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CFPB Moves to Cut Off Any Loans to People with Bad Credit

The Consumer Financial Protection Bureau’s distaste for payday loans is well known (and a final rule on them is due June 2). It has also recently turned its attention on another major source of short-term credit, overdraft protection. This week it has released a study that suggests it will look to control car title loans.

The common thread between these three financial services is that they are sources of recourse for people who, for whatever reason, find themselves unable to secure more conventional credit in the form of a credit card or personal loan. Such people are often struggling to make ends meet, perhaps working more than one job, and often need access to funds quickly to do things like pay an electricity bill to keep the lights on.

As I mentioned in a recent post on National Review Online, the argument that such people are being exploited by subprime loan companies is not borne out by research:

There are a few customers who have an unrealistic assessment of what they can afford, but research shows that most customers have a realistic expectation of what it will cost and how long it will take them to repay the loan. Vast numbers of people who use payday loans do so without being deceived or preyed on.

What about the harm? Again, the academic literature shows that payday loans are not harmful and may even have a slight general-welfare benefit, as you might expect from something that provides a better option than the certain harms listed above. Indeed the most recent of those papers shows that the supposed “rollover trap” that the Consumer Financial Protection Bureau relies on as its main justification for regulating payday loans at the federal level is not really a trap at all. Most customers recognize that it will take more than the initial period to get out of their problem, and the lenders will only lend again to them if they have shown an ability to repay.

The same is surely true of the car title loan study, which is extremely superficial in its treatment of the data. The study amounts to a mere counting of events, without any attempt to establish whether events like repossession are caused by the terms of the loan or by other circumstances, such as losing the second job.

Some cars will have broken down, so the borrower will not care as much about repossession. Other borrowers will have more than one car and therefore not be as seriously disadvantaged by repossession as those who have just one. And some people will only have a choice between a title loan and selling the car outright. The CFPB does not consider any of these possible circumstances, instead drawing a straight causal line between the terms of the loan and default or repossession.

If the CFPB gets its way (and it usually does), then payday loans, overdraft protection, and car title loans will all be strictly regulated, reducing the options available for the person in dire straits. The result will be more people plunged into financial chaos. If car repossessions fall as a result of these regulations, then house repossessions may well rise as people are unable to pay their mortgages. Utilities will be turned off and renters will be evicted.

So people may have to live on the streets, but at least they aren’t being “exploited” by companies who are willing to lend them money on terms they generally understand and accept.