WSJ Editorial Board: CFPB Overdraft Rule Would Harm Low-Income Consumers the Most

The Wall Street Journal Editorial Board in a new piece discusses how the Consumer Financial Protection Bureau’s (CFPB) recently released overdraft rule would harm low-income consumers by pushing them outside of the well-regulated banking system to predatory lenders to meet their liquidity needs with payday loans and other harmful products:

“Forcing banks to cut their fees, or to offer overdrafts as standardized loans, could prompt many to limit the service, especially to low-income and low-credit customers. That would drive customers in a pinch toward high-interest credit such as payday loans.

“Payday loans can help cover small, short-term budget gaps, but their 15% to 20% interest rates are much higher than overdraft fees.”

Moreover, the editorial highlights the fraught regulatory environment America’s leading banks have been operating in and calls the Consumer Bankers Association’s litigation against the CFPB to stop this rule from taking effect “strong,” stating:

“Banks have grown familiar with this kind of regulatory ambush during the Obama-Biden years, and the damaged parties had a lawsuit ready as soon as the CFPB finalized its overdraft rule. In their complaint, the Consumer Bankers Association and allies say the agency didn’t weigh the rule’s consequences. It’s a strong claim, since the CFPB admitted to having ‘little reliable quantitative evidence’ about how customers might react.

“This makes the rule a prime target for repeal in the next Congress. Under the Congressional Review Act, the House and Senate can cancel the rule by a majority vote, and President Trump could approve its repeal.”

Lastly, the piece asserts the Biden Administration’s overdraft rule was never about using facts to justify the need for the overdraft rule:

“Like the rest of the Biden Administration’s war on junk fees, the overdraft rule was hatched based on a foregone conclusion. By their logic, hardly any fees are justified, even for free checking. Regulators think every customer is a rube in need of their protection, and evidence is an afterthought.”

To read the full piece, click HERE or see below.

The CFPB vs. Checking Accounts

By the Editorial Board
The Wall Street Journal
Dec. 25, 2024

Time is almost up for the Biden Administration, which means agencies are rushing out their last overreaching rules. One example is the Consumer Financial Protection Bureau’s attempt to redefine checking accounts to make it harder for banks to charge overdraft fees. It’s bad for banks, and especially for their low-income customers.

The CFPB rule, finalized this month, applies to commercial banks and credit unions with more than $10 billion in assets. It gives three options for charging a customer whose account goes negative.

The first lets banks charge $5 per overdraft, down from an average of $35 today. Another is to charge an amount equal to what overdrafts cost them in lost investment interest, as defined by the CFPB. The last choice is to charge any amount, but only if banks present overdrafts to customers as a form of credit instead of a penalty.

These changes are meant to block banks from what the CFPB claims is a sly form of loan-sharking. Director Rohit Chopra, the Elizabeth Warren protege, claims each overdraft is a high-interest loan, with banks fronting cash to account holders in exchange for the $35 fee.

Conveniently, defining overdrafts as loans is what the CFPB claims gives it the legal authority to regulate them. Congress charged the agency with enforcing the Truth in Lending Act, which governs credit products like payday loans but generally not standard checking.

Defining overdrafts as loans is a stretch, even by the flexible logic of modern executive agencies. Customers don’t get checking accounts so they can be dunned, but they like to know their bills will still be covered if they lose track of expenses in a difficult month. Banks charge a fee to make sure overdrafts aren’t overused, and they can deny them to accounts that run empty too often.

Forcing banks to cut their fees, or to offer overdrafts as standardized loans, could prompt many to limit the service, especially to low-income and low-credit customers. That would drive customers in a pinch toward high-interest credit such as payday loans.

Payday loans can help cover small, short-term budget gaps, but their 15% to 20% interest rates are much higher than overdraft fees. The CFPB is also trying to snuff out payday loans, so the only alternative is often real loan sharks.

Banks have grown familiar with this kind of regulatory ambush during the Obama-Biden years, and the damaged parties had a lawsuit ready as soon as the CFPB finalized its overdraft rule. In their complaint, the Consumer Bankers Association and allies say the agency didn’t weigh the rule’s consequences. It’s a strong claim, since the CFPB admitted to having “little reliable quantitative evidence” about how customers might react.

This makes the rule a prime target for repeal in the next Congress. Under the Congressional Review Act, the House and Senate can cancel the rule by a majority vote, and President Trump could approve its repeal.

Like the rest of the Biden Administration’s war on junk fees, the overdraft rule was hatched based on a foregone conclusion. By their logic, hardly any fees are justified, even for free checking. Regulators think every customer is a rube in need of their protection, and evidence is an afterthought.

CBA Advocacy

• To read CBA’s “Myths vs. Facts” piece debunking several claims about the CFPB’s overdraft rule, click HERE.
• To read what industry experts, legislators, and thought leaders are saying about the CFPB’s overdraft rule, click HERE.
• To read CBA President and CEO Lindsey Johnson’s statement on filing litigation against the CFPB regarding its final rule on overdraft, click HERE.
• To read CBA President and CEO Lindsey Johnson’s statement on the CFPB’s final rule on overdraft, click HERE.
• To get the facts on the value of overdraft services and learn why government mandates are misguided, visit OverdraftFacts.com.
• To view CBA's recent national empirical survey on consumer need for overdraft products, click HERE.
• To read CBA President and CEO Lindsey Johnson's recent written Congressional testimony on why financial regulations should be guided by sound policy, not partisan politics, click HERE. 
• To read CBA's blog post on how limiting overdraft services will hurt consumers, click HERE.
• To read CBA SVP, General Counsel, and Head of Regulatory Affairs David Pommerehn's written congressional testimony on overdraft services, click HERE.