, annual fees, and foreign transaction fees. These companies do not always present these fees straightforwardly, making it arduous for cardholders to evaluate the actual cost of using their cards.
Although junk fees are small, they can add to a massive financial burden over time. For most individuals and families, these hidden charges can significantly push already tight budgets to the brink.
One of the most common junk fees that significantly strains consumers are mortgage fees. In mortgage lending, borrowers typically encounter many fees, including appraisal fees, prepayment penalties, and origination fees.
While each fee may seem minor, their cumulative impact can substantially boost the overall cost of homeownership.
Junk fees can also disproportionately impact low-income and vulnerable communities. These individuals may be on a tight budget and have fewer resources to absorb unexpected charges, which makes it more challenging to crawl out of financial cycles of debt.
Payday lending fees are an excellent example of a common type of junk fee issue that plagues these communities. Payday lenders are notorious for charging high fees, typically targeting struggling people.
These fees can trap borrowers in a seemingly endless cycle of debt that exacerbates their financial difficulties.
Some financial institutions engage in predatory practices by assessing unwarranted or excessive fees. These practices can erode trust in the financial system due to the harm it inflicts on consumers. Every US state has laws targeting unfair and deceptive trade practices, although these can vary by state.
One example of these predatory practices is predatory mortgage lending. During the 2008 housing crisis, some lenders engaged in predatory mortgage lending practices, including offering loans with hidden terms and charging borrowers exorbitant fees. This contributed to the widespread economic downturn and foreclosure crisis.
Furthermore, the opacity surrounding junk fees allows some companies to avoid accountability. Without clear fee disclosure, consumers may struggle to identify situations when they receive unfair charges and find it challenging to seek redress.
Utility and telecom companies also often tack on regulatory, service, and administrative fees to bills without proper or adequate explanation. These hidden fees and extra charges often go unquestioned by consumers, which leads to higher bills without reasonable justification.
Junk fees contribute massively to the growing distrust and frustration among consumers. Feeling exploited or taken advantage of erodes their confidence in financial institutions and the broader financial system.
Experiences with hidden banking fees can make consumers question the integrity of banks, ultimately ruining their trust in these institutions and possibly pushing them toward alternative financial services.
Consumers also spend their valuable time and effort navigating through the maze of fees, which detracts from their ability to make informed financial choices and can result in stress and frustration.
When consumers notice erroneous or unauthorized charges on their bills, they must invest energy and time to dispute these fees, which distracts them from more productive activities.
Various state and federal regulations have been enacted to address the problems associated with junk fees. These regulations aim to protect consumers, hold financial institutions accountable for unfair practices, and improve fee transparency.
The Truth in Savings Act, or TISA, requires banks to provide accurate and clear disclosure of fees associated with deposit accounts. This regulation helps consumers better understand the costs of maintaining a bank account.
Consumers and advocacy groups have played an essential role in raising awareness about junk fees and taking legal action against organizations engaged in unfair practices. These efforts have resulted in court rulings and settlements that hold institutions accountable.
In some cases, class action lawsuits have been instrumental in challenging hidden fees and predatory lending practices, forcing financial institutions to change their practices and refund consumers.
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President Joe Biden has said that his administration is highly committed to combating unfair fees in various sectors. In response to growing concerns about the billions of dollars lost annually by consumers to junk fees, his administration introduced the proposed Junk Fee Prevention Act. The Act targets surprise fees charged by event ticketing companies, airlines, phone and cable services, and hotels.
The proposed Junk Fee Prevention Act is based on studies conducted by the Consumer Financial Protection Bureau (CFPB), which prompted the initiative to “Save Americans Billions in Junk Fees” in January 2022. The initiative came after a Consumer Reports article posted in May 2019 showed that at least 85 percent of individuals who took the survey experienced paying hidden fees in the last two years.
In parallel, Biden has directed agencies like the Federal Trade Commission (FTC), Consumer Financial Protection Bureau (CFPB), Department of Transportation, and Federal Communications Commission (FCC) to use their powers under existing consumer protection laws to crack down on predatory feeds. In the words of FTC chair Lina Khan, these regulations “would prohibit corporations from running up the bills with hidden and bogus fees, requiring honest pricing and spurring firms to compete on honesty rather than deception. Violators will be subject to civil penalties and be required to pay back Americans that they tricked.”
Whether junk fees are illegal depends on numerous factors, including the specific fee in question, the circumstances surrounding its imposition, and the jurisdiction. It often hinges on factors that include disclosure requirements, prohibitions on deceptive practices and excessive fees, other consumer protection laws, and your rights to take legal action.
Junk fees are likely to be deemed illegal if they result from unfair or deceptive practices by financial institutions. For example, if a bank advertises “free checking accounts” and then later imposes hidden fees, it could be liable for deceptive advertising practices.
In some cases, courts may contest fees deemed grossly excessive or unconscionable. Courts may rule that such fees are illegal if there is clear evidence that they are disproportionate to the service’s cost.
Consumer protection laws are essential in determining the legality of junk fees. The design of these laws is to safeguard consumers from predatory and unfair practices. If a fee violates consumer protection laws, it could be considered illegal.
You can follow several steps to avoid falling victim to junk fees and ensure you do not unknowingly pay excessive charges. Here are some ways to avoid junk fees and maintain your financial stability.
Always meticulously read terms and conditions, fee schedules, and contracts before signing up for a financial product or opening an account. In many cases, the Consumer Financial Protection Bureau (CFPB) requires a simplified cover page disclosing key information, which is a good place to start.
While the FTC and the CFPB do their best to protect American consumers, it is your responsibility to always ask questions in the interest of self preservation. Never hesitate to ask your financial institution about fees you do not understand or which seem unclear.
There is nothing wrong with taking your time and doing some comparison shopping. Shop around for financial services and products to compare terms and fees from different providers. Choose the one that offers the best value for your needs.
Make it a habit to regularly and thoroughly review your account statements to identify any unexpected fees. Contact your financial institution to dispute any charges you believe are unauthorized or unfair.
Keep yourself informed about new regulations and changes to fee structures in the financial industry.
Junk fees are pervasive in the financial world, which has caused frustration and financial strain for many consumers. While not all junk fees are necessarily illegal, they often raise questions about transparency, fairness, and consumer protection.
If you want to protect yourself, it’s crucial to be vigilant, read the fine print, and be aware of your rights as a consumer. Ultimately, the legality of junk fees may vary depending on the jurisdiction and circumstances, so staying informed and advocating for transparency is vital to addressing this issue.
Ivan Serrano has been been a technology and business writer since 2015. He is obsessed with our constantly evolving fast-paced society and finding ways to teach readers something new. He has worked with companies like SmallBizClub, StartupNation, Namecheap, Time Doctor, and Searcheye—which has a business relationship with FairShake.
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