Paging Todd Zywicki. CFPB director Richard Cordray complains that 9% of bank customers pay 84% of overdraft fees, with the implication that paternalistic regulation is needed. Of course, as Shannon Phillips points out (via Funnell), what this statistic really reflects is that the vast majority of account holders use their accounts responsibly: if someone in that 9% were to do a better job of balancing their checkbook, they'd move into the 91%. But CPFB regulation (still in a notice and comment procedure, with comments due by June 29), would likely punish the 91% to protect the 9% from themselves. Except that without the overdraft fees, banks will find it unprofitable to serve these customers in the first place, and will instead charge monthly fees that effectively preclude any access to the banking system for both the responsible and irresponsible lower middle class. But at least regulators can feel better that they stopped overdraft fees.
Similarly, Jeff Sovern complains that many consumers and students are cluelessly engaging in complex financial transactions without understanding basic concepts like variable and fixed interest rates. The proposed solution—required use of mortgage counselors—would make mortgages more expensive for everyone, even those responsible citizens who are capable of representing their own interests and making their own choices without the needless additional overhead. Why not let consumers choose for themselves whether they need to hire a financial advisor?
Part of the problem in the mortgage context, I would strongly suspect, is the degree to which meaningful disclosures are buried in meaningless defensive disclosures banks engage in upon risk of class action liability. To take a related example, the pending Supreme Court case of First American Financial Corp. v. Edwards involves a RESPA class action alleging a technical violation of the law without any financial injury; while this is not a disclosure case, it shows the degree to which banks face litigation exposure by entrepreneurial rent-seeking trial lawyers without regard to whether the alleged transaction problem actually harms consumers. The disclosure regime has grown to the extent that it has become counterproductive: even brilliant experienced federal judges find it unprofitable to read the disclosures. Where CFPB could be useful is to create a clear-cut disclosure regime—a page of disclosures—together with preemption precluding lawsuits over the lack of the other 100 pages of disclosures. Earlier.