The Consumer Financial Protection Bureau (CFPB) ostensibly exists to protect consumers. However, its recent actions raise serious concerns about whether its policies truly serve the best interests of the public. This is particularly evident in CFPB Chair Rohit Chopra’s eleventh-hour decision to cap overdraft fees charged by banks to account holders with negative balances.
Overdraft fees may not be popular, but they serve a crucial function. Banks operate by accepting deposits and lending those funds at a higher interest rate. When an account holder overdrafts, the bank is temporarily unable to lend money from that account, as it has a negative balance. Overdraft protection, offered as a service by banks, allows the transaction to proceed, but at a cost. These fees act as a disincentive for overspending, encouraging responsible financial behavior.
Chopra and the CFPB are attempting to pass its price control off as consumer-friendly. However, this overlooks the fact that overdraft fees are not arbitrary penalties; they compensate banks for the risk and administrative costs of covering transactions when account holders lack sufficient funds. By capping these fees, the CFPB disrupts the ability of the market to effectively price for credit in real-time, potentially leading banks to eliminate overdraft services altogether to avoid operating at a loss. This outcome could leave consumers without a crucial financial safety net, even during emergencies or an expensive holiday season.
Such regulatory intervention also begs the question of why the government would be better capable of pricing this service to begin with. Banks should have the autonomy to set fees that reflect the true cost and risk of their services — not government bureaucrats arbitrarily setting prices. What does Chopra know about the cost of providing capital to someone who is overdrawn?
Chopra’s decision to cap overdraft fees may also leave consumers more inclined to take greater (unnecessary) risks in their short-term borrowing, potentially leading to an increase in overdrafts. Historically, overdrafting was considered a costly financial decision, one requiring borrowing at higher interest rates. By attempting to cap overdraft fees rather than educating consumers to improve their financial literacy and avoid them, these fees may hit consumers with even greater frequency. This decision appears more about burnishing Chopra’s progressive credentials than genuinely serving the best interests of consumers.
Like any price control, capping overdraft fees will lead to a reduced availability of overdraft services. Given that the cost of borrowing money is always subject to market forces, why would the CFPB be better equipped to set such a price than those who actually lend in the market? It seems rhetorically easy for the CFPB to say what the cost of overdrafts should be when they are not the ones ensuring the deposit. Let’s defer to the private sector on what the price of goods should be—not bureaucrats.
