When the Consumer Financial Protection Bureau finalized a rule regulating payday loans in October last year, I wrote that this could be the end of the road for millions of desperate customers who rely on these loans to get from paycheck to paycheck.
There aren’t many options left for these marginal consumers, as the federal government has sought to regulate away valued financial products over the past decade. For example—while 76 percent of all checking accounts used to be free, only 38 percent remain so today thanks to the Dodd-Frank Act. And while banks and other traditional financial institutions used to offer more competitive kinds of short-term, small-dollar loans, the Obama-era financial regulators effectively prohibited them. Combine this with a sluggish economic recovery since 2008 and you have millions who rely on payday loans to get through the week.
This makes the CFPB’s rule, in many ways, the last straw. If desperate consumers can no longer get a short-term loan from the only game in town, where would they go? It’s not unreasonable to think that they would end up in the hands of black market lenders.
Recently, however, individual states and the federal government itself have been looking at ways to circumvent the CFPB’s rule. In particular, they are seeking to remove restrictions on similar kinds of financial products that could directly compete with payday loans—the type of products that the government has previously regulated away.
Just last week, the state of Florida passed legislation that would expand installment lending—loans of up to $1,000 that are paid back in installments of around 60 to 90 days. While payday loans, which are typically under $500 and due within two weeks, may become increasingly unavailable under new federal rules, states can still expand offerings of longer-term installment loans that are less-harshly regulated at the federal level. Given that most states either prohibit or heavily regulate installment lending, there is ample opportunity for reform to permit consumer access to desperately needed credit.
In Congress, Rep. Trey Hollingsworth (R-IN) recently introduced the Ensuring Quality Unbiased Access to Loans Act. The EQUAL Act would nullify guidance issued by former President Obama’s Federal Deposit Insurance Corporation that effectively prohibited deposit advance products. Deposit advance was a bank’s equivalent of a payday loan—an advance from the bank on a customer’s incoming paycheck. While these loans were relatively expensive, they were about one-third cheaper than the average payday loan. According to Richard Hunt, the President and CEO of the Consumer Bankers Association, the products were incredibly successful prior to their being outlawed: “Deposit advance products were cheaper than payday loans, offered greater transparency, required substantial disclosures and compliance with federal law, received positive feedback from borrowers, and had low default rates.” The EQUAL Act goes further, exempting banks and credit unions from the CFPB’s payday loan rule. Bringing formal financial institutions back into the small dollar loan space is the right response. Competition from banks and credit unions will be much more effective in improving outcomes for consumers than simply banning products that bureaucrats disapprove of.
For its part, the executive branch of government is working on making it easier for payday lenders to partner with banks. The Office of the Comptroller of the Currency recently lifted a prohibition on partnerships between one of the largest payday lending chains, ACE Cash Express, and national banks. An OCC consent order from 2002 restricted the chain from offering payday loans funded by nationally chartered banks, effectively preventing the partnership nationwide.
The CFPB’s payday loan rule will be devastating for desperate consumers who rely on these short-term loans to get by from paycheck to paycheck. But both state and federal governments can work to soften the blow by relaxing restrictions on other kinds of loans that directly compete with payday lending, such as deposit advance products or installment lending. Ultimately, however, the best course of action requires Congress to block the Bureau’s rule using the Congressional Review Act. The CRA gives lawmakers 60 legislative days to overturn the rule with a simple majority vote in both chambers. A rough estimate puts the CRA expiring on April 27th. By using the Congressional Review Act, Congress can preserve vulnerable consumers’ access to credit and protect them from their biggest threat — the Consumer Financial Protection Bureau itself.