CFPB Asks For Advice; Prepares to Ignore It

A customer walks out of a Check Masters payday lending store Monday, Dec. 28, 2009, in Seattle. A new law regulating payday lenders that takes effect Jan. 1, 2010, will limit the size and numbers of loans people can make in Washington state.
AP Photo/Elaine Thompson

To its credit, when the unconstitutional Consumer Financial Protection Bureau was gathering information for the Small Dollar Lending Rule it proposed in June, it reached out to users.

The bureau’s Tell Your Story website collected more than 12,000 comments from people who have received small-dollar loans. But instead of complaints about unfair loan terms or strong-arm tactics, 98 percent of the customers praised small-dollar lending.

The agency received only 240 so-called negative responses, and 84 of them dealt with complaints about other industries and were misclassified and 42 dealt with complaints directed at payday lending scams, which are perpetrated by unregulated lenders unaffected by the rule.

Borrowers said small-dollar lenders were everything traditional banks were not. They were straightforward, convenient, easy to use, with understandable processes and fair prices. They kept people off welfare and allowed them to buy Christmas presents for their children, fix their cars and pay their utility bills.

The bureau hid the results – it took a Freedom of Information Act request from the Community Financial Services Association of America to dislodge them – because they wanted to promulgate a far tougher regulation than the industry’s customers would want.

And now it appears the rule the bureau did propose was not tough enough for some people. Last week, attorneys general from seven states and the District of Columbia urged the bureau to strengthen the regulation because those states have passed laws that effectively banished consumer lending, and they don’t want to see it come back.

The rule, proposed in June and set to take effect 15 months after it is finalized probably early next year, does not limit interest rates on consumer loans because the bureau is not allowed to. Rather, it requires lenders to ensure their customers are able to repay before they can make loans. In some cases, the reporting requirements would make it easier to get a credit card with a $10,000 limit than to borrow $100 online or from a storefront consumer lender.

Under the rule, which received more than 1 million comments – by far the most in the Consumer Financial Protection Bureau’s five years of rulemaking – lenders must conduct a full-fledged analysis of their customers’ finances, regardless of the loan amount. They must determine not only if borrowers can repay, but whether they then will have enough money to pay all their bills and normal living expenses afterward. Borrowers would have to submit a written statement of their income, housing expenses, outstanding debt and child support, as well as obtain a national credit report.

Most lenders say they cannot profitably offer their services if this goes through.

Various states, mostly on the East Coast, thought they already had eliminated consumer lenders when they passed laws that limit loan rates so severely lenders cannot make a profit.

But the attorneys general from those states, which included Pennsylvania and New York, told the agency they worry the rule doesn’t sufficiently acknowledge their prerogative to limit rates, and they worry putting the emphasis on ability to repay will allow lenders to move back in. They worry about the provision that allows lenders to extend six loans per year to each individual before the ability-to-repay requirement kicks in.

It’s not just “Do you still beat your wife?” but “Do you still beat your wife enough?”

The attorneys generals’ letter came on the last day of the comment period, and it’s unclear what the agency is prepared to do to address its concerns.

But the fact is there’s no fixing the Small-Dollar Lending Rule. Not when the workforce participation rate is 62.9 percent. Not when a two-term president will leave office next January after becoming the first president in American history never to have presided over even 3 percent growth. Not when the people hurt most will be the people who have the least.

People making $200,000 per year don’t take out many consumer loans. It’s the $40,000-and-less crowd, those recently separated from their spouses and, disproportionately the disabled. African-Americans, those with less than a college degree and renters also are frequent customers.

States brag that when they cut out consumer lending, barely 1 in 20 customers turn to alternatives such as online lending. Instead, they borrow from friends and family, get a loan from a bank or credit union, pawn or sell possessions or delay paying some bills. None of those alternatives are any more virtuous or any more effective at putting customers on sound financial ground than consumer loans.

Then there’s the basic issue of being judgmental. What difference does it make why people take out loans, how many they take out per year or even whether some get caught in a debt trap? Would borrowing from a bank, delaying payment of bills or letting checks bounce be more favorable financially or in terms of credit?

The fact here is there are customers and companies standing in line to do business with each other. The companies offer a service customers need, and the repayment rates – 90 percent for most loans – make it profitable for the companies as well.

Don’t fix the rule; ditch it. Nobody who needs the loans will be upset, and the people who will be upset never will need these loans or understand why other decent Americans do.