The Supreme Court recently asked U.S. Solicitor General Donald Verrilli to weigh in on a case involving the preemption of state interest rate caps, a move the Wall Street Journal suggests could carry broad implications for the Consumer Financial Protection Bureau's (CFPB) payday lending regulations.
The case, which involves whether debt buyer Midland Funding LLC should get the same pre-emption from state interest rate caps as the bank from which it purchased the debt, comes less than a week after CFPB Director Richard Cordray argued before the House Financial Services Committee that the Bureau is "not preempting state law."
But as lawmakers noted, by mandating more stringent regulations than those currently enacted in certain states, the Bureau is effectively overriding individual state laws in favor of sweeping federal regulations.
For example, the proposed 60-day "cooling-off" period between loans would overrule law in Rep. Mick Mulvaney's home state of South Carolina, which mandates a two-day waiting period. "Let's be clear and be honest: You do intend to preempt state law in certain areas," Rep. Mulvaney (R-SC) told Director Cordray.
NYT Shows Rules Will Skew Interconnected Marketplace to Consumers' Detriment
At their core, the CFPB's short-term lending regulations will do nothing to ease the challenges faced by consumers with urgent financial needs. In addition to undermining effective state regulations, the rules will eliminate a valued credit option and drive consumers to more expensive and less regulated alternatives, such as some online loans and bank overdraft and line of credit programs.
Consumers carefully weigh their credit options, considering their credit needs, obligations, and lenders' terms, convenience and reliability, among other factors. More than nine in ten borrowers agree that payday loans can be a sensible decision when faced with unexpected expenses, according to a new survey from the Tarrance Group. This simple reality, however, seems still lost on the Bureau. The CFPB continues to view payday loans in a vacuum, subjecting nonbank short-term lenders to arbitrary and complicated rules while ignoring comparable bank products.
After all, what happens to consumers when overly strict regulations eliminate a preferred credit option and thus bolster so-called better alternatives - as defined not by those who use them but by Washington "elites"? Consumers pay the consequences.
As a recent story in the New York Times explored, these bank programs, including overdraft and line of credit programs, are laden with expensive fees and long-term consequences. One bank's credit line, for example, "carries a 15 percent interest rate, a $10 fee for every time customers overdraw their account, a $30 annual fee and $25 late fees," while another's lends to customers in $100 increments at 18.25 percent interest even if they are only short by a few dollars. Moreover, the terms are often opaque, confusing and hidden in complicated checking account agreements - a sharp contrast to the simplicity and transparency of a payday loan, with its one-time, flat fee, typically $15 per $100 borrowed.
Instead of picking winners and losers in the marketplace and leaving consumers fewer options, the CFPB should level the financial playing field by regulating products that consumers use interchangeably in a similar manner.