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Comments to CFPB on Regulation of Overdraft Lending by Very Large Financial Institutions

In February, the Consumer Financial Protection Bureau (CFPB) proposed a rule that would regulate overdraft lending by very large financial institutions (VLFIs). Overdraft fees amount to billions of dollars a year, and those costs are disproportionately borne by low-income households. The Proposed Rule would narrow regulatory exemptions that previously enabled banks extending overdraft credit to avoid complying with the regulatory requirements otherwise imposed on credit products. Under the Proposed Rule, VLFIs charging overdraft fees above “breakeven overdraft credit”— defined as overdraft credit provided at or below costs and losses—would be required to comply with disclosure obligations and protections that apply to other forms of credit. In determining whether a fee counted as breakeven overdraft credit, VLFIs would be allowed to choose between: (1) calculating its own costs and losses under a CFPB-defined process, or (2) charging fees at a benchmark level set as a default by CFPB. CFPB sought comment on whether that fee should be $3, $6, $7, or $14.

The Proposed Rule reflects a well-reasoned approach to correct market failures in the overdraft credit market, mitigating these harms. To strengthen CFPB’s analysis, our comments make the following recommendations:

  • CFPB should lay out in further detail that it has always had clear statutory authority to regulate overdraft credit. 
  • CFPB should underscore that the Proposed Rule reflects a reasoned and justified change from its prior regulations. 
  • To calculate benchmark fees, CFPB should consider average, rather than high-end, charge-off rates and recognize that the $6 and $14 options are overestimates of the breakeven point. 
  • CFPB should clearly identify relevant market failures, such as information asymmetry and behavioral biases, and explain how the Proposed Rule is intended to remedy them.
  • CFPB should recognize that distributional effects further justify the Proposed Rule. Because frequent overdrafters are likely to be low-income, transfer of benefits to these consumers is likely to improve social welfare rather than be zero-sum.