November 4, 2013

Commentary: CFPB Study of Overdraft Program

  • G. Michael Flores

  • Todd Zywicki

    George Mason University Foundation Professor of Law, Antonin Scalia Law School, George Mason University
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Created as part of the Dodd-Frank financial reform legislation, the Consumer Financial Protection Bureau (CFPB) was established in response to the perception of widespread failures concerning financial products in the federal consumer protection regime. As part of its mission, the bureau has consistently pledged itself to ground consumer financial protection policy in data and empirical evidence so as “to enable informed decision-making in all internal and external functions.” 1 

Pursuant to that mission, in April 2012 the CFPB announced a public inquiry and industry research study to gain insight into the impacts of overdraft (OD) protection on consumers.2 In its Request for Information, the CFPB specifically sought public comment on how consumers use overdraft programs, the information they receive about various banking products, the impact of prior overdraft regulations, and the costs of providing overdraft protection. In the statement that is perhaps most relevant and important for policy purposes, the CFPB said that it was seeking to determine what “alternatives consumers have for meeting short-term shortfalls.” 3 

In June 2013, the CFPB published a white paper that summarizes its findings on the usage of overdraft protection.4 Notably, however, the white paper falls short of the CFPB’s own proffered standards and guidelines for investigations regarding overdraft protection. Although the white paper suggests that it is merely a “first step” toward understanding whether overdraft protection can harm consumers, it makes numerous inferences that the underlying analysis does not support. 

The white paper organizes its analysis around potential consumer protection problems that it purports to identify. In this comment, we provide a synopsis of findings from previous analyses to lay the foundation for our response to the white paper. We then follow the paper’s organizational structure as we discuss specific points it makes. However, unlike the white paper, we also identify the larger policy questions that must be addressed before the bureau can make any findings of consumer harm that would justify new regulation. What’s more, these are questions that the CFPB itself said it intended to address in its research, but did not. 


Prior analysis has consistently found that the consumers who use overdraft protection regularly are those with impaired credit who lack more attractive alternatives to credit, and thus that consumers who are unable to access overdraft protection are likely to turn to other, perhaps more expensive, alternatives.5 Moebs Services research firm, for example, states that the only accurate predictor of the propensity to overdraft is credit score—those with lower credit scores are more likely to use overdraft protection.

A survey conducted by Raddon Financial Group of customers of a large regional bank asked users of overdraft services where they would turn for emergency funds if they no longer had access to overdraft protection.7 Fifty-three percent of “elevated users” of overdraft protection reported that if it were not available they would “not be able to get money,” as opposed to only 16 percent of nonusers.8 While 26 percent of nonusers of overdraft protection said they would “use a credit card” if overdraft protection were unavailable, only 10 percent of elevated users said they would use a credit card. Similarly, while only 6 percent of nonusers said they would seek a payday loan if overdraft protection were unavailable, 24 percent of elevated users reported that as their option (the second-highest response after “not be able to get money” for elevated users).9 Moreover, while 56 percent of nonusers said that in such situations they would simply transfer the needed money from another account, presumably a savings account, only 13 percent of elevated users said they would do so, presumably reflecting the simple truth that they have no other accounts available.10 

Regular users of overdraft protection have low credit quality and limited credit alternatives.11 According to the Raddon survey, for example, only 7 percent of elevated users of overdraft protection describe their personal assessment of their credit rating as “excellent,” while 70 percent describe their credit rating as “fair” or “poor” (38 percent and 32 percent, respectively). By contrast, 74 percent of nonusers of overdraft protection describe their credit rating as “excellent” or “good,” and only 9 percent consider their credit rating “poor.” 12 Thus, reducing access to overdraft protection likely would exacerbate the plight of those who rely on it because of the lack of better alternatives to replace it. 

For many consumers who use overdraft protection regularly, the most likely alternative is either bounced checks and declined payments—with resulting nonsufficient funds (NSF) fees and perhaps termination of utilities and other dire consequences—or a payday loan.13 Research by economists Morgan, Strain, and Seblani on the impact of state payday loan bans also shows that consumers substitute between the two products.14 As predicted, they find that when a state bans payday lending, overdraft revenues increase at banks, whereas allowing payday lending results in a decline in bank overdraft fee revenue. While payday loans may often be less expensive than overdraft protection for those who choose between the products, the CFPB has also expressed concerns about the cost and usage of payday loans by consumers;15 thus it is hard to believe that the CFPB would seek to adopt policies that might restrict the most cost-effective credit options to meet consumers’ specific short-term credit needs, whether this be in the form of overdraft protection or payday loans. 

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