The Consumer Financial Protection Bureau recently trotted out new research on payday loans from online-only lenders. Like previous CFPB studies, this report manipulates the data to fit a preconceived narrative: that payday loans hurt consumers. The end result is a splashy - yet misleading - headline the Bureau can use to justify sweeping federal regulations that will abolish a trusted and valued source of credit, leaving consumers worse off.
Rather than focusing its rulemaking on the small number of accounts that experience measurable harm, the Bureau's anticipated payday lending regulations will shutter regulated storefront lenders, pushing consumers to unregulated online lenders and more costly bank overdraft programs, the very products the Bureau criticizes in this report.
Below are four key points to consider:
- Selective, outdated data helps to bury the most significant finding - that nine out of ten times, the system works as intended.
This latest report's conclusions are reached by using only half of the data in order to find the biggest dollar amount possible, and the data - more than five years old - pre-dates significant rule changes regarding electronic payments, resulting in an outdated and inaccurate view of the current marketplace.
NACHA, the electronic payments association, for example, lowered their acceptable return rate to 15 percent, a move the Bureau praised: "Industry self-regulation, implemented lawfully and effectively, can reduce the need for government intervention through regulation, supervision, or enforcement actions." Yet, the Bureau now claims that the 12 percent return rate of the online lenders included in their study is abusive.
Constructing a narrative from selective, dated data hides the report's most significant finding: 88 percent of the time customers' repaid lenders successfully. In other words, 9 out of ten times, the system worked as intended.
- The report only examines online - and potentially unregulated - lenders.
Many online lenders are unregulated and thus do not carry any consumer protections. Regulated lenders, on the other hand, must abide by all state and federal laws. Advance America and other members of the Community Financial Services Association (CFSA) must also follow a set of Best Practices, which include strong consumer protections around online lending.
According to the Bureau's most recent complaint data, payday loans account for less than two percent of all complaints, and the vast majority of those are against the unregulated online lenders the Bureau criticizes in this report. By limiting its analysis to online-only lenders, the Bureau is again using selective data to inflate its findings.
- A review of the CFPB's previous research underscores how the Bureau is building new short-term lending regulations on a shaky foundation.
Rick Hackett, the former director of the CFPB's short-term lending division, recently 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" - instances in which borrowers paid more in fees than they borrowed - by 50 percent.
Earlier research suffers from similar, selective biases. 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, repeat borrowers while undercounting "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 CFPB refuses to subject its research to standard quality controls, including peer-review.
CFPB has exempted its own research from government research standards under the Information Quality Act. According to the Bureau, the research is not intended to inform the development of policy, and does not have consequences for specific products, and therefore is not subject to IQA. Yet, the Bureau has repeatedly stated that its research on short-term lending will form the basis of forthcoming rules.