In testimony before the House Financial Services Committee, the director of the Consumer Financial Protection Bureau (CFPB), Richard Cordray, doubled down on the Bureau's refusal to acknowledge the distinction between legal and illegal short-term lending, or the proven negative consequences of banning regulated lending.
Under questioning from Representative Blaine Luetkemeyer (R-Mo.), Director Cordray said that 14 states have no payday loans and "that's tens of millions of Americans in those states that seem to get by just fine." Congressman Luetkemeyer pointed out that there is in fact short-term lending in those states-though a more costly and dangerous kind from offshore, unregulated lenders and other inferior alternatives.
In fact, the CFPB's own data shows that consumers in states that ban payday lending complain more about payday loans than those in states with regulated lending.
This is just the latest example of the Bureau ignoring the fact that where regulated short-term lending is restricted, unlicensed, unregulated lending proliferates. Just last week, a CFPB email newsletter featured the story of a Pennsylvania borrower who was taken advantage of by a lender - at least the third time the Bureau has cited a complaint in that state. In both cases, the Bureau failed to acknowledge that storefront short-term lending is banned in Pennsylvania - the consumers in these stories had undoubtedly borrowed from an illegal lender, probably offshore, and so the CFPB's proposed limits on access to short-term credit would do nothing to protect them.
Again this morning, Director Cordray chose to ignore Congressman Luetkemeyer's reference to unlicensed, illegal lenders and responded that "in the states that do not have payday lending, people find many other ways to meet that need."
Indeed they do find other ways:
- They bounce more checks, complain more about illegal lenders and debt collectors, and file for bankruptcy at a higher rate than in states where short-term loans are available, according to a Federal Reserve staff study.
- They find a lesser supply of alternative financial options and resort to costlier, unregulated options for short-term credit, according to reports from the U.S. Department of the Treasury, in contract with The Urban Institute.
- Montana, Oregon and Washington state regulators all reported significant increases in online lending and related complaints after implementing restrictions on short-term lending.
The fact is that if the CFPB succeeds in its crusade to drastically limit the availability of regulated short-term credit, consumers will face a choice between more expensive alternatives such as overdraft programs or late payment penalties, or the very real risks of unlicensed lenders, who offer higher cost loans with none of the consumer protections that state- and federally-regulated companies provide.