On small-dollar loans, federal agency peddles fiction

Recently, Consumer Financial Protection Bureau (CFPB) Director Richard Cordray falsely claimed in testimony before the House Financial Services Committee that people in the 14 U.S. states that do not provide small-dollar lending “seem to get by just fine.” Director Cordray’s statement, and the CFPB’s own actions, again prove that the bureau prefers its ideologically-driven activist agenda to facts.

Independent data and academic research have repeatedly disproven the myth that consumers living in states without small-dollar lending are better off. In fact, data and research have repeatedly shown that American consumers value their access to small-dollar loans and face worse financial prospects when small-dollar loans are not available. 

{mosads}A 2007 staff study published by the Federal Reserve Bank of New York found that in certain states that banned small-dollar loans, consumers “bounced more checks, complained more about lenders and debt collectors, and have filed for Chapter 7… bankruptcy at a higher rate.”

A separate study by a senior economist at the Federal Reserve Bank of Kansas City found that limiting access to small-dollar loans leaves consumers with fewer credit options, can hurt consumers’ credit standings and leads to consumers settling for inferior products. The study noted that small-dollar loans can be a sensible and less costly credit option for underserved and underbanked communities. 

Just last month, a survey of small-dollar loan customers conducted by KRC Research found that a new small-dollar lending ban in South Dakota will severely restrict customers’ access to small-dollar credit. In fact, 66 percent of respondents believe they will be negatively affected by the law.

The data also found that more than half of the customers surveyed who were unable to obtain small-dollar loans were forced to pay late fees or not pay their bills at all. A significant proportion of these customers also bounced checks or used overdraft protection through their bank or credit union, mirroring earlier findings.

The research shows that limiting access to small-dollar loans can and will have a disastrous impact on individuals’ financial well-being. Tellingly, the same day Director Cordray made his ill-considered claim that consumers in the states that ban small-dollar loans “seem to get by just fine,” at least 11,600 consumers in the 14 states without small-dollar loans went online to seek such loans, according to data my organization, the Community Financial Services Association of America, received directly from the non-prime credit bureau Clarity Services Inc.

Further data from this company show that in the fourth quarter of 2016, an estimated 2.7 million small-dollar loan applications were submitted online from residents in these 14 states.

Even the CFPB itself repudiates Director Cordray’s claim. Nearly one-third of consumer complaints that the CFPB has received into its complaint portal about small-dollar lending come from residents of the 14 states without legal, licensed lending, thus proving that bans do not remove small-dollar loans from the marketplace.

In fact, all these bans do is remove state regulations and consumer protections. The CFPB wants to eliminate small-dollar lending nationwide without addressing the issue of illegal, unlicensed lenders at all. 

The CFPB and its allies ignore research and data that show the consequence of their agenda on consumers who are in legitimate need of access to credit. Cordray’s claim parallels Pew Advocacy’s recent survey that attempts to delegitimize small-dollar loans through skewed and flawed methodology.

The bureau attempts to peddle its agenda without any understanding of, or attention to, the data, marketplace, financial options, or concerns of consumers who use small-dollar loans. While they argue that borrowers have access to an array of financial products, such as those offered by banks or credit unions, the reality is that consumers are largely shut out of the traditional financial system. 

The CFPB and its allies could work constructively to find ways to protect consumers while preserving options and access to credit. Following the complaint data, for example, they could seek to create a registry of legal and licensed small-dollar lenders to help combat illegal, unlicensed lenders — who make up one-third of its complaints — and protect consumers. This is a measure my organization has supported for years, but which the CFPB and its allies have ignored. 

Instead, they persist in a misguided effort to outlaw the entire small-dollar lending industry. Their ignorance of the facts and efforts to perpetuate the myth that people “seem to get by just fine” when access to small-dollar loans is restricted is a short-sighted and dangerous assumption that has been repeatedly disproven.

Demand for credit will exist whether or not small-dollar loans are available in any given jurisdiction. Removing consumers’ access to legal, licensed small-dollar loans will only exacerbate the financial struggles of millions of Americans.

Dennis Shaul is the chief executive of the Community Financial Services Association of America, a trade organization representing the payday lending industry.

The views expressed by contributors are their own and not the views of The Hill.