Last week, the House Financial Services Committee released a trove of documents proving that CFPB officials knew their research on auto-loan racial bias was flawed. The officials went so far as to deliberate on ways to prevent people outside the agency from learning the extent of the misrepresentations, which officials worried – if revealed – would be deemed “junk science.”
This latest development is shocking on first read – the Wall Street Journal editorial board called it an “illegal guessing game of name-that-race.” But for anyone who has followed the Bureau since its inception, there have long been concerns that the CFPB is playing fast and loose with the “data” it uses in its rulemaking.
Regardless of the product, the CFPB’s rulemaking process should be based on sound, peer-reviewed research. However, as seen with its auto-lending guidance – and evidenced below with their proposed payday lending rules – the Bureau has made it a habit of using flawed data as a pretext for ideologically-driven attempts to limit businesses that they deem offensive.
CFPB research is not held to government research standards under the Information Quality Act.
When the Bureau released the March 2014 payday loan report, Director Cordray stated, “The purpose of all this additional outreach, research and analysis on these issues is to help us figure out the right approach to protect consumers in the marketplace for payday loans.”
However, the Bureau maintains that its research is not subject to government research standards under the Information Quality Act, including peer review. According to the Bureau, the research is not intended to inform the development of policy, and does not have consequences for specific products.
Despite this claim, the Bureau’s flawed research formed the basis for upcoming rules that will restrict access to credit, crush small businesses and harm thousands of Americans who responsibly use payday loans to manage unexpected and periodic financial difficulties.
The CFPB’s research excludes 92 percent of customers who borrow once.
Since the CFPB began studying payday lending, its model has been tragically flawed. By its own admission, the CFPB April 2013 white paper, which forms the backbone of the Bureau’s proposed rule outline, over-counted high-intensity, repetitive borrowers.
The CFPB acknowledges that its methodology undercounts “low intensity users.” In fact, the CFPB’s analysis excludes 92 percent of one-time borrowers, but counts every 12-time borrower. The reality is that more customers use Advance America’s service one time than any other rate of usage.
Despite this admission, the Bureau never formally retracted the conclusions reached in its white paper and continues to reference it. The Bureau must formulate rules based on credible, peer-reviewed research, whether in finalizing restrictions on short-term lenders, auto lenders or any other industry under the Bureau’s purview.
The Bureau has not examined the consequences of limiting cash advance use.
The CFPB notes that it has not yet “analyzed what other strategies a consumer might employ, other products she might use in lieu of a payday loan or deposit advance, or the possible consequences or trade-offs associated with these choices.”
Customers use cash advances to cost-effectively bridge gaps in their finances. In many instances, a storefront cash advance is less expensive than unregulated Internet loans, overdraft programs and the consequences such as fees for late payments and bounced checks. Simply put, consumers use cash advances for as long as they are the least expensive alternative available.
The Federal Reserve Bank of Kansas City, meanwhile, found that restricting payday lending can adversely affect consumers, and that payday loans are a cost-competitive option. The Bank reports that without access to payday lending, consumers may have limited ability to maintain formal credit standing, may have inadequate access to credit or may resort to more costly credit alternatives. Coupled with a recent study from the American Bankers Association which found that only one percent of small dollar loans offered by banks in 2014 were for $500 or less, it is clear that consumers in need of short term loans will be harmed by restricted access to regulated payday lenders.
No meaningful conclusions to inform policy can be drawn until the CFPB does the difficult work of understanding the rationale of cash advance customers; the choices and consequences faced by those in need of short-term credit; and the risks of driving people to higher-cost products, expensive penalties or less-regulated providers.