Overdraft Is Short-Term Lending
Overdraft Is Short-Term Lending
Earlier this month, Sens. Sherrod Brown (D-OH) and Cory Booker (D-NJ) introduced the Stop Overdraft Profiteering Act of 2018, legislation that would place new limitations on overdraft fees charged by banks and credit unions.
By introducing this bill, Sens. Brown and Booker acknowledge what others – including Advance America – have maintained for some time: that bank overdraft programs are loans, not unlike the short-term, small-dollar loans offered by Advance America and others in the nonbank lending industry, and consumers use them interchangeably.
Brown and Booker’s legislation comes at a time when many Americans continue to struggle to make ends meet; according to the Federal Reserve, 40 percent of American adults cannot cover a $400 unexpected expense without borrowing or selling something. As a result, the demand for credit is real, and household borrowing across credit products is high.
In fact, consumers paid $34.3 billion in overdraft fees in 2017, a post-recession high, with each overdraft costing an average of $30. And lawmakers, former regulators, industry, and activists increasingly agree that overdraft is a form of credit:
“Overdraft protection is really a form of credit. You’re borrowing it and repaying later.”
-- Lauren Saunders, National Consumer Law Center (NCLC)
“When consumers [overdraw] recurrently, it is a credit product, and they're paying eye-popping rates.”
-- Sheila Bair, then Federal Deposit Insurance Corporation (FDIC) Chair
“…I think you're absolutely right to note that there are comparabilities between [payday loans] and overdraft product and the effect on consumers.”
-- Richard Cordray, former director, Bureau of Consumer Financial Protection
“Payday lending and overdraft protection compete directly for consumers in that many consumers actually use, or could use, both products to achieve the same objects.”
-- Robert Clarke Former U.S. Comptroller of the Currency, and Todd Zywicki, George Mason University Professor
Yet, even as Americans’ credit needs remain and the clear parallels between short-term loans and overdraft are widely acknowledged, the two products are not regulated in similar fashion.
On top of extensive existing regulations at the state level, a new rule from the BCFP finalized last year stands to effectively eliminate the regulated short-term, small-dollar loans offered by nonbank lenders and valued by millions of consumers. Meanwhile, current overdraft regulation has done little to help educate consumers about the terms and costs associated with overdrawing their accounts, and the Bureau – under both former director and Ohio gubernatorial candidate Cordray and Acting Director Mick Mulvaney – has made little effort to prioritize regulation of comparable overdraft loans.
Given that overdraft looks like a short-term loan and acts like a short-term loan, it should be regulated like one. But arbitrarily restricting consumers access to regulated, reliable, and convenient credit options, particularly as unlicensed, unregulated lenders and scammers flood the market, only stands to further harm their ability to make ends meet. Uniform disclosure and transparency surrounding the costs of all short-term credit offerings would be a sensible starting point, providing consumers with the information they need to make an apples-to-apples comparison of competing credit products.
As Congress considers the Stop Overdraft Profiteering Act and the BCFP reevaluates its short-term, small-dollar lending rule, policymakers would do well to ensure all short-term credit products are regulated similarly and in context with one another. Doing so will level the competitive playing field between banks, credit unions, and nonbanks, empowering consumers to evaluate comparable credit options and choose the product that makes the most sense for their financial situation.