As we wrote in the letter, the original small-dollar loan rule, which was finalized in 2017 by then-director Richard Cordray, is one of the most detrimental regulations ever issued by the bureau. While it was put forward under the guise of consumer protection, the rule would have stripped valued financial services away from some of the most vulnerable people in society.
For example, payday loan volume and revenues were predicted to decline between 60 and 82 percent under the rule, meaning that billions of dollars of consumer credit would be wiped out. But eliminating the supply of credit does not eliminate its demand. Instead, the 12 million Americans who take out a payday loan each year may lose access to legitimate credit altogether, perhaps even forcing them into the hands of black market loan sharks.
The “ability to repay” standard is also plainly inappropriate for small-dollar loans. If borrowers had an immediate ability to repay—including meeting basic living expenses without needing to re-borrow over the ensuing month—they would have no need to patronize payday lenders in the first place. Instead, they would access traditional sources of credit, such as their own savings or credit cards. As Thomas W. Miller, Jr. a professor of finance at Mississippi State University, has written, “Though [the ATR requirement] may sound sensible, basic living expenses are exactly what many payday loan borrowers seek to cover—meaning the rule denies them the option until their financial situation improves.”
The original rule was also entirely devoid of evidence. To start with, the research the bureau conducted to justify the rule was deeply flawed. For example, it did not base its rulemaking on the consumer complaints portal or any empirical survey data concerning consumer sentiment. It also failed to design an appropriate and representative study of the small-dollar loan market, while the background research that the bureau did complete failed to study whether protracted payday loan borrowing actually reduced consumer welfare. Further, the final rule refused to consider the wealth of research that refuted its empirical claims.
The greatest problem with the 2017 rule, however, was its failure to demonstrate the behavioral economics claims made in favor of regulation. Notably, the ability to repay requirement was based off a faulty behavioral economics premise that claimed that consumers could not accurately predict how long it will take to pay off a single loan, which leads them to roll over their loans more than they otherwise would.
The bureau largely relied on this theory to justify the payday loan rule, but provided scant empirical evidence to support it. In fact, it relied almost exclusively upon one 2011 study by Columbia Law School professor Ronald Mann. The problem, however, is that the Mann study itself contradicts the claims of the bureau. Prof. Mann even went so far as to criticize the bureau’s use of his research in a comment letter to the agency, stating that it was “frustrating” that the CFPB’s summary of his work was “so inaccurate and misleading,” torturing the analysis to the extent that it was “unrecognizable.”
Fortunately, Director Kraninger announced in February 2019 a new proposal to rescind the ability to repay portion of the payday loan rule. This is well justified—and we applaud the bureau’s decision to preserve consumer choice and access to credit.
Rescinding the payday loan rule is a win for consumers and business alike, allowing individuals, not Washington bureaucrats, to decide what is best for themselves.