President Trump hasn’t fired Consumer Financial Protection Bureau (CFPB) director Richard Cordray despite ample cause. Yet the economic costs continue to compound—now with the bureau’s payday-loan rule that seeks to put the industry out of business.
The CFPB on Thursday finalized its rule regulating the pay-day market. These short-term loans are typically for less than $500 and carry fees of $15 per $100 borrowed. Many low-income Americans use them to pay for emergencies or bills that are due between paychecks.
Payday lending has been regulated by the states, and 15 impose restrictions that in effect ban the business. House Democrats in 2009 proposed sweeping legislation to regulate the industry that never got traction. Dodd-Frank directs the CFPB to supervise pay-day lenders but doesn’t include express rule-making authority. But Mr. Cordray has demonstrated time and again that he doesn’t see the law as a limit on his discretion.
The new rule requires lenders to conduct a “full-payment” test to ensure that borrowers can repay the loans and fees within two weeks while meeting other major financial obligations. Short-term loans that customers can roll over are capped at three, and lenders are barred from debiting customer checking accounts after two unsuccessful attempts at collection.
These restrictions may seem well-intended, but they in effect allow loans only to unprofitable customers with good credit and prevent lenders from taking recourse against borrowers who don’t pay their bills. As a result, many Americans will lose access to an important source of emergency cash.
Mr. Cordray is outraged that “lenders actually prefer customers who will re-borrow repeatedly rather than simply repaying the loan when it comes due.” Yet this is how credit cards make money too.
While he portrays borrowers as unwary victims, most understand their options. A 2009 study by George Washington University found that about half of borrowers surveyed had considered other credit alternatives, and more than 80% lacked funds in their bank accounts to cover expenses. Payday loans can prevent borrowers from incurring more expensive overdraft fees.
A New York Federal Reserve study in February 2008 examined how households in two states fared after they banned payday loans. Compared with households in states where payday lending is allowed, the study found that Georgia and North Carolina households had “bounced more checks, complained more to the Federal Trade Commission about lenders and debt collectors, and filed for Chapter 7 bankruptcy protection at a higher rate.” The researchers concluded that payday credit is preferable to alternatives such as bounced-check protection from banks or loans from pawnshops.
The final rule doesn’t cover longer term loans that were included in its proposal because reviewing all of the public comments could have required several more months. Mr. Cordray appears to have truncated the regulatory process in anticipation of leaving to run for Governor of Ohio, though we hear he may now have second thoughts.
Mr. Trump may be loath to make Mr. Cordray a progressive martyr by firing him. But his reluctance has allowed the director to do significant economic harm with the pay-day rule and ban on arbitration class-action waivers, which Senate Republicans are unlikely to overturn under the Congressional Review Act.
The recent rule-makings give the President more cause to dismiss the director, and a D.C. Circuit Court of Appeals panel has held that he can be removed at will. Mr. Cordray has appealed the panel’s ruling to the full circuit. If Mr. Cordray doesn’t now leave on his own, will the President have the will to fire him?