Many Americans who cannot cover regular or emergency expenditures are also finding it harder to obtain traditional forms of credit to tackle unexpected expenses, such as an emergency car repair or medial need. But rather than ease this burden, the Consumer Financial Protection Bureau is proposing to take away viable short-term funding options.
Within the next six months, the CFPB is set to finalize a number of regulations and propose others that would potentially limit consumers' informed choices about the financial products they use. The very agency tasked with consumer protection could actually cause harm to consumers.
Specifically, the CFPB is expected to address courtesy overdraft services, one of the lasting viable sources of short-term liquidity for many U.S. consumers. In 2016, the CFPB is expected to advance policy considerations that could usher in barriers to how freely customers use the service. As the agency tries to determine the right policy, it is imperative to dispel myths about courtesy overdraft, which is wanted and needed by consumers who know the terms and conditions.
In recent years, various groups have examined how consumers use overdraft services. The undertaking has led some to conclude that overdraft services are inherently bad for consumers. However, these studies have largely assumed that informed consumers would avoid overdraft, and therefore banks must be "tricking" customers. These assumptions are fundamentally wrong.
Recent research by Novantas found the majority of overdrafts come from highly informed consumers who preferred to use it over other forms of credit. Their decisions are based on clear disclosures and personal experience with the service. The research uncovers insights important to informing the public policy discourse on the use and availability of overdraft services. Novantas found that many consumers who use overdraft see value in the service and use it strategically based on their financial situation.
Meanwhile, we need to keep in mind that the existing regulatory framework for overdraft services already incorporates the role of individual choice. Just five years ago, significant changes were made to increase transparency and improve disclosures around overdraft. Since the implementation of these reforms, consumers must affirmatively opt in to receive overdraft services. They also receive numerous written disclosures concerning their right to revoke the decision to opt in at any time. Again, this process supports consumer choice.
Policymakers should be mindful of the reality many Americans face: without viable short-term funding alternatives, they will be left with little recourse but to use less-regulated nondepository institutions to meet their needs. So regulators should work closely with banks to design real options for consumers, not idealistic products and services without regard for business and economic principles.
As long as consumers are given clear terms and conditions in a simple format that lets them make informed decisions, the CFPB should be careful not to project its preferences on consumers whose situations they do not know. Consumers are not helped when their access to reasonable products and services is limited because of misperceptions and exercises of regulatory power to subrogate individual choice.
David Pommerehn is vice president and senior counsel at the Consumer Bankers Association.