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By Gregory T. Angelo
January 22, 2018
Under new leadership, the Consumer Financial Protection Bureau (CFPB) recently announced plans to reconsider the payday rule, which opens the door to repealing the burdensome regulation outright. A full repeal would be a massive win for American consumers.
As it stands now, the payday lending process is smooth and transparent. Borrowers generally understand the terms of their loan agreement, and they can obtain much-needed credit efficiently without being slowed by government red tape.
But the CFPB’s payday rule would tie up payday lending by imposing excessive standards to slow down the transaction process. The mandate would require payday lenders to verify a borrower’s income, major financial obligations, and borrowing history before issuing a short-term loan. The agency has already issued a long list of so-called affordability criteria to lengthen the payday lending process and, eventually, decrease the number of transactions taking place.
For years, CFPB regulators — namely former Director Richard Cordray — hoped to undermine industry groups and score political points with liberal activists by scapegoating payday lenders. The burdensome payday rule was formed on the basis of the CFPB’s disingenuous “debt-trap” narrative. Arguing that short-term loans are predatory due to inordinately high interest rates, CFPB regulators hoped to rein in short-term loan agreements “carry(ing) an average annual interest rate of over 300%.”
But it’s a misleading argument. An average two-week payday loan of $100 carries a $15 finance fee, which the CFPB equates to “an annual percentage rate (APR) of almost 400%.” Cut through the rhetoric, and there’s nothing nefarious about a $15 fee. Not only do payday borrowers often boast risky credit histories, but the transaction itself brings a much quicker turnaround than traditional bank loans.
Moreover, the “debt-trap” narrative doesn’t hold up to empirical scrutiny. A 2009 study from Clemson University found that neither the legality of payday lending nor an increase in the number of loan stores led to higher rates of bankruptcies. Professor Michael Maloney, who co-authored the Clemson study, concluded that payday loans “appear to increase the welfare of consumers by enabling them to survive unexpected expenses or interruptions in income.” This especially applies to low-income Americans, who often need short-term loans to pay rent or make a car payment.
According to BankRate.com research, 57 percent of Americans don’t have enough cash to cover an unexpected $500 expense. Their dire financial situation underscores the need for payday loans, which guarantee quick access to credit when other loans won’t.
White House Budget Director Mick Mulvaney, the acting CFPB director, is right to stand up for American consumers. And he’s right to rein in the agency’s regulatory powers after years of mismanagement.
Under Cordray, the CFPB ballooned in size and scope. In its first year of existence, the agency employed 58 people. Last year, and the agency had nearly 1,700 employees — a roughly 2,750 percent increase in less than a decade.
As you might imagine, the CFPB’s expansion has led to even more judicious rulemaking — all under a cloud of allegations of discrimination based on race, age, gender, and sexual orientation. In one recent year, the total financial impact of regulations and lost revenue to credit unions surpassed $7 billion.
If there is indeed a Washington swamp, then the CFPB is its poster child. Director Mulvaney should drain it posthaste.