In its thorough examination of financial institutions' overdraft protection programs, the Consumer Financial Protection Bureau has repeatedly asked if banks and credit unions offer financial alternatives to these programs. The answer is: Yes, they do. However, the CFPB has failed to ask if these alternatives are better and more affordable for cash-strapped consumers. The answer: No, they are not.
A Georgetown University study that delves into the topic of overdraft protection programs, and their impact on consumers, clarifies the various reasons that these programs are most effective and affordable to individuals. For many consumers, access to traditional lending remains tight as a result of the economic mess left behind by Wall Street. Therefore, a large percentage of Americans in all income brackets may not qualify for credit cards or personal loans, and those who do may not receive the most competitive terms. This means that those who face a temporary shortfall may be forced to cover the cost on a credit card and potentially face interest rates as high as 24.99 percent.
Others who are ineligible for traditional credit lines would be forced to turn to payday lenders if access to overdraft protection programs were curbed by the CFPB. Payday loans can be significantly risky and charge rates amounting to more than 300 percent. This can force households who just need short-term financing into a spiral of debt.
Overdraft programs, in contrast, maintain a safe and regulated service to the riskier and high cost alternatives regulators are pondering.