By The Numbers: How Consumers May Be Harmed By CFPB Regulatory Action Limiting Access To Overdraft

WASHINGTON, D.C. – Consumer Financial Protection Bureau (CFPB) data demonstrates overdraft fees have substantially declined as banks innovate to meet evolving consumer needs. Yet the CFPB continues to move forward with a one-size-fits-all rulemaking that could require all overdraft services be treated as credit products under Regulation Z. The Consumer Bankers Association (CBA) has estimated* the number of consumers who could potentially lose access to overdraft due to the CFPB’s proposal. Our research relies on the Bureau’s own data, as well as survey data from the Federal Reserve Board, and other industry leaders. This is a conservative estimate of the number of consumers the CFPB could be pushing out of the well-regulated banking system into other types of products, like payday, pawn, and auto title loans, when they need to make ends meet. As the CFPB moves forward with its rulemaking, it is important the agency detail the extent to which its proposal could restrict access to this important emergency safety net – particularly to consumers most on the margins.

Key Findings

• If the CFPB requires overdraft services be treated as credit, we expect financial institutions may have difficulty underwriting as many as 2.4 million Americans who fall into the CFPB’s historical definition of “frequent overdrafters” (those who overdraft more than 10 times in a year).
• At least half of consumers that may lose access to overdraft services due to the CFPB’s forthcoming overdraft rulemaking will likely not have the ability to utilize other credit products, meaning they will need to turn to higher cost, higher risk alternatives like payday loans, pawn shops, and auto title loans.
  • This will include a disproportionate number of people of color and those making less than $50,000.

As many as a quarter of Americans use overdraft services to make ends meet.

With a reported 60 percent of Americans living paycheck to paycheck, access to liquidity is critical to helping consumers make ends meet. Data from the 2022 Census Bureau population estimates, the CFPB’s “Making Ends Meet” survey, the Financial Health Network, and the Federal Reserve’s 2022 Survey of Household Economics and Decision Making show that between 11 percent and 26.5 percent of U.S. adults with bank accounts use overdraft services.

• This means: Nearly 27 to 65 million Americans used an overdraft product in 2022.

Overdrafters regularly lack access to other credit products.

Acting Comptroller of the Currency Michael Hsu explains “[l]imiting overdrafts may limit the financial capacity for those who need it most.” Indeed, agency research suggests many consumers that rely on overdraft services lack access to other safe, well-regulated, affordable credit alternatives. According to the Federal Reserve Board’s Survey of Household Economics and Decision Making data:

• Thirty-seven percent of consumers that used overdraft services at least once in 2022 indicated that they were “not confident” they would be approved if they applied for credit.
• Fifty-four percent of consumers who used overdraft services at least once in the last year indicated they could not obtain credit when they applied.
• Additionally, The Pew Charitable Trusts found more than half (54 percent) of consumers who used overdraft in 2017 could not use a credit card to cover a $400 expense (see page 9).

For these consumers, overdraft is an important tool in meeting short-term liquidity needs and limiting their access to it has direct, negative impacts.

If the CFPB requires all overdraft programs be treated as credit, banks may not be able to underwrite certain overdraft users due to their limited credit histories.

The CFPB has expressed, via its Unified Regulatory Agenda and other communications, it intends to propose overdraft services be treated as credit under Regulation Z. Credit risk standards, cost limitations, and other safety and soundness requirements could impede banks’ ability to underwrite “frequent overdrafters,” due to the population’s limited credit histories. The Financial Health Network’s 2022 survey study and the CFPB’s 2017 “Data Point” on overdraft each show that:

• Nine percent of consumers who utilized overdraft used it 10 or more times in a given year, meeting the CFPB’s historical definition of “frequent overdrafters” (those who overdraft more than 10 times in a year).

Based on the available data from the CFPB, 2022 Census estimates, and Federal Reserve, we estimate this would include as many as 2.4 million Americans. Given the prevailing statistics for consumers that have overdrafted at least once, we expect that CFPB regulation could result in consumers who are “frequent overdrafters” losing access to this important service. Because of the difficulty meeting credit risk expectations and cost issues regarding underwriting low-to-no-credit consumers who frequently overdraft:

• At least half of consumers that may lose access to overdraft services due to the CFPB’s forthcoming overdraft rulemaking will lack access to other credit products.
  • This will include a disproportionate number of people of color and those making less than $50,000.

As previously stated, we fear that without access to overdraft, this subset of consumers could either:

• Face significantly greater financial hardships in meeting their daily needs, or
• Be pushed outside of the confines of the well-regulated banking system to acquire access to short-term liquidity from less-supervised, more expensive options, such as predatory payday lenders, pawn shops, and auto title lenders.

The Bottom Line

Bank-led innovations in the overdraft space are estimated to save consumers $28 billion between 2021 and 2025, and have ushered in customer-friendly features like real-time payment updates, grace periods, and no-fee overdraft accounts – all without burdensome regulation or legislation. If the CFPB’s forthcoming proposal forces banks into a one-size-fits-all approach to this critical consumer financial product, which would be a vast departure from the highly-tailored offerings banks provide consumers today, not only would the proposal stifle innovation and competition among banks, but it would put the consumers who rely on overdraft the most on the losing end of this government price setting agenda.

CBA Advocacy

• To read CBA’s response to the CFPB’s misleading overdraft press release that accompanied its most recent report, click HERE.
• To read what regulators, legislators, scholars, thought leaders, and the media are saying about these bank-led overdraft innovations, click HERE.
• To read CBA’s recent blog post on how the CFPB’s forthcoming overdraft proposal could stifle innovation and competition, click HERE.
• To read CBA President and CEO Lindsey Johnson’s op-ed urging policymakers to recognize the impact of recently unveiled bank-led overdraft innovations designed to expand choice, strengthen transparency, and lower costs for hardworking consumers, click HERE.
• To read CBA Senior Vice President, General Counsel, Head of Regulatory Affairs David Pommerehn’s testimony before the Senate Banking Committee Financial Institutions and Consumer Protection Subcommittee hearing on examining the effects of overdraft fees on working families from May 2022, click HERE.