Biden Admin New Overreach Targets Checking Accounts
The Biden administration’s Consumer Financial Protection Bureau (CFPB) “issued a rule in December to curb overdraft penalties” in a way many experts described as “government overreach.”
The CFPB rule aims to force banks to cap overdraft fees at $5 — the average is currently $35 — or provide overdrafts as a type of credit rather than a penalty against customers, reported DCNF. The policy’s publicly stated goal is to “increase transparency and protect American depositors,” experts told the outlet that it will actually force banks to create stricter rules around their accounts, which could limit access to financial services and credit to low-income Americans. In turn, this will likely push more borrowers towards payday lenders, which often push a very high interest rate.
Payday lenders can charge rates upwards of 300-500%, the outlet continued, noting that in 2022, 17% of households with checking accounts reported at least one family member paying an overdraft fee. American credit card loan defaults are currently at the highest rate in 14 years, with the crisis likely to hit the same bottom third of consumers the new overdraft rules will likely target.
Legal Challenges
CFPB is claiming it can implement the regulations “on the grounds overdrafts are loans and not penalties.” Schaerr | Jaffe LLP partner Erik Jaffe called the CFPB argument of “legal authority” a “stretch.”
“The CFPB was given authority to regulate certain circumstances of consumer lending. As a result, the question is whether or not an overdraft on your checking account constitutes a short-term loan,” Jaffe explained to DCNF. “It seems like quite the stretch. Banks charge customers a fee on overdrafts. The fee is not interest, as the length of time you take to pay back the fee does not change how much you owe. Interest must have a time component to it. It’s not like banks are giving customers with overdrafts money over time. They are just doing a courtesy of not bouncing a charge and embarrassing the customer.”
The ruling was hit with instant legal pushback, most notably from the American Bankers Association (ABA) filing a motion for a preliminary injunction in the Southern District of Mississippi’s Fifth Circuit. Jaffe believes this, and other motions, could be successful after the Supreme Court voted 6-3 in June to overturn Chevron defense that “gave federal agencies broad authority to implement regulations under ambiguous language unless Congress had explicitly prohibited such rules,” The Federalist said at the time. (LEARN MORE: Supreme Court Delivers Major Blow To Federal Agencies)
Republicans Take Aim
Republican lawmakers have also “taken aim at the rule,” noted DCNF, particularly focusing on how it will limit access to credit.
“As I’ve said repeatedly, lawful and contractually agreed upon payment incentives promote financial discipline and responsibility and protect access to important financial services,” incoming Senate Banking Committee Chairman Tim Scott of North Carolina said in Dec. “With just over a month until the next administration takes over, Director [Rohit] Chopra should never have finalized this rule in the first place, and I look forward to working with the next CFPB Director to advance policies that prioritize consumers over political talking points.”
“We told federal agencies — including the CFPB — to put their ‘pens down’ and stop all midnight rulemaking. Director Chopra blatantly disregarded our request by finalizing this rule. Capping overdraft services is another form of government price controls that hurts consumers who deserve financial protections and greater choice,” incoming House Financial Services Committee Chairman French Hill of Arkansas stated later in the month.
Who Pushed For This Policy?
Chopra was described by DCNF as a “longtime ally of Democratic Massachusetts Sen. Elizabeth Warren,” who helped establish CFPB shortly after the passage of the Dodd-Frank financial reform law in 2010.
“This agency was Elizabeth’s idea, and through sheer force of will, intelligence, and a bottomless well of energy, she has made, and will continue to make, a profound and positive difference for our country,” former President Barack Obama said of Warren’s work in July 2011.
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