The Biden administration is continuing their big government intervention in the financial sector by unilaterally declaring that bank fees may be unfair, deceptive, or abusive. Instead of providing an opportunity for stakeholders to comment on a formal rulemaking, the Consumer Financial Protection Bureau has decided to issue informal guidance in opposition to financial institutions’ use of overdraft fees.
The intent of the guidance is to further bolster future CFPB enforcement actions against financial institutions. Out of fear of potential legal action, financial institutions may decide to remove overdraft fees, effectively eliminating them altogether. The White House has admitted that the ultimate goal is “effectively banning” the fees.
At the same time, this guidance will embolden consumers to be fiscally irresponsible and complete payments even if they know they cannot afford a certain good or service.
Overdraft fees are not an unfair or deceptive practice. Consumers anticipate these fees because they voluntarily participate in overdraft protection. In fact, consumers participate in overdraft protection because they find it to be valuable. According to one study, consumers purposefully use overdraft fees. The study states that over “60% of overdrafts come from consumers who intend to use the service. More than 80% of overdraft transactions come from consumers who opted into debit card overdraft programs with the clear intention of using it to cover their payments.” The study also found that since 2008, overdraft fees per adult have declined by 77 percent.
Moreover, in a survey cited by Todd Zywicki, “86 percent of elevated users stated that the availability of overdraft protection was extremely valuable.”
Consumers benefit from overdraft protection by using it to make essential purchases. Professor Zywicki wrote in recent testimony that the majority of overdraft usage “occurred in transactions arguably recognized as necessities, such as groceries, gasoline, utility bills, [and] insurance payments.” Ensuring that overdraft protection is not compromised by overburdensome regulation is especially important for individuals with lower credit quality.
Individuals with low credit scores have limited access to alternative credit options and need overdraft protection to purchase essential goods and services. Professor Zywicki’s testimony also points out that data published by the CFPB proves that individuals with lower credit scores rely on overdraft protection because they do not have access to credit cards. According to the testimony, the CFPB found that “consumers with zero overdrafts or non-sufficient funds (NSF) transactions had an average credit score of 747, whereas consumers with 10-20 transactions had a credit score of 585 (borderline deep subprime) and those with 20 or more overdraft/NSF fees had an average credit score of 563 (very deep subprime).”
Additionally, consumers understand the functions of overdraft fees and do not see any reason to move forward with additional regulatory requirements, let alone any government-mandated restriction on the use of the fee. Among surveyed overdraft users in one study, “roughly half do not support price regulation, and only 17%–19% support price regulation regardless of impact.”
The CFPB’s notion that banks rely on overdraft fees to fund their operations is wholly inaccurate. The CFPB is basing their claim on the false assumption that most of the revenue that banks receive from deposits comes from overdraft and NSF fees. In fact, most revenue banks receive from deposits comes from net interest income, not deposit fees. In the third quarter of 2021, banks insured by the FDIC received over $134 billion in net interest income compared to only $69.5 billion in overdraft revenue as calculated by the CFPB. Banks made nearly $65 billion more from interest income than from overdraft fees.
Consumer opposition to price regulation of overdraft fees and the lack of evidence showing that banks rely on overdraft calls into question the CFPB’s justification for pursuing any potential changes to the current deposit fee landscape.
The United States Court of Appeals for the Fifth Circuit’s ruling that the CFPB’s funding structure is unconstitutional calls into question the legal grounds by which the overdraft fee guidance was drafted. It also diminishes the authority by which the CFPB can legally issue policy bulletins, such as the one accusing fees charged on returned deposited items (e.g., bounced checks) as being an unfair practice (even though the CFPB admits that federal regulations already require banks to disclose these fees to consumers prior to opening an account).
The CFPB should withdraw its overdraft fee guidance. It is the epitome of the federal government intervening in private contracts between businesses and consumers. The Biden administration’s “consumer protection” initiative is nothing more than a veiled excuse to allow the government to dictate how companies run their day-to-day operations.