When the Consumer Financial Protection Bureau (CFPB) first outlined its proposed rules for short-term loans in March 2015, Director Richard Cordray and his staff claimed to be taking just the first public step in the rulemaking process, vowing that the outline would be followed by further research and engagement with relevant stakeholders, including consumers and the industry, particularly small business.
But in the 14 months that have followed, the CFPB has done little to follow through on this promise. The Bureau now looks poised to release rules more or less identical to those outlined in 2015, in spite of extremely low-and shrinking-complaint volume, concerns raised by state policymakers whose rules will be usurped, and thousands of testimonials from payday loan users. Moreover, numerous independent studies revealed the significant negative consequences of the CFPB's regulatory prescriptions, including a drastic impact on consumers' ability to access credit.
- Arbitrary Ability-to-Repay Ratios Do Not Improve Outcomes. A study from credit reporting agency Clarity Services examined borrower's ability-to-repay, using 87 million small-dollar loan records, and found no correlation between a borrower's payment-to-income (PTI) ratio and lower default rates. The report also found practical limitations to an ability-to-repay regulation model: Under the five percent PTI proposal, the average borrower (based on the CFPB's data) could access around $54.00 of credit, but the average loan is $350. This amounts to a sizeable mismatch between consumers' credit needs and the principle lenders would actually be permitted to loan.[February 2015]
- Rules May Increase Defaults. Charles River Associates, a global consulting firm, evaluated the impact of the CFPB's proposed rule on small businesses. It found that, when applied to 2013 data, the rule "would have reduced the payday loan revenues of small lenders by 82% on average." The report concluded that the proposed rules "may dampen demand to originate payday loans and/or increase default rates." [May 2015]
- Bureau's Objections not Based in Evidence. A meta-study from four economists writing on the Federal Reserve Bank of New York blog examined several entrenched yet misguided criticisms of payday lending and found that "many elements of the payday lending critique-their 'unconscionable' and 'spiraling' fees and their 'targeting' of minorities - don't hold up under scrutiny and the weight of evidence." The economists call for further research into rollovers, which are at the heart of the CFPB's proposed rules, before the Bureau seeks to unilaterally modify or abolish the entire industry. [October 2015]
- Surge in Overdraft Expected. In a research note, respected bank analyst Dick Bove of Rafferty Capital wrote 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." [June 2015]
- CFPB Overcounts Instances of Harm. A Clarity Services study from applied the Bureau's own research methods to more than three years of lender transaction data and found that the CFPB over-counted instances of "harm" - when borrowers paid more in fees than they borrowed - by 50 percent. The study followed a test group of borrowers for 3.5 years. When a borrower left the product completely (paid off their loan and did not need another), the researchers replaced that borrower with a new, randomly sampled borrower and followed the replacement for the rest of the 3.5 years. For new, replacement borrowers (the bulk of the customers studied), nearly 80 percent of loan sequences did not meet the CFPB definition of "harm."
Actual Users Are Overwhelmingly Satisfied and Oppose Restrictions.
- Survey research by premier polling firms Global Strategy Group (D) and the Tarrance Group (R) suggests that misperceptions around payday loans, rather than fact and experience, fuel regulatory action. Contrary to the claims of regulators and consumer advocates, the survey shows that borrowers appreciate having the payday loan option and fully understand the loan terms. When compared with banks, payday customers give the payday lenders higher marks for treating them fairly. Borrowers and non-borrowers alike expressed concern about regulations that would restrict access and the ability for consumers to choose payday products. And both borrowers (80 percent) and non-borrowers (47 percent) are more likely to say current payday loan requirements are enough than to say there is a need for stronger requirements. [January 2016]
- Similarly, a KRC Research survey found that by a 22 point margin, payday loan users were more likely than non-users to oppose government limitations. Sixty-nine percent of respondents from households that have used payday loans in the past agree that "you should be able to decide how often you take out a payday loan and not be limited by government restrictions." Among respondents from households that have never taken out a payday loan: 47 percent agree; 47 percent disagree; and 6 percent say they don't know. [March 2015]
Storefront [i.e. regulated] Lenders Will Cease to Exist.
- A Clarity Services study authored by former CFPB assistant director of research Rick Hackett found that the CFPB's outlined rules would substantially reduce the number of regulated loans. Hackett concluded, "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." [May 2015]
- A report by Deloitte for the Financial Services Centers of America (FiSCA) similarly found that, under the rules outlined, few small lenders "would remain economically viable, potentially leading to the closing of most, if not all stores, resulting in the loss of jobs for most, if not all employees." [Summer 2015]
This outside research merely confirms the CFPB's own analyses, which also conclude that its short-term lending rules will dramatically shrink the marketplace and impact consumers:
- According to the CFPB's proposal outline, CFPB "simulations predict that storefront short-term payday loan volume would fall by 84 percent if consumers did not return. If consumers did return after the 60-day period had passed, loan volume would fall by 69 percent" (page 43). The Bureau went on to conclude, "The proposals under consideration could, therefore, lead to substantial consolidation in the short-term payday and vehicle title lending market."
In light of all of this research - from the CFPB and outside observers - and the increasing likelihood this week's proposed rules will merely formalize those outlined in 2015, the CFPB has made eminently clear that it cares little for preserving consumers' ability to access credit, or conducting a rulemaking process grounded in sound data. As we enter the public comment period on the rulemaking, we look forward to the CFPB finally hearing the voices of the consumers it claims to represent.