If the Consumer Financial Protection Bureau (CFPB) is serious about regulating short-term credit and leveling the playing field in financial services, it must rewrite the short-term lending rule to regulate like products, including overdraft services.
The short-term lending rule has myriad flaws requiring a fresh start, beginning with widespread opposition to the rule. But the need for the CFPB to include overdraft programs recently reemerged, when the CFPB released new overdraft research and disclosure prototypes aimed at simplifying the fees and terms associated with bank overdraft programs. The disclosure forms amount to one more instance of the CFPB picking winners and losers in the financial marketplace, as they prepare to issue a final short-term lending rule that will eliminate Americans’ access to non-bank short-term credit, all while giving banks a free pass on a comparable, more expensive, and less transparent product. Given that overdraft looks like a short-term loan and acts like a short-term loan, it should be regulated like a short-term loan. Here’s why:
Members of Congress and consumer activists agree that overdraft programs and short-term loans are functionally identical and used by consumers interchangeably.
According to the CFPB, overdraft fees generated $15 billion for banks and credit unions in 2016, and Moebs Services estimates that approximately one-fifth of bank income comes from these fees. Even CFPB Director Richard Cordray admitted to a Congressional subcommittee that it is “right to note that there are comparabilities between [payday loans] and overdraft product and the effect on consumers.” Yet the Bureau has failed to regulate overdraft products as vigorously, only taking these first steps toward optional disclosure forms. (Advance America is a leader in consumer-friendly transparency, having adopted a simple, two-page disclosure spelling out all terms and fees associated with its loans.)
Overdraft programs are often more costly than short-term loans and can carry higher interest rates.
In the words of Director Cordray following the release of the CFPB’s first study on overdraft back in 2014, “[S]ome consumers are essentially paying $34 - which is the typical overdraft fee - to have the bank spot them less than $24 for just a few days. If a consumer were to get a loan on those terms, that would equate to an annual percentage rate of over 17,000 percent.” Former federal bank regulators from the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) have similarly affirmed that overdraft is a form of credit, while independent researchers have validated that overdraft and short-term loans are competing products.
Under the Dodd-Frank Act, the CFPB is obligated to implement regulations that govern comparable products similarly, regardless of provider.
But the Bureau seems determined to pick winners and losers, siding once again with the powerful banks and credit unions over the consumers it is meant to protect. Inconsistent regulation of short-term loans and overdraft programs will reduce competition - a boon for the banks - while hurting consumers with higher prices and fewer, lower-quality short-term credit options.
Even activists agree that overdraft should be included in the short-term lending rule.
The Pew Charitable Trusts’ Alex Horowitz told American Banker, "A broad rule [on non-bank and bank short-term loans] is important to create a level playing field for banks." Rebecca Borné from the Center for Responsible Lending told NBC News, “[Overdraft research] just continues to confirm the need for some meaningful, substantive regulations in an area that’s been insufficiently regulated.”
Nearly every aspect of the short-term lending rule set to be finalized by the CFPB in the coming weeks is flawed, from the Bureau’s faulty research and preference for only consulting like-minded activists, to its unwillingness to assess the more than 1.3 million comments submitted during the public comment period, many from consumers. As these comments suggest and POLITICO reports, no one likes this rule, regardless of their opinion on short-term lending. A first step towards fixing it must be to regulate all comparable short-term credit options, including overdraft programs. Doing so will level the regulatory playing field for all short-term, small-dollar credit providers, as CFPB founder Sen. Elizabeth Warren and Director Cordray have long vowed. Because without a level playing field, consumers lose.