Critics of revised CFPB salary rule miss target
The Consumer Financial Protection Bureau recently released its proposed revisions to the Small Dollar Lending Rules. The public reaction was predictable and immediate, as politicians and commentators denounced the office for allowing “predatory loans” while telling stories of “debt traps” and ruined lives.
The CFPB should ignore this criticism, however. His rule review was a victory for evidence-based governance and credit-hungry consumers.
Small loans, including payday loans, provide millions of underbanked Americans with the lines of credit they need. As originally conceived, the rule set deliberately onerous underwriting requirements in order to shut down the sector from August – but the new CFPB leadership turned the tide by issuing revised rules earlier this this month.
What is most telling in the public debate around payday lending is the experience gap between those who denounce payday loans and those who use them. Reflecting on the public’s perception of small loans, “Hillbilly Elegy” Author JD Vance reflects, “Powerful people sometimes do things to help people like me without really understanding people like me.
The original CFPB lending rule, which also regulates installment loans and auto title loans, was finalized in 2017 under the leadership of CFPB director Richard Cordray, appointed by Obama. The ostensible purpose of the rule was to “help people like” Vance with the allegedly harmful consumer lending practices of payday lenders and the like.
According to figures used by the bureau, approximately 12 million Americans use payday loans each year. Through the 2017 rule, the CFPB would have knowingly reduced the number of these loans from 62% to 68%. This justified the decision using research from Professor Ronald Mann, saying that consumers who typically use the loans “are unable to accurately predict the likelihood of their borrowing again.”
In other words, consumers took out these loans in ignorance of the economic peculiarities. The problem? Mann disagreed with the way the CFPB used its work.
“The Bureau has declared a laudable intention to base its rulemaking on empirical evidence gathered in the academic context,” Mann said in public comment on the rule of origin. “I only wish that the implementation of this statement reflects an unbiased assessment of the evidence rather than a bias of the evidence to fit the policies that the Bureau has shortlisted for implementation.”
It’s pretty damning, and the recent CFPB review, led by new director Kathy Kraninger, cites the abuse of Mann’s study as a rationale for rolling back the small loan rule.
This “distortion” of evidence included a glaring and indisputable fact about small loans: millions of people use them. According to the CFPB’s own admission, deeply buried in the 2017 rule, these loans are “generally used by consumers who live from paycheck to paycheck, have little or no access to other credit products and are looking for funds to meet recurring or one-off expenses. . “
Little or no access to other credit products is the key phrase here. Far from meeting the demand for credit, the destruction of small dollar loans would have eliminated some of the few options available to millions of consumers, potentially pushing them into the arms of less scrupulous lenders. The 2017 rule would almost certainly have been a boon to loan sharks.
While waiving strict underwriting requirements, the CFPB revisions leave new rules in place for collecting payments, but extend their compliance date to 2020. After 90 days of public comments, the CFPB will make the final revisions to the regulation. .
Some lenders are concerned that the CFPB has not changed the collection rules, but removing only underwriting requirements would provide many benefits for businesses and consumers. Under the new rule, the CFPB estimates that “loan volumes would increase between 104% and 108%” from the 2017 requirements. In other words, lenders get more business and consumers have more access to credit.
By revising rules that were based on questionable premises, the CFPB’s actions are a victory for anyone who believes government regulations should have a solid foundation on solid evidence. The onus should be on government regulators to prove that products and services cause harm, especially if, like payday loans, they are used by millions of Americans. Distorting studies to implement “pre-selected” policies is a recipe for generating unintended consequences, not for improving consumer welfare.
Through its holdback, the CFPB keeps credit available to low-income Americans with limited options. Netflix just bought the rights to Vance’s memoir for $ 45 million, so it will likely never need payday loans again. Thanks to the rule revisions, however, they’ll be there if he does.