In the modern political world, presidential State of the Union addresses often resemble recitations of wish lists, interspersed with appropriate pauses for applause from the audience assembled in the House of Representatives chamber. According to media accounts, so it will be with President Biden’s speech this coming Thursday.
Taxpayers should beware of the hidden price tag behind the President’s words, especially a “Strike Force” (!) he will mention that was recently formed against what the White House has termed “price gouging” and “junk fees.” His unfortunate choice of intimidating words aside, the policies Biden proposes amount to an Administration-wide assault on commonly accepted (and often already regulated) fees and charges associated with everything from car and home purchases to bank overdrafts, from past due payments on credit cards to hotel accommodations.
The Consumer Financial Protection Bureau (CFPB), the Federal Communications Commission (FCC), and the Federal Trade Commission (FTC) are just a few of the agencies issuing rulemakings in this regard. If successful, this massive regulatory overreach would reduce the services customers have come to count on, while leaving taxpayers to clean up the mess.
The problem with this effort starts with the Biden Administration’s varying definitions of what a “junk fee” is. One of the more articulate, but still vague attempts appeared in a White House document last year, which referred to “unnecessary, unavoidable, or surprise charges that inflate prices while adding little to no value.”
Yet, this very interpretation would contradict the actions of CFPB’s rulemaking that proposes price controls on overdraft fees for “very large financial institutions” ($10 billion or more in assets). The agency would force affected banks to calculate the break-even cost of an overdraft and set the fee accordingly, or adopt government-mandated fixed rates (contemplated at a range of $3 to $14).
This type of micromanagement is silly on its face, for several reasons. Overdraft charges are currently well-disclosed under federal and state laws. Perhaps that is one reason why both the average charge, at $35, as well as total overdraft revenue, are heading downward dramatically without further government intervention. Bank of America has slashed its fee to just $10, which will soon put pressure on others to either do the same or offer some other kind of benefit to lure customers to their services.
Not content to leave well-functioning markets alone, CFPB insists that Americans are still insufficiently informed about overdraft fees. Yet there is no “surprise” to the consumer who reads the terms of their bank account. Furthermore, overdraft charges often have to cover more than just the cost to the bank of the individual’s mistake. An overdraft may occur due to identity theft or fraud, necessitating investments from the bank in network-wide security.
An additional consideration is the incentive behind overdraft charges – to protect customers who exercise care in maintaining proper balances in their accounts from paying for others’ mistakes. Most account holders would find plenty of “value” in such charges, precisely because they do not raise the “price” of the account itself by forcing banks to charge everyone higher monthly service fees. In this light, overdraft fees hardly seem “unnecessary.”
Ironically, government attempts to manipulate overdraft charges could penalize moderate-income consumers who are trying to build good financial histories that could improve their access to credit and other tools. As Washington Post financial columnist Megan McCardle noted, previous experience shows that overdraft fees help to balance the costs of offering free checking and low minimum balance accounts:
This seems to have happened in the past, judging from what we saw when federal regulators preempted some state fee caps in 2001. According to researchers from the New York Fed, the exempted banks both raised overdraft fees and expanded available overdraft credit, while lowering minimum balance requirements. The rate at which checks were returned for insufficient funds declined by 15 percent. And the share of low-income households with a bank account rose by 10 percent, suggesting that minimum balance requirements had kept those households from opening accounts.
But setting all these arguments aside, why not simply conduct a trial run of this regulatory scheme? After all, it only affects the biggest banks. Wrong again. In January, three banking associations – representing larger banks, credit unions of all asset classes, and independent community banks – warned CFPB that its rulemaking would impact every depositor in America. If the agency wields its power to crack down on “unfair, deceptive, or abusive” practices, by definition that authority cannot be selectively applied by the size of the financial institution. If, on the other hand, CFPB tries to use this power to simply subject overdraft fees to new disclosure rules, the three associations observed that “all banks would face market pressure to conform their practices to the Bureau’s rule. … CFPB therefore erred in not conducting a small-business impact analysis before even issuing its proposed changes.”
Many of these same arguments apply to CFPB’s attempt to force down credit-card late payment fees, with a rule that just became final this week. Writing for NTU in DC Journal last year, Alex Milliken explained:
Late fees act as an incentive to make payments on time and, therefore, help encourage borrowers to improve their credit scores. Currently, the law allows for these fees to be up to $30 for the first fee and up to $41 for subsequent late payments, but the proposed rule would limit a late-payment fee to just $8 with no additional fee for future delinquencies.
Estimates say this will remove $9 billion yearly from the industry. While some might herald this a victory in the ‘Junk Fees War,’ it will certainly have a devastating effect on the availability of credit. Those with low credit scores stand to lose the most by this new rule. By implementing a price control on late fees, the CFPB will be directly responsible for reducing access to credit because credit issuers must examine their product offerings and eliminate as much risk as possible from their books.
Here again, late fees, which have been well-disclosed and capped for some 15 years, are part of a system of checks and balances that encourage sound financial management from the household level all the way up to the c-suite. If the government tinkers with this system, the services Americans expect, such as solid card security or rewards, may suffer as companies invest fewer resources in those areas in anticipation of tighter rules (and more costs) from delinquent payments. In an industry already facing unwise price caps on “interchange” and routing fees, CFPB’s meddling is more unwelcome news.
But CFPB is not the only regulatory entity out of its depth. Recently the Federal Trade Commission (FTC) issued a rulemaking to stamp out “unfair and deceptive fees” in a variety of consumer-facing situations including prepaid calling cards, funerals, hotels, membership programs, and product discounts. One flaw NTU’s research arm, NTU Foundation, immediately identified was FTC’s clumsy attempt to exclude taxes and government charges from the dictates of the rulemaking. According to NTU Foundation’s filing with FTC:
The Proposed Regulation would exclude taxes and fees only if they are “imposed on consumers by a Federal, State, or local government agency, unit or department,” and not any charge “that the government imposes on a business and the business chooses to pass on to consumers.”
This strange distinction would overturn most of the longstanding U.S. system that defines how a tax, penalty, or charge operates, versus who is obligated to remit or collect it. As a practical matter, NTU Foundation notes, the FTC’s untenable framework would “require every retailer in America to engage in a confusing and massive alteration of business sales and payment processing systems. Retailers would have to understand that they must differentially treat certain states’ sales taxes, excise taxes, and other charges based entirely and counterintuitively on whether the authorizing statute imposes the charge on consumers or on business.”
Assuming there is any forethought to the consequences of the rulemaking on the part of the government, perhaps it is that “making businesses pay” government charges somehow enhances “fairness” in the tax system. Nothing could be further from reality. Whether the business passes along the costs of a tax, penalty or charge to consumers, workers, and shareholders, or whether those same consumers, workers, or shareholders shoulder those costs directly, is economically immaterial. The FTC’s legal experts and economists should have known this and conducted an honest cost-benefit analysis before ever unleashing this rulemaking on the American people. Here, the FTC itself is engaging in “unfair and deceptive” practices surrounding fees.
Thomas Kingsley, Director of the Financial Services Policy with American Action Forum, recently encapsulated the current rulemaking malaise when he wrote, “Populism is not an effective way to regulate markets, and going after socially disfavored targets for providing goods and services within the bounds set by federal regulators does everyone involved a disservice, not least consumers themselves.”
Taxpayers also face this disservice. The more that banks, card issuers, and other service providers are squeezed by overzealous government and reduce the attractiveness of their offerings, the louder the cries will be for the government to step in with progressively worse “solutions.” This includes mission expansion for taxpayer-backed lending giants like Fannie Mae and Freddie Mac, banking through the U.S. Postal Service, direct federal assistance and looser credit for borrowers, and more debt forgiveness programs such as the costly student loan write-offs the Administration has repeatedly heaped onto the backs of taxpayers.
The Biden Administration’s crusade against “junk fees” is more aptly described as “junk policy,” one for which taxpayers should not foot the bill.