Highlights
The Consumer Financial Protection Bureau (CFPB), has been too cute by half since its inception. The brainchild of then-Professor Elizabeth Warren, the agency is the quintessential product of a leftist faculty lounge. Established by Congress at the high-water mark of Democratic control of the House, Senate, and the executive branch, its authorizing statute walled it off from virtually all democratic oversight. Its director could not be fired, its funding was isolated from Congress’s power of the purse, and its mandate was sweeping.
The Singular Structure of the CFPB
The risks of consolidating such singular authority into one agency and one director were widely understood from its inception. Legal challenges to its unique authorities were inevitable, as was the recasting of its director from the “the single most powerful official in the entire United States Government” to employee serving at the president’s pleasure, courtesy of the U.S. Court of Appeals.
Now, the agency is facing a reckoning that was long in coming. Elon Musk has tweeted that he wants to “Delete CFPB.” President Trump’s acting director of the Consumer Financial Protection Bureau has sent back the agency’s funds and told employees to stay home. We only have to look to the previous director under former President Biden to see just how far CFPB had strayed from serving as an accountable regulator.
Midnight Rules
For more than 50 years, Congress enacted laws that ensured consumers were provided with accurate, timely and understandable information about financial products and services (and their fees). Consumers are best positioned to make decisions about the financial products and services that meet their needs. Congress correctly concluded that clear disclosures promote informed use of products, which enhances competition and ensures access to services.
But in his final days in office as a government regulator in Washington, D.C., former CFPB Director Rohit Chopra issued a regulation that rejects Congress’ framework in favor of price caps and other substantive restrictions on overdraft protection services. These regulations could end customers’ access to a valued financial safety net for meeting unplanned expenses.
Many consumers use overdraft strategically to ensure important expenses – such as rent, utilities, and medical bills – are paid when the consumer experiences a shortfall in funds. Without access to overdraft, consumers will be driven to less regulated payday and other nonbank lenders to meet their liquidity needs.
Former Director Chopra’s final rule declared overdraft services offered by banks and credit unions with more than $10 billion in assets to be “credit” regulated by a statute – the Truth in Lending Act (TILA) – designed to regulate credit cards unless the overdraft fee is below a $5 price cap or below the institution’s “breakeven” costs to operate its overdraft program. Bankers uniformly state they will not take on the compliance or litigation risk of offering overdraft under TILA or of calculating the bank’s breakeven costs. And banks cannot sustainably offer overdraft services to the vast majority of their customer base at $5 per overdraft.
The evidence shows that these illegal price controls will create unwanted market distortions. Banks will reduce, if not eliminate, access to overdraft for the vast majority of their customers:
It’s not just large banks that will stop offering overdraft to consumers if Chopra’s final rule takes effect. If a large bank reduces its overdraft fee to $5, the neighboring community bank will feel compelled to do the same or risk losing its customers to the large bank. A final rule with the professed goal of lowering overdraft fees will lead many consumers to have no access to overdraft. That is the opposite of consumer “protection,” but is the inevitable and predictable result of price controls.
Fortunately, Senator Tim Scott of South Carolina and Congressman French Hill of Arkansas have introduced resolutions in Congress that would nullify Chopra’s final rule. Congress should protect consumers’ choice to use overdraft by passing these resolutions.