Congress must heel rogue financial watchdog

The Consumer Financial Protection Bureau (CFPB) released a new rule focusing on alleged “debt traps” caused by payday loans.

It is hard to know exactly what is in this 1,590-page rule, but it includes a “Full Payment Test” requiring lenders to “determine whether the borrower can pay the loan payments and still meet basic living expenses and major financial obligations both during the loan and for 30 days after.” 

{mosads}Will consumers who need a loan to cover basic living expenses until their financial condition improves now be denied a hand up? If so, this rule is disastrous for the very people it allegedly protects.

How can such an abusive rule emerge? Simple. The CFPB wrote this rule based mostly on feelings, beliefs and political aspirations — not on evidence.

The truth, which the CFPB has at its disposal, is that despite the politically hyped stigma surrounding the payday loan industry, it serves 12 million low-income Americans annually who do not have better credit options. 

Before becoming a Senator, Elizabeth Warren (D-Mass.) testified that the CFPB is designed to be “a data-driven agency by making research and market analysis core to all of its work.” Thus, every CFPB rule should adhere to facts.

According to the bureau’s own research, this payday loan rule will deny credit to low-income consumers. In their June 2016 report, the bureau predicted, “Payday loan volume and revenues would decline between 60% and 82%” because of this rule.

Still, without empirical research to support the claim, the bureau “believes that covered short-terms loans would still be available in States that allow them to consumers facing a truly short-term need for credit.” 

Really? How do we know that consumers who face a short-term need for credit will still get it if the rule profoundly affects the payday loan industry?

Drastically shrinking or perhaps even eliminating the payday lending market will cause consumers with little or no access to much-needed credit to go elsewhere — perhaps to illegal loan sharks. How are people better off with even fewer credit options? 

Consider the tough, life-impacting decisions affected consumers must make if the CFPB rule eliminates credit provided by payday loans.

Perhaps people will delay going to the doctor, visiting the dentist or taking a pet to the veterinarian. Perhaps they will not buy needed school supplies for their children. Perhaps they will defer regular maintenance (or repairs) to their home or vehicle. Perhaps they will bounce a check to pay a utility bill. Outcomes of life decisions like these will cause lingering harm.

If consumers had better alternatives, they would be using them. Consumers are smart — they know their financial situation.

When the rule was proposed, the bureau ran a “Tell Your Story” initiative to solicit comments from consumers. Through a Freedom of Information Act (FOIA) request, the Community Financial Services Association of America (CFSA) obtained the results.

Over a five-year period, the CPFB received 12,308 comments praising the payday loan industry and only 240 critical comments from payday loan users. It is disturbing that the CFPB has promulgated this scurrilous rule denying millions of people access to credit when users of the product overwhelmingly support it. 

Throughout the bureau’s 1,300-plus-page proposed rule preceding the final rule, the CFPB acknowledged persistent research gaps concerning consumer credit. In science, the gap between beliefs and current research results drives further research.

{mosads}Before instituting a regulation with wretched outcomes for many borrowers, the bureau should build a mosaic of transparent research results. These should include both CFPB and independent findings.

Some consumers choose to take out payday loans; the vast majority do not. Those who choose them do so under simple-to-understand terms. They also know that payday loans provide, in most instances, the last source of legal credit.

In addition, they know that their financial situation dictates that these loans take time to repay. Why prohibit some of the consumers who need credit the most from making their own credit decisions?

Congress has not granted the CFPB authority to remove, or even materially reduce, access to consumer credit. It should immediately heel the rogue watchdog that is harming the very people it is supposed to protect. 

Thomas Miller is a professor of finance at Mississippi State University and a senior affiliated scholar with the Mercatus Center at George Mason University.