Two new reports find that the Consumer Financial Protection Bureau’s (CFPB) proposed payday lending rules would cause nearly two-thirds of lenders to close down, and would disproportionately affect small businesses. The proposed rules would require non-bank payday lenders to refuse credit to those who fall below an arbitrary payment-to-income ratio.
The first report, from credit reporting agency Clarity Services, found that the rules would reduce the number of regulated loans by more than 70%.
The report’s author, former CFPB assistant director of research Rick 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.”
Separately, a report released last week from 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.”
CFPB Corroborates Each Independent Report
Both reports are consistent with the CFPB’s own conclusions and apparent motivations. According to the proposal outline, loan volume would decrease by an average of 65 percent (table 1, page 45).
The CFPB’s conclusion echoed the new reports: “The proposals under consideration could, therefore, lead to substantial consolidation in the short-term payday and vehicle title lending market.” (page 45)
Taken together, the Clarity and CRA reports clearly demonstrate that the CFPB’s proposed regulations are not based on how best to protect borrowers, but instead on how to eliminate short-term lending. Nowhere do they answer, or even contemplate, the essential question: what happens to a consumer who walks into a payday loan center and is unable to get a loan to meet an urgent financial need?
The Clarity Services report is authored by Rick Hackett, former CFPB assistant director of research, markets and regulations of installment and small-dollar lending. Hackett examined the most comprehensive dataset of payday lending transactions to date – more than 87 million small-dollar loan records from five major lenders – which were offered to the CFPB and other researchers to help foster a more comprehensive understanding of why consumers choose payday loans and how the loans work.
The Charles River Associates report examined loan level data and financial information from a sample of small payday lenders which are member of the Community Finance Services Association (CFSA) or Financial Service Centers of America. The loan level data reflect 1.8 million loans to 150,000 consumers across 234 stores and 16 states. The financial information data came from monthly Profit & Loss statements at the store level from six small lenders, mostly for a 2-year period, covering about 200 stores with payday lending revenues across 15 states.