The hysteria in Washington around the release of the Consumer Financial Protection Bureau’s final short-term, small-dollar loan rule has been immense as of late. With the final rule issued late last week, it largely lived up to the hype.
The content of a federal rulemaking, while devastating for the payday loan industry, wasn’t all that was at stake. The CFPB’s Director Richard Cordray has long been expected to run for Governor of Ohio once the rule was finalized. With reports flowing in that Cordray plans to make the announcement any day now, the speculation is well-founded.
The biggest dark horse, however, came from an unlikely source. The national bank regulator, the Office of the Comptroller of the Currency, rescinded regulatory guidance that made it more difficult for banks to offer deposit advance, a payday loan-like product, only hours after the CFPB released their rule. This sent those who follow financial regulation into a tail spin.
With all of that in mind, let’s start from the beginning.
The final small-dollar rule is largely as predicted, with a few caveats. The final rule is applied only to shorter-term loans, exempting longer-term loans for further study. The rule also exempts community banks, credit unions and any other lenders that have less than 10 percent of their business in the loans.
But the crux of the final rule remains the same. It will force lenders to conduct an “ability to repay” assessment of customers to ensure that borrowers can repay the loans and fees within two weeks, it will cap the amount of times a customer can roll over a loan at three, and it will prevent lenders from charging a customer’s checking account after two unsuccessful attempts.
These restrictions may seem well-intended, but as The Wall Street Journal editorial board reports, “they in effect allow loans only to unprofitable customers with good credit and prevent lenders from taking recourse against borrowers who don’t pay their bills.”
This makes the impact of the rule devastating. The CFPB’s own impact analysis found that the rule would reduce industry revenue by approximately 75 percent. This is in essence a death warrant to at least three-quarters of the 20,000 payday loan shops that service some 12 million Americans annually.
Eliminating the already limited choices of vulnerable consumers will do more harm than good. There are multiple surveys confirming that the users of payday loans widely approve of the option. As a CEI study by Hilary Miller found, “only a small minority of payday borrowers report difficulty in repaying their loans, and the satisfaction rate is greater than 90 percent.”
It is not even certain whether the rule is constitutional. The CFPB was explicitly prevented from imposing interest rate caps or regulating consumer credit prices by the Dodd-Frank Act. Yet they have found a work-around by imposing the “ability to repay” standard on certain thresholds of loans, creating a de facto usury cap. In response, industry groups will likely file a lawsuit in order to keep the regulation from going into effect.
Another option lies with the fate of the Bureau’s Director, Richard Cordray. If Cordray does indeed run for Governor of Ohio, a newly appointed Trump Director will take over in July 2018. Theoretically, a new Director could effectively block or change the rule before it ever goes into effect.
But Congress should not rely on such action. Now that the CFPB has issued the final rule, Republicans should waste no time in using the Congressional Review Act to overturn this devastating regulation. Despite their busy calendar, it is imperative that Congress can marshal a rollback to protect consumers from a rule that will disproportionately harm the most vulnerable in society.
Out of all the bad news from Thursday, there was one silver lining. The Office of the Comptroller of the Currency rescinded an Obama-era guidance document that made it more difficult for national banks to offer deposit advance, a payday loan-like product that extends lines of credit offered associated with an existing account.
In 2013, both the OCC and the Federal Deposit Insurance Corporation issued strict guidelines for deposit advance, which effectively eliminated the product. According to Richard Hunt, the President and CEO of the Consumer Bankers Association, the products were incredibly successful prior to their outlaw: “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.”
As I argued in a blog post earlier this month, instead of issuing a rule that takes away options from consumers, we should be providing them with more options. A lack of alternative choices is what drives most people to payday loans to start with and increasing competition will drive down costs and foster better industry practices and innovation.
The OCC seems to agree, as per their document: “As a practical matter, consumers who would prefer to rely on banks and thrifts for these products may be forced to rely on less regulated lenders and be exposed to the risk of consumer harm and expense.”
The OCC’s residence is a step in the right direction, even if the CFPB’s rule is a leap in the wrong one. By removing barriers, as opposed to erecting them, we can bring more competition into the small-dollar loan market. Unfortunately, the CFPB’s payday loan rule makes this much harder, destroying large swaths of an already hampered industry. Congress must pursue the Congressional Review Act to overturn it.