In June, the Consumer Financial Protection Bureau (CFPB) issued a rule on short-term lending that, if implemented, would unjustifiably restrict individuals' access to credit. Advance America's Chief Executive Officer, Patrick O'Shaughnessy submitted a comment letter urging the CFPB to carefully consider the opinions of consumers who overwhelming oppose the regulation.
Unfortunately, the Bureau does not - and has made little effort to - understand the needs of our customers, nor the rational choice they make to use payday loans during periods of financial difficulty.
View O'Shaughnessy's full comment letter here, and see below for several excerpts.
Short-Term Loan Customers Report High Satisfaction and Few Complaints
Industry-wide studies of customers of regulated payday lenders find very high rates of satisfaction. A 2016 survey of 1,000 payday loan borrowers by widely-respected polling firms Global Strategy Group and the Tarrance Group found that 94 percent agree that payday loans can be a sensible decision when consumers are faced with unexpected expenses. Sixty percent believe that payday loans are fairly priced for the value they provide, especially when compared to alternatives...
The Proposed Rule is Based on Flawed and Incomplete Research
People who used payday loans are not - as the Bureau clearly assumes - financially worse off than those who do not... In order to determine the financial well-being of our customer base, Advance America surveyed both customers and non-payday loan users using the Bureau's own Financial Well-Being Questionnaires and Scale. The Bureau has called this tool a "highly reliable and valid measure of the financial well-being construct based on multiple waves of quantitative testing," which provides a "common metric that allows an 'apples-to-apples' comparison of scores across consumers."
Thus, we compared the financial well-being scores of customers to similarly situated non-customers and also analyzed whether repeat borrowing had any impact on the customers' financial well-being. We found no evidence that payday loans had a negative effect on consumer's sense of financial well-being. This is consistent with most academic research on this topic.
Consequences of the Rule: Reduced Access to Credit
The proposed rule eliminates consumer choice and credit access in several distinct ways. To begin with, the "full payment test" provisions would eliminate access for an estimated 7 of 10 storefront payday-loan customers. Beyond the practical limitations of a full payment test, that loss of credit access would not improve outcomes: there is no correlation between a borrower's payment-to-income (PTI) ratio and lower default rates.
A report authored by former CFPB Assistant Director of Research Rick Hackett found that the proposed rule would ban a cumulative 93 percent of loans currently available to customers. Hackett also found that the rule would reduce credit access to storefront payday customers by 81.3 to 90.5 percent.
Politics and Cronyism Bias Policy
The incorrect assumptions underpinning the proposed rule should perhaps not come as a surprise. All too often, people who have no need for payday loans are the ones who lead the charge to eliminate them, while dismissing the rational actions of millions of Americans who value the service. As Congressman Brad Sherman (D-California) succinctly put it, "So many of the people making the decisions do not ever need a payday loan and don't understand that you work out the percentage interest rate and isn't it terrible that you paid $50 to borrow $400? Well, not if it keeps the lights on in your house. Do you know what the fees are to get reconnected? People in public affairs don't know. People in the political world always have the $400 to pay their light bill."
The CFPB's proposed rules have dangerous flaws and should be completely reconsidered. Moreover, Advance America urges the Bureau to evaluate the high level of feedback against the proposed rule from consumers who have actually used the product - the very people the Bureau claims it is acting on behalf of. Further research and consumer input must be taken into account in order for the CFPB to create fair regulations that protect consumers without eliminating financial choice.