I just posted a new article on SSRN co-authored with Robert Clarke, former Comptroller of the Currency. It is entitled “Payday Lending, Bank Overdraft Protection, and Fair Competition at the Consumer Financial Protection Bureau” and will be forthcoming in Boston University’s Review of Banking and Financial Law. Here’s the abstract:
The Consumer Financial Protection Bureau (CFPB) is considering new regulation of payday lending and bank overdraft protection. The Dodd-Frank Act, which established the CFPB, recognizes that consumers benefit from competition among providers of consumer credit products. That law requires the CFPB to preserve fair competition by providing consistent regulatory treatment of similar products offered by both bank and nonbank lenders. We illustrate how this mandate for fair competition applies to the regulation of payday lending and bank overdraft protection, products that are offered by different entities but attract an overlapping customer base, compete with each other directly, and raise similar consumer protection concerns. Unequal regulation would provide a competitive advantage for one product over another, resulting in reduced choice and higher prices for consumers, without a corresponding increase in consumer protection. Therefore, as the CFPB considers new regulation of these products, it should be careful to regulate them similarly to preserve fair competition.
The article examines the available evidence of the ways in which consumers use both products and what that means for CFPB regulation. Most notably, not only are they economic substitutes, but they raise similar consumer protection issues about overuse and high cost. So restricting access to one product (such as overdraft protection) while retaining access to a substitute (such as payday lending) will harm consumers economically but will also generate no benefits in terms of advancing consumer protection goals.