Unprotected: Experts weigh impact of overdraft fee regulations

The Senate’s looming vote on Richard Cordray’s nomination to head the Consumer Financial Protection Bureau has renewed a debate over possible new regulations of bank overdraft fees.

Cordray recently argued that bank overdraft policies leave “consumers more vulnerable to increased costs and involuntary account closures.” The CFPB released a report last week that “raises concerns about the ability of consumers to anticipate and avoid overdraft costs.”

But the CFPB’s possible solutions have raised concerns themselves, as some experts worry about unintended consequences. Bank analyst Richard Bove went so far as to predict the bureau would send needy consumers into the arms of loan sharks. Bove believed the report was a prelude to sweeping new rules regarding the charges incurred when consumers overdraw from their checking accounts.

Many low-income consumers — particularly those whose credit history makes obtaining traditional loans difficult — use overdraft protection as a form of short-term, expensive loans. If regulations limit or eliminate that service, some may instead turn to a “shadow banking system” to make ends meet.

“I think it is important to note that nothing in this report implies that banks and credit unions should be precluded from offering overdraft coverage,”  Cordray told reporters last week. But John Berlau, a scholar at the Competitive Enterprise Institute, takes little comfort in these assurances.

“He didn’t say the CFPB wasn’t going to move to put price controls on what banks and credit unions can charge, he just said ‘we won’t preclude them from offering overdrafts,’” Berlau told The Daily Caller News Foundation.

Berlau worries that a cap on overdraft fees would cause banks to stop offering the service to keep from losing money on the transaction. Coupled with the CFPB’s increasing scrutiny of other short-term loan products, such a move could leave hard-up consumers no choice but to turn to organized crime and other below-the-board loan providers.

It could also lead to increased cost for all consumers. Overdraft fees charged by U.S. banks accounted for about $32 billion in revenue in 2012, according to the research firm Moebs Services, Inc.

Berlau warns that with that revenue stream cut off, “all consumers will have to pay the price of their basic checking account fees going up.”

The CFPB argues that additional regulation of overdraft fees may be necessary to prevent consumers from falling prey to predatory fees. But rules set down in 2009 by the Federal Reserve prohibit banks from charging the fees unless customers “opt into” an overdraft program; customers who choose not to participate will instead have their transactions declined.

“An overdraft is the electronic equivalent of bouncing a check,” Berlau added. “Banks and credit unions have every right to charge if they provide this valuable service.” While the CFPB should work to ensure consumers receive truthful information, Berlau argues they should also “let consumers decide and let competition work to bring the fees down. Let things like overdraft compete with payday and other short-term loans.”