Picking Winners and Losers: An Impact Analysis of the CFPB Small Dollar Rule

In this April 3, 2015 photo, an ACE Cash Express outlet is seen on San Mateo Boulevard in Albuquerque, N.M.
AP Photo/Vik Jolly

Yet again, the party that makes noise about helping the poor is stepping up for its big banking friends against the poor.

The Consumer Financial Protection Bureau released its long awaited rule on small-dollar consumer loans on June 2, and it looks as if the 27 million Americans with less-than-perfect credit who rely on consumer loans to meet short-term emergencies will not fare well.

In fact, the rule, as proposed, would fundamentally alter the process by which Americans seek payday, auto title and other consumer loans. The new rule supposedly is designed to protect those who take out consumer loans, but it represents another attempt by government to pick winners and losers in a key market and is more likely to hurt rather than help customers.

Who are those winners and losers?

The Big Winner: So-Called “Consumer Groups”

The rule, in its present form, would represent a big victory for so-called consumer groups, which have advised the Consumer Financial Protection Bureau from the start. They’ve worked so closely, in fact, that, according to Politico, an agency deputy director joked he was “starting to have withdrawal pains” during a three-week pause in rule-making.

Most of the groups’ talking points have ended up in the proposed rule, such as the insistence on measuring loan costs in “annual percentage rate,” which is appropriate for larger and longer-term loans but not for short-term borrowing. It seeks to impose an “ability to repay” process on lenders, which would create a compliance burden that would dwarf that now required for credit card or auto loan underwriting. It talks about preventing a “debt trap” when customers return to lenders for further loans. That’s like calling Apple a “mobile phone trap” because customers get hooked on their cell phones or Uber a “transportation trap” because customers keep calling for rides.

Winner: Cronyism

That deputy director referred to “withdrawal pains” in the email chain with officials from the Center for Responsible Lending. CRL bills itself as a consumer advocacy organization but is funded by Self Help Credit Union, a national credit union with cozy ties to the bureau that happens to offer products that compete directly with payday lenders. The credit union is seeking to have the bureau enshrine its business model and outlaw that of its competitors.

Winner: Large Banks

If short-term credit becomes harder to access, some customers will respond by seeking help from unregulated lenders instead. Others will resurrect the strategic overdraft, where they write checks they know will be insufficient and pay overdraft fees that are higher than the cost of small-dollar loans. Large banks have shown no interest in this market and even have turned down government offers to incentivize this activity. These fees aren’t calculated in this costs of consumer lending because they are regarded as “one time” charges rather than what they are – hidden fees.

Overdraft and non-sufficient funds fees account for more than 60 percent of banks’ revenues from consumer deposit accounts. Indeed, many consumers take out small-dollar loans precisely because they are cheaper than overdraft fees. If payday lenders are regulated out of business, those fees will start flowing toward Democrats’ friends in big banking yet again.

Earlier this year, the Consumer Financial Protection Bureau called overdraft, auto title, payday loans and open-ended credit a “short-term [rulemaking] priority.” But somehow, overdraft fees did not end up on the list. Officials say they’re now “looking closely” at overdraft practices. Don’t hold your breath. This administration has taken care of big banks from day 1, and that will not change as long as windfall profits for those banks hang in the balance.

The Big Loser: The Market

At present, consumers who are underserved by conventional banking have a wide variety of legal, regulated short-term credit options from which to choose – payday loans, installment loans, paycheck advances, title loans, pawn loans and overdraft lines of credit to name a few.

These consumers rely on a robust, competitive market to keep prices down and come up with new products. What would the rule mean to these companies? Jamie Fulmer, senior vice president of Advance America, one of the largest U.S. payday lenders, called the rule “a death sentence,” particularly for smaller lenders.

Loser: Credit Unions, Community Banks

Even credit unions and community banks that agree in principle with the approach find the specifics of this rule troubling. “We fear that we may be reaching the point at which the credit union can no longer provide short-term, small-dollar credit and still be seen as a responsible steward of our members’ capital,” said Keith Sultemeier, president and chief executive of Kinecta Federal Credit Union, said at a Consumer Financial Protection Bureau hearing on the rule.

Loser: Minority Constituencies

Likewise, groups representing minority communities found much to criticize in the proposed rule. The U.S. Hispanic Chamber of Commerce said in a statement the proposed rule “ignores the needs of consumers, reduces access to credit for millions and it harms small businesses and the millions they employ.” The Hispanic Chamber of Commerce said consumer lending is needed so those who use short-term loans responsibly can manage unexpected financial difficulties.

The Native American Financial Services Association, which represents tribes that operate small-dollar loan businesses, said the Consumer Financial Protection Bureau and director Richard Cordray “flagrantly violated their statuary obligation to co-regulate with Native American tribal regulators as explicitly mandated under the Dodd-Frank Act.”

Loser: Consumer Groups?

Even some of the consumer groups that worked with the agency to develop the proposed rule have expressed some dismay. Nick Bourke, who runs Pew Charitable Trust’s small-dollar loan project, said borrowers want three things – lower prices, manageable payments and quick approval – and said the the proposed rule goes “0-for-3” on those matters.

Mike Calhoun of the Center for Responsible Lending claimed that “…the rule contains significant loopholes that leave borrowers at risk.”

These comments, particularly those by Calhoun, could be designed to get the agency to go even tougher with the final rule. The agency says it doesn’t want lenders to succeed when consumers fail. But its new rule seems designed to ensure large banks succeed at the expense of the very customers the rule supposedly seeks to help.