Dear Director Chopra:
On behalf of the Competitive Enterprise Institute (CEI), I respectfully submit the following comments in response to the Consumer Financial Protection Bureau’s (CFPB) request for information on what the CFPB terms “junk fees” in the financial services industry.
CEI is a Washington-based free-market public policy organization, founded in 1984, that studies the effects of regulations on job growth and economic well-being. Our mission is to advance the freedom to prosper for consumers, entrepreneurs, and investors. At CEI, we have long championed private-sector innovation that promotes financial inclusion and warned about government red tape that contributes to the problem of the unbanked.
Above all, we support the rights of consumers to make choices in the marketplace without overreaching government bureaucracies limiting these choices, ostensibly “for their own good.” We believe the government should punish deceptive claims, but otherwise leave consumers free to make their own choices among products and services.
We urge the CFPB to end its inquiry into “junk fees” soon and take no further regulatory action regarding them. “Junk fees” is a subjective and paternalistic term that puts the subject matter out of the CFPB’s jurisdiction. The Dodd-Frank Wall Street Reform and Consumer Protection Act gave the CFPB the power to police fees that are “unfair, deceptive, abusive.” Although we have argued that the term “abusive” is vague and its definition should be tightened,1 that term at least conveys a seriousness that is entirely missing when CFPB choose to utilize the word “junk” to describe fees its leadership does not like.
Fees that are separate from a product’s or service’s basic price can serve many beneficial functions for consumers and entrepreneurs, including to ensure that only consumers who use this service are billed for its cost. If those fees were to be banned, all consumers—including lower income-consumers—would likely be charged more to subsidize the cost of a particular service. How would that lead to fair and equitable results?
A fee can also denote external costs, providing consumers needed information to seek appropriate public policy changes through their elected representatives. For instance, a fee that discloses a tax on a product or service lets consumers know the parties responsible for the costs they are paying.
Most importantly, fees convey price signals that increase transparency and give consumers important information in their decisions about products and services. As American Enterprise Institute economist and senior fellow Stan Veuger points out, if regulators “blur the price signals” by banning or heavily restricting fees, consumers “won’t get to the optimal outcome.”2
Since this request for information takes a particular interest in—and animus toward—overdraft fees by banks and credit unions, I am enclosing recent congressional testimony on the subject by Todd Zywicki, professor of law at the Antonin Scalia Law School of George Mason University and a board member of CEI. Professor Zywicki was also chair of the CFPB Taskforce on Federal Consumer Financial Law, which released comprehensive recommendations last year to improve consumer welfare. In his congressional testimony, he documents a) the significant benefits that overdraft protection has provided to consumers and b) the competition in the financial market that gives consumers alternatives to fees:
Historically, overdraft protection was a courtesy that banks reserved only for its most elite customers, typically high-income professionals and others who had personal connections to bank managers. Ordinary consumers, by contrast, were typically forced to deal with the inconvenience, embarrassment, and in some instances threat of criminal prosecution, of bounced checks, NSF fees, and declined payments. Over time, however, financial institutions developed automated overdraft protection programs that have reduced the risk and cost of providing overdraft services and eliminated the traditional subjectivity and selectivity of discretionary overdraft protection programs, thereby expanding eligibility to virtually all bank customers regardless of income or status.
Thank you for this opportunity to present the views of the Competitive Enterprise Institute on this important matter. If you or your staff should have any questions, please feel free to contact me by phone or email.
John Berlau Senior Fellow
Competitive Enterprise Institute (202) 331-2272