As the CFPB continues its rulemaking process for the short-term lending industry, three key questions remain unanswered by the Bureau.
Is the Bureau purposefully inflating the number of complaints against payday lending to justify the proposed regulations?
The Bureau reported receiving 5,600 complaints concerning payday lenders in 2014 – just two percent of total annual complaints. However, this total is severely distorted, as the CFPB itself acknowledges: at least 65% of payday loan complaints are related to online lenders, many of which operate illegally. At a recent CFPB Consumer Advisory Board (CAB) meeting, Director Cordray combined two separate industries to justify further regulation of short-term loans, citing payday loan debt collection complaint statistics. As with all of the complaints received by the Bureau, a significant number of these are unverified, with most likely relating to illegal lenders and scammers.
This information makes clear – and underscores an apparent pattern – that the CFPB is conflating data to bolster its case for sweeping payday lending regulation. In fact, the current proposal fails to address the aspects of payday lending – unregulated lenders and debt collection scams – where there are actual, notable complaints and evidence of consumer harm.
Why is the CFPB pushing consumers towards unregulated lenders and costly overdraft loans?
In a recent research note, respected bank analyst Dick Bove of Rafferty Capital writes that the proposed rules will force a number of companies out of business, resulting in a surge in bank overdraft loans – an equivalent, though typically more expensive credit option conspicuously absent from the CFPB’s rulemaking efforts.
Bove concluded that the proposal “does not eliminate the need for money on the part of the borrowers,” who will either turn to overdraft loans to deal with temporary cash shortfalls, or will “go to the grey markets to get the funds that they need.”
Why has the Bureau ignored its own findings and those of independent researchers on the impact of the CFPB proposal?
In June, Sen. Vitter requested the Government Accountability Office (GAO) investigate the CFPB’s process in light of concerns about the “adequacy and thoroughness of the CFPB’s analysis” with respect to the impact on small businesses.
In fact, existing independent research from Charles River Associates underscores the devastating effect the rules would have on small operators: the rules, when applied to 2013 data, “would have reduced the payday loan revenues of small lenders by 82% on average,” and “may dampen demand to originate payday loans and/or increase default rates.”
It’s not only small business that stands to lose from the rules. According to the CFPB’s own outline, loan volume would decrease by an average of 65% and “could, therefore, lead to substantial consolidation in the short-term payday and vehicle title lending market.”
Former CFPB assistant director of research Rick Hackett reached a similar conclusion: “The mono-line payday storefront business would lose well more than 70% of its volume and, we think, likely would cease to exist under the Bureau’s proposed rule.”
Despite these clear warning signs, the Bureau is moving forward with rule that will eliminate millions of consumers’ access to credit. This activist approach has frustrated many at the Bureau, like Leonard Chanin, who came from the Fed to oversee rulemaking. “I lost faith that the agency would become a truly independent entity and carefully balance consumer costs and access to credit with consumer protection.”
Chanin offered the payday loan rule as an example. “I think the bureau sees consumers taking out payday loans and believes ‘there must be something wrong here, because consumers really wouldn’t choose these products.’ There is great risk in assuming you know what is best for the consumer.”