Republicans in Congress show signs of their commitment to dismantling Biden-era rules
Senate Banking Chairman Tim Scott (R-S.C.) and House Financial Services Chairman French Hill (R-Ark.) introduced Congressional Review Act (CRA) resolutions to dismantle the Consumer Financial Protection Bureau (CFPB) rule capping overdraft fees at $5. Under the leadership of one of the most prolific members of the Biden administration, CFPB Director Rohit Chopra, the agency released a wide variety of rulemakings and enforcement actions to target the financial services sector in the name of dismantling so-called “junk fees.” Among them was the Overdraft Fee Rule, a piece of midnight rulemaking released in the final days of the administration.
Under this rule, banks with over $10 billion in assets must either cap overdraft fees at $5; allow customers to overdraft as a courtesy, only charging what it costs to incur; or treat overdraft as a credit product, complying with all lending laws including interest rate disclosure.
Described as an enforcement action to address what the CFPB claimed is a “loophole” exempting overdraft fees from lending laws, the rule faced a lawsuit from leading financial trade organizations soon after its release. The filing stated that the rule “overturns a ‘half-century of consistent interpretation’ of the Truth in Lending Act.” The plaintiffs argue that overdraft is not a form of credit, “as customers do not have a right to incur overdrafts or defer repayment of the overdraft.”
As is the case in many financial consumer protection regulations, this would harm the financially disadvantaged the most. Consumers, some of whom may lack access to credit, use overdraft in times of need. This may include purchasing essentials like food and medicines. Should the rule be implemented, one possible outcome is that it would dismantle overdraft entirely, leaving customers with a “card declined” message at the checkout counter and forcing them to depart empty handed.
This is not to suggest that consistently relying on overdraft is a good financial habit (quite the opposite, in fact), which is why forcibly reducing the fee is an additional negative. The only way to strike a good balance between incentives, consequences, and prices is through free-market forces—not government price controls.
As mentioned, many banks might not be able to provide overdraft under these price constraints, which could destroy the service altogether. Other banks might be required to make up the losses in other ways, such as through checking account maintenance fees or monthly fees—an effect seen before with other price controls in the financial services sector.
Though alternative options exist to dismantle the Overdraft Fee Rule—such as letting the legal action play out, which could leave consumers and banks in limbo for years—the most efficient way to do so is through the CRA. Not only does it save time and resources, but it also sends a message to Americans about following through on the plan to reduce the size and scope of the federal government and dismantle much of the regulatory red tape that came out of the Biden administration. Republicans have spent years discussing their intent to make major changes at the CFPB, a responsibility that ultimately rests with Congress. Getting rid of the overdraft fee rule via CRA is a step in the right direction.