Marvin Umholtz's latest CU Strategic Hot Topics email newsletter contains a lengthy discussion of a position paper issued late last month by the National Consumer Law Center (NCLC), which calls on the CFPB to restrict bank and credit union overdraft fees to the "reasonable and proportional" standard applied to credit card penalty fees by the terms of CARD Act, notwithstanding the fact that there is no express statutory requirement to apply such a limitation to overdraft fees. The NCLC argues that the CFPB has such authority by virtue of its ability to ban "unfair, deceptive, and abusive practices."
Of particular interest to Marvin, and to me, is the use of behavioral economic theory (previously discussed here) as support for the argument that overdraft fees are inherently "abusive" and "unfair."
This correspondent found of particular interest the NCLC white paper’s discussion about how the CFPB should leverage unfair, deceptive, or abusive practices authorities to price-control overdraft fees. It argued that overdraft fees were inherently unfair because they were not avoidable by a reasonable consumer. The NCLC said, “Accordingly, the analysis should take into [account] consumers’ likely knowledge gaps and their optimism bias, which has been shown by behavioral economics research. The information differential between banks and consumers is stark. As discussed in Sections II and III.B, supra, banks use sophisticated systems to keep track of consumers’ transactions and maximize overdrafts. In contrast, behavioral economics research shows that consumers are over-optimistic and tend to discount the likelihood of negative events. Nor do they have the capacity to quickly and accurately assess the risks associated with such contingencies. This gives banks the opportunity to attract consumers with, for example, a promise of ‘free checking,’ while at the same time charging high fees for overdrafts and engaging practices to maximize them that will far outstrip any savings from lack of a monthly maintenance fee. As a result, overdrafts and their associated fees may not be reasonably avoidable by consumers – especially the lower-income consumers who bear the brunt of these fees.” The NCLC’s anti-bank rhetoric is specious and mean-spirited.
Behavioral economics assumes that many consumers are uninformed and irrational and that consumers make systemic mistakes in their choice of credit products. Rather than let people make their own decisions behavioral economists believe that a central regulator should adopt policies designed to address that ignorance and irrationality. Behaviorists use these premises to justify big government intervention in the market to prevent consumers from harming themselves. The NCLC’s anti-overdraft narrative is reliant on this everyone-is-a-victim belief.
I couldn't have said it better myself. And now, I don't have to.
As the NCLC points out, the Dodd-Frank Act defines a practice as abusive if the CFPB finds that it (1) Materially interferes with a consumer’s ability to understand a term or condition of a consumer financial product or service; or (2) Takes unreasonable advantage of – (A) A consumer's lack of understanding of the material risks, costs, or conditions of the product or service; (B) A consumer’s inability to protect his or her own interests when selecting or using a product or service; or (C) The consumer’s reliance on a covered person [the financial services provider]. The NCLC white paper came to the simple conclusion that due to the inherent nature of overdrafts they were abusive. NCLC wrote, “When choosing a bank or type of account, consumers cannot be expected to be able to know or compare how banks process transactions or what steps the bank will do to induce overdrafts. The way in which transactions are processed by a bank is a complicated matter that consumers cannot reasonably understand. Again, banks take advantage of the consumer’s reliance that the bank will not engage in activities to deliberately trip them into incurring overdrafts and being charged overdraft fees.” Why does the empowering of the CFPB to make arbitrary and capricious “abusive” findings remind this correspondent of the in loco parentis “ability to repay” determination in other Dodd-Frank Act-mandated CFPB rules? Apparently the ideologically questionable behavioral economists at the CFPB will know “abusive” when they see it. Do the CFPB behavioral economists have any respect for individual rights – like the right to make one’s own decisions even if mistaken?
I think that the answer to that question is "No." Or, perhaps, "Hell, No!"
None of this should come as a surprise. Liz Warren's purpose in birthing the idea for the CFPB was to create a powerful independent federal agency, free from most oversight and any chance of "regulatory capture," to decide whether consumer financial products and services were "safe" for consumers. In other words, the basis for the CFPB is a belief in the use of the Nanny State to protect the proles from themselves because the state knows what's best for them even when they don't. Behavioral economic theory is the bedrock on which this house of cards is built. Moreover, the CFPB has been manipulating statistics in its war on overdraft fees for some time.
Get used to it, folks, because barring a "counter revolution," this is only the beginning.