Overdraft Protection And Regulatory Overkill
Late yesterday, the CFPB unveiled a report on overdraft fees. Although it hasn’t yet proposed any regulations on this matter, you know where this is headed with the certainty of a Met fan watching his team’s relentless assault on 100 losses this season: they’re both inevitable. In fact, no area of regulation better exemplifies why the CFPB and modern day consumer advocates are so misguided in their approach to regulatory oversight.
First, some good news. The CFPB acknowledged that the opt in requirements mandated since 2010 had made a material difference in reducing unwanted overdraft protection on the part of consumers. Second, the report provides additional evidence of what financial institutions have known for a long time, that overdraft protections are disproportionately used by a relative handful of consumers. I would argue that most of these people are making a rational choice to give themselves protection against bouncing their mortgage payment because they don’t have the time or inclination to balance their checkbook.
So, does that mean we can move on to another regulation, confident that the money and time we have invested in complying with these regulations has been well-spent? Of course not. The CFPB remains concerned with the wide variance of members who have opted in to overdraft protections on a financial institution to financial institution basis. As it surmises in its conclusion, the wide variance in opt in rates most likely reflects differences in marketing approaches to maximize fees paid. The inevitable solution will, of course, be well-designed, easy to read disclosures, which I wouldn’t be so opposed to if I thought the people most likely to avail themselves of overdraft protection were the type of people to read and act on disclosures in the first place.
To me, no area of regulatory concern better epitomizes what’s wrong with the approach of the CFPB and consumer advocates in general when it comes to regulation. Cass Sunstein (formerly President Obama’s regulation czar, and author of Nudge, the best explanation of the intellectual framework animating the CFPB’s work) explains in an essay in Foreign Affairs that the modern day consumer nudgers “recognize the importance of freedom of choice” but — and there’s always a but –” people may err and that in some cases most of us could use a little help.” In other words, it’s the role of government to not only recognize when people are acting stupidly, but to mitigate that poor judgment by having apolitical regulators guide them towards the right choices.
For credit unions, this means that every regulation is a first draft to be refined until enough members act the way rational people would act. It’s a beneficent view of government’s role that has a certain facial appeal until you realize that the underlying assumption is that you can fool all the people all the time and that only government stands in the way. No thank you.