BankThink

Policymakers shouldn’t undermine existing overdraft regulations

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Roughly 10 years ago, policymakers made significant changes to the existing overdraft rules to increase transparency and improve physical disclosures.

Today, in conjunction with these rules and advances in mobile banking technology, consumers have more account information at their fingertips than ever before, making it easier to manage their funds. However, the fact remains a large portion of Americans do not have enough money to cover emergency expenses or simply run out of funds before payday hits.

Policymakers need to take a measured approach to any changes to the current rule and be mindful of consumers’ financial needs.

The initial changes required customers to affirmatively opt in to overdraft services, with the ability to opt out and back in at any time, while also receiving notice of their options with any overdraft they incur. The choice to opt in or opt out of overdraft protection services provides an important backstop for consumers during financial emergencies and helps them better manage finances.

Despite these facts, some groups have argued the overdraft services are harmful to consumers and assume it’s solely used by uninformed consumers. This is fundamentally incorrect.

Research by Novantas found the majority of overdrafts are by highly informed consumers who proactively protect themselves with overdraft services. Not only do these consumers choose overdraft coverage, they are aware of the wide variety of account management tools available to avoid overdraft fees and are more likely to utilize these tools than those who choose to opt out.

The Consumer Financial Protection Bureau is currently reviewing the overdraft rules consistent with the Regulatory Flexibility Act. While the Consumer Bankers Association believes adjustments and clarifications to the rule may be warranted, the rule currently in place should largely remain the same.

The current regulatory mandates concerning overdraft services afford consumers strong protections via detailed disclosures. The industry needs regulatory policy and oversight that will not impede banks’ current ability to offer a variety of overdraft payment services in order to meet their customers’ financial needs.

It is also important to note when the new rule was crafted, the Federal Reserve Board determined the requirements should only apply to ATM and point-of-sale transactions, not physical checks or ACH transactions.

This is largely due to extensive data gathered through consumer focus groups that found consumers “would prefer to have their checks paid into overdraft, because those transactions represent important bills” and “generally indicated that they were more likely to pay important bills using checks, ACH, and recurring debits, and to use debit cards on a one-time basis for their discretionary purchases.”

As the Fed board found, checks are most often used to pay a consumer’s most important bills. Placing restrictions on overdraft services would take away a well-regulated source of financial liquidity, causing consumer harm through returned payment fees, accumulation of higher merchant-imposed interest or late-payment penalties for returned checks.

Some have suggested changes to the rule based on the size of a financial institution. We believe this would create a fragmented consumer protection framework and confuse consumers. The notion that consumers would receive less protection by exempting certain financial institutions from the rules is contrary to the very notion of consumer protection.

This kind of bifurcated application of rules creates fragmentation in vital protections and an uneven playing field between financial institutions. Simply put, a harmonized and consistent regulatory framework for overdraft payment services is necessary to both support informed choices by consumers and facilitate compliance by banks of all sizes.

The possible monetary and nonmonetary consequences of restricting overdraft services would be broad and complex for consumers, service providers and merchants. For consumers, restrictions on overdraft services would reduce access to valuable liquidity.

Merchants and service providers would be adversely affected through loss of income from the sale of goods or services, and incur higher costs as a result of returned payment items or disruption to their receivables cycle.

We believe the current regulatory framework concerning overdraft services afford consumers strong protections via detailed disclosures and allows an avenue for financial management when funds are low.

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