America Wins if Congress Spikes the CFPB’s Overdraft Rule

It’s difficult to predict the outcome, but if the House and the President follow the Senate’s lead, it will be a big win for America.

In his remarks during consideration of the CRA resolution, Sen. Scott quoted from New York Fed research, pointing out, “When constrained by fee caps, banks reduce overdraft coverage and deposit supply, causing more returned checks and a decline in account ownership among low-income households.” And he nailed it when he argued, “To do the right thing for the working class is to give them all the options and let them decide. Trust them with their own resources.”

The Bureau’s Midnight Rule

For some background, the CFPB issued its new rule in December, which was the waning hours of the Biden administration. According to the Bureau, the rule is meant to “update regulatory exceptions for overdraft credit.” But that’s a bit tricky.

Congress initially assigned the Federal Reserve responsibility for enforcing these rules to implement the Truth in Lending Act of 1968 (under the name Regulation Z). As the new rule states, the Fed argued, from the beginning, that overdraft protection fees did not qualify as credit under the Truth in Lending Act.

That’s a reasonable position because section 1602 of the law defines credit as “the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment.” Overdraft protection, on the other hand, is a service that attaches to a deposit account for a fee. For years, the rule treated overdraft protection as distinctly different from credit products such as lines of credit, credit cards, home equity lines of credit, and even overdraft lines of credit.

Nonetheless, the Bureau changed that interpretation because of “widespread financial institution adoption of information technology systems as well as the expansion of debit card transactions that can overdraw an account.”

The Bureau Ignores Consumer Choice

I suppose reasonable people can disagree, but there’s another catch: Since 2010, consumers have had to actively choose overdraft protection. They could opt in or opt out at any time. Unsurprisingly, consumer surveys have shown that people have been quite happy with this approach.

As my colleague Nick Anthony points out, an American Bankers Association survey reports that 88 percent of consumers say overdraft protection is a valuable service, and 77 percent of those who paid an overdraft fee preferred paying the fee over having the transaction denied. Still, the Bureau gave more weight to the idea that overdraft fees now make up a “substantial portion of the direct fee revenue that financial institutions make from checking accounts.”

This view is a great example of why the Bureau has been so controversial. It’s one thing to regulate the rules and procedures that financial institutions must follow when dealing with customers. It’s very different, though, when the government starts dictating specific terms and prices that private companies can offer because they don’t like private companies earning profits. The Bureau’s new overdraft rule falls into the latter category.

The Bureau Should Not Decide Which Prices Are “Too High”

Ignoring the (very important) question of whether the Bureau exceeded its authority with this rule, it’s very clear that the Bureau was trying to make providing overdraft protection prohibitively costly. If the rule goes into effect as planned in October 2025, banks will essentially have to choose between reducing prices by more than 80 percent, pricing their services at cost, or changing overdraft services to a loan program.

The latter choice would, of course, expose overdraft services to all the rules of the Truth in Lending Act. Consumers would lose. At the very least, banks will offer more expensive overdraft protection. All things equal, consumers will have to choose between forgoing overdraft protection or paying even more for it. Banks will have to raise prices to cover the costs of underwriting the new “loans.”

The bigger problem is that Congress has established independent federal agencies that can impose these kinds of decisions on Americans.

Who, exactly, are voters supposed to hold accountable when one of these agencies decides to implement price controls because they simply don’t like that something is “a source of billions of dollars in profits”? Former Rep. Barney Frank or former Senator Chris Dodd, the namesakes of the Act that created the Bureau? Many voters still don’t even know (or care) what the Bureau does because they’re too busy living their lives.

This sort of “regulation” goes well beyond setting up the rules of the game. It usurps the market and replaces the judgment of private citizens with those of unelected bureaucrats. It’s the type of paternalistic nonsense that autocratic rulers use to gain power over people, and it has no place in a republic built on the principles of limited government and free enterprise.