It has been a little less than a year since the Consumer Financial Protection Bureau announced its intentions to examine the institution of small-dollar, short-term lending — of course, with an eye toward new regulations aimed at reining in the worst abuses associated with it.
“Today, we are taking an important step toward ending the debt traps that plague millions of consumers across the country,” CFPB Director Richard Cordray remarked last year at a field hearing on payday lending in Richmond, Virginia. “Too many short-term and longer-term loans are made based on a lender’s ability to collect and not on a borrower’s ability to repay. The proposals we are considering would require lenders to take steps to make sure consumers can pay back their loans. These common sense protections are aimed at ensuring that consumers have access to credit that helps, not harms, them.”
The move, as is the case with much of what the CFPB does when it talks about its work in the context of protecting consumers, has been highly controversial.
Proponents of additionally stringent regulation claim that unsuspecting consumers become trapped in years-long cycles of escalating debts, with interest compounding upon interest trapping those least able to pay with a neverending cycle of debt. Moreover, the supporters of regulatory reform note that the CFPB is not looking to ban or eliminate short-term borrowing. Instead, it is merely looking to ensure that underwriters make reasonable decisions about how and when consumers can repay and place reasonable limits on how often loans can be extended or taken out in the first place.
Opponents of additional stringent regulations take a rather different view of the situation.
They note the CFPB has already ruled all short-term, small-dollar lenders as villains by virtue of their line of work and does not distinguish between good and bad actors. All short-term lenders, they note, will charge higher rates because they lend to deeply subprime borrowers — that is how risk management works; high-interest rates are not proof positive of predatory intentions. Moreover, they note that the CFPB is pretty obviously trying to rid the world of payday lending — both through regulatory pressure and by boosting small banks and credit unions as their natural replacements in the marketplace. But, of course, it wants to regulate how much money can be made by those whom they feel should be lending to those subprime borrowers, which isn’t likely to come even remotely close to aligning with the risk that they are undertaking by extending those loans in the first place.
Neither argument acknowledges two very important things.
First, these borrowers obviously need the money and have no other alternative — since, if they did, they’d pursue it. So, shutting off access — either by regulation or by making them totally unprofitable for anyone to extend — only pushes those in need to loan sharks or worse.
And second, there is a way for all of the regulatory boxes to be checked — ensuring that consumers aren’t overextending themselves and that providers behave themselves. It’s called software, it exists and more than a dozen states use it.
But we digress. Why let the facts get in the way of a good regulatory rumble?!
The very heated debate, as we’ve portrayed it, between the two camps has raged back and forth throughout 2015 and, if recent congressional action is any indication, looks poised to carry on with increasing intensity and, quite possibly, acrimony for much of 2016.
What makes us say that?
What’s In A Name? When It Comes To A Congressional Hearing, Possibly Quite A Lot
Within a minute of it starting, an outside observer could probably have guessed that the meeting between CFPB officials and the members of the House Financial Services Committee’s Financial Institutions and Consumer Credit subcommittee was not going to be a friendly one.
Sometimes, the name says it all, and this was one of those times.
“The CFPB’s Assault on Access to Credit and Trampling of State and Tribal Sovereignty” was the official title for that meeting.
We’re totally serious.
And the congressmen in attendance were, unsurprisingly, unimpressed by the testimony of David Silberman, acting deputy director of the CFPB, stating that the CFPB is working in tandem with state and tribal regulations on payday loaning, not contrary to them.
“What we are doing is establishing a federal law, and the states will continue to be able to enforce their laws and their specific requirements, in addition to the federal floor that implements the obligation that’s been placed on the bureau.”
Subcommittee Chair Randy Neugebauer (R-TX) noted that the legislatures of 35 states have already enacted small-dollar lending laws of varying protections, including and up to outright bans.
The remaining 15 states, either by declining regulation or regulating through interest rates, had addressed the issue.
“Crucially, and contrary to the bureau’s appeal to a greater moral obligation, no state lacks the authority to enact, repeal or amend its own payday and lending laws in order to provide greater protections to its consumers,” Neugebauer noted.
Others, like David Scott (D-GA), were a little more passionate about the harms the CFPB might be bringing to the consumers they seek to protect, who, through the new regulations, could find themselves ineligible for a loan they need.
“Why are you trying to destroy small-dollar loans? We have 75 percent of American people living paycheck to paycheck,” Scott noted of the problems with the CFPB’s plans.
The problems created for temporary loan borrowers were something of a recurring theme during the hearing.
“Conversations about consumer credit often reflect utopian visions of the world. Many people imagine that a few tweaks to regulations can ensure that everyone has the money needed to feed, clothe and shelter the family,” Thomas Miller, Jr., visiting scholar at the Mercatus Center at George Mason University, said in testifying before the committee. “According to this logic, if households need to borrow money, lenders will treat them fairly, charge little and always be repaid. But no matter how hard we all try, a well-crafted regulatory framework cannot bring us this utopia. Deliberate, empirically informed regulators, however, can do much to preserve and expand consumers’ options along the nonbank-supplied, small-dollar loan landscape.”
In his remarks, Silberman noted that the CFPB was drawn to the payday lending landscape by the sheer volume of consumer complaints and the empirical evidence that it was harming consumers more often than it was helping them out of trouble.
Silberman also noted the bureau is still in the “early stages” of rulemaking and is committed to reviewing comments from businesses, consumers and others that were submitted last year.
“We’re listening to feedback, then we’ll put out another outline and start another comment session,” he said.
And when the bureau does issue its proposed regulations, both the public and the industry will be invited to submit written comments.
Those rules are not out yet, though many expect to see at least a draft rendition by the end of this month (February) or early March.
Expect more high-clash congressional hearings to follow.
We’ll be there!