Michael Moebs, Moebs $ervices
LAKE FOREST, Ill.—The CFPB’s proposed rules on prepaid cards, which would re-categorize overdrafts as a loan, could potentially eliminate overdrafts, according to one analyst who believes if that happens CUs will feel the pinch more than banks.
Michael Moebs, economist and CEO at Moebs $ervices, said the CFPB re-categorizing overdrafts from “credit but not a loan” to a loan fully subject to Truth-In-Lending, Reg Z, has significant ramifications for all aspects of the financial services marketplace—for both overdraft users and providers.
“In play is approximately $32-billion in overdraft revenue,” said Moebs, a figure that has been steady for the past three years, according to the Moebs $ervices Study on Overdraft Revenue.
Moebs pointed out that more than 40-million people use overdrafts.
“If the CFPB proposal is put in place, ODs would be subject to Truth-In-Lending with an interest rate cap of 36% or a maximum amount of interest earned of $3 in a month on every $100 in overdraft balance,” he said. “The cost of processing an overdraft (per Moebs $ervices Study) is approximately $12.50 for most institutions. The CFPB, by proposing to consider overdrafts as loans and subject to Truth-In-Lending, is signaling to lenders—including payday lenders—that interest revenue for overdrafts or advances will be less than the cost of processing. The result is lenders will not offer overdrafts.”
The loss of $32-billion in fee income by banks, thrifts and credit unions will impact the rebuilding of capital by these financial Institutions in an economy that is still fragile, explained Moebs. “The Moebs Study on OD Revenue calculates the risk for different FI types. Overall about three-quarters of fee revenue, 77%, would be lost if overdrafts are eliminated.”
Credit unions would be impacted most because the ratio of OD revenue to total service charge revenue is 93%--almost 30% higher than banks, noted Moebs. “Will the prices of other financial services be increased, such as interest on auto and home loans or the interest paid on deposits decreased to offset the loss of $32-billion in fee revenue?”
The CFPB’s predecessor, the Federal Reserve, conducted and published extensive investigations of proposed rules looking at all types of FIs, large and small in asset size, and measured the impact on consumers, explained Moebs. “Many times the Fed’s proposals were redrafted based upon information obtained in the proposal process. Is the switch of overdrafts from a deposit service to a loan and the movement of a fee-revenue source to an interest-earning source significant enough to warrant Congressional scrutiny and/or Supreme Court review?”
Moebs also noted that 40-million Americans losing a service they use to cover paycheck shortfalls or math errors might increase unemployment and cause “financial hardship.”
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