7 reasons to oppose the federal payday loan rule
In October of last year, the Consumer Financial Protection Bureau released its final rule regulating small dollar lenders, who provide loans between $ 100 and $ 500 over a two week period for an average commission of 15 percent. Later that year, a bipartisan group of members of Congress introduced a disapproving resolution that would overturn the rule through the Congressional Review Act. Below are 7 reasons why Congress should use the CRA to overturn the small dollar loan rule, as shown in my new paper, How the Office of Consumer Financial Protection’s Payday Loans Rule Hurts the Working Poor.
- It leaves low to middle income consumers without access to credit
The CFPB’s own analysis found that the rule would reduce industry-wide revenues by 75 percent. That would make at least three-quarters of the industry unprofitable and wipe out about $ 11 billion in consumer credit.
Since 12 million consumers use payday loans each year, millions of people can be expected to lose access to a vital source of finance. But these consumers will always need emergency funds, and the new regulations do not provide for better alternatives. Therefore, two choices emerge. At best, consumers will resort to defaults on other loans or a second job, options they had always had but rejected. At worst, they will be pushed underground into the hands of illegal and unregulated lenders, or even usurers.
- Payday loan users overwhelmingly approve of the product
Taking out a high cost, low cost loan is a perfectly rational response to the options that many consumers face. For cash-strapped consumers, small loans are often a better option than the alternatives available, such as overdrafting a bank account or defaulting on another loan.
For these reasons, payday loans enjoy wide support among their users. Surveys have revealed that 95 percent of borrowers say they appreciate the possibility of taking out a loan. The same proportion also believe that payday loans are a safety net in the event of unforeseen financial difficulties. A 2009 comprehensive economic analysis of consumer demand for payday loans by Gregory Elliehausen, professor of economics at George Washington University, found that 88 percent of respondents were satisfied with their last transaction. In addition, less than 2% of consumer complaints filed with the CFPB are related to payday loans, the vast majority being related to already illegal collection practices.
- The rule is based on a flawed theory of harm
The CFPB final rule is designed to prevent borrowers from “overusing” payday loans, particularly by targeting refinances. The final rule admits that “payday loans can be beneficial for borrowers with discreet, short-term needs”, but finds that consumers cannot predict how long they will be in debt and therefore suffer disproportionate harm. .
There is not enough empirical evidence for this premise. In fact, most of the academic research suggests otherwise. Numerous surveys have shown that consumers are not “tricked” into renewing their loans, but that they fully understand the terms. A 2011 study by Ronald Mann of Columbia University tracked borrower repayment performance and found that the majority of consumers expected and understood, before borrowing, that they were likely to roll over the loan. Sixty percent of borrowers also accurately predicted during a pay period when they would pay off the loan in full. Consumers of payday loans also research a lot of credit options before deciding on a payday loan. A to study found that payday loan applicants had an average of five requests for credit options in the 12 months prior to taking out a loan, three times that of the general population.
Even if consumers have renewed their loans more than they expected, it does not necessarily mean that they are being harmed. While renewing a loan can be expensive, it is often better than other options available to consumers. Current Federal Reserve Governor Gregory Elliehausen and University of Missouri Professor Edward C. Lawrence find that a payday loan taken out to avoid late payments on utility bills and credit cards improves the well-being of consumers. This includes not only those who take out a single loan, but also those who renew their loans several times. Jennifer Priestley from Kennesaw State University in Georgia find that borrowers with longer loans had larger positive changes in their credit scores than those with more time-limited borrowing.
- State regulations already deal with payday loans
The final rule also prevails over more than a century of different state regulations. All fifty states broadly regulate low-value loans, with eighteen states and the District of Columbia prohibiting high-cost loans entirely. While there is substantial evidence showing that households in those states had rejected more checks, filed more complaints against loan sharks and debt collectors, and filed for bankruptcy at much higher rates, consumers still had some flexibility in choosing where to live and to access loans. The role of the federal government should not be to dictate to local communities what types of credit products they may have. This is why several state lawmakers from 17 different states have filed comments with the Bureau urging them to withdraw the rule, as it prevents citizens and lawmakers in each state from deciding for themselves how to regulate small dollar loans. .
- The Bureau’s rule-making process was deeply flawed
As part of its regulations, the CFPB is required to undertake the Small Business Regulatory Enforcement Act (SBREFA) process to reduce the regulatory burden on small entities. According to almost all of the accounts of those involved, the CFPB totally ignored the SBREFA participants. Three Senators, Senator Marco Rubio (R-FL), Senator John Kennedy (R-LA) and Senator James Risch (R-ID), went to write to the office, noting that the Small Business Administration felt that the CFPB “flagrantly violated” SBREFA requirements by enacting the small dollar loan rule.
Additionally, documents obtained through Freedom of Information Act requests show that Bureau staff engaged directly with the Center for Responsible Lending and other consumer advocacy groups to draft the rule. According to Advancing America, a payday lender, “Special interest groups engaged in frequent email exchanges and private meetings with staff, described key features of the proposed rules… coordinated their research efforts with those of the Bureau and solicited potential candidates for job offers. Representatives of the payday lending industry were not allowed any equivalent access or influence, while consumer groups were given key positions within the Bureau. “
- It endangers consumer data
The new rule requires lenders to collect and share sensitive customer data with credit reporting agencies. This unnecessarily puts a huge amount of customer data at risk, such as income, employment, housing expenses, child care expenses, debts and more.
To make matters worse, this sensitive information will also be shared with the CFPB – the same agency as the Government Accountability Office already. critical for failing to implement appropriate privacy controls to secure individuals’ personal data.
- It favors some lenders over others
In particular, the CFPB decided to exempt institutions granting less than 2,500 loans or drawing less than 10% of their annual income from granting small loans in dollars. This arbitrary determination is puzzling. Why would a small loan be suitable for the first 2,500 people, but not for just anyone after? Allowing institutions to offer products only if they derive less than 10 percent of their income restricts this activity to those who do not specialize in the product or benefit from economies of scale.
More importantly, the exemption for small banks and credit unions will not stop the exodus of small lenders from the market. Small loans are still too expensive for most community banks. It costs banks about the same amount to lend $ 500 as $ 20,000, with much lower income. Credit unions represent about 2% of the current payday loan market. On the other hand, there is about 20,000 payday loan stores carrying out approximately 150 million loans per year.
Congress must act to protect vulnerable consumers from the CFPB’s small loan rule. The ARC only needs a simple majority to pass both houses of Congress. However, the CRA usage period expires around the beginning of March. Now is the time for Congress to vote to save consumer access to small dollar loans.