If the Payday Lending Rule Stays, Ability-to-Repay Does, Too

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On its face, the Consumer Financial Protection Bureau’s (CFPB) payday loan rule doesn’t seem to be an issue for anyone but, well, payday lenders. The final rule, which was issued in October last year, carved out the three largest constituencies that would have opposed such a regulation: community banks, credit unions, and longer-term installment lenders.

As a result, there has been sparse industry resistance to the rule. Recognized financial institutions that hold great sway on Capitol Hill have barely raised a finger. Some simply don’t want to defend payday industry, who are unfairly labeled as “predatory lenders.” Others may even be opposed to the competition that payday lenders bring against their own business.

But many in the financial services industry simply seem to believe that because the rule doesn’t impact them, it’s not worth fighting. That is shortsighted. While the CFPB has excluded certain groups this time around, there is no reason to believe that the agency won’t impose the same burdensome regulations on other institutions in the future. A Trump-appointed director may be able to prevent this now, but there’s nothing stopping a new director down the road.

Establishing a precedent for the kind of ability-to-repay (ATR) requirements imposed by the payday loan rule will ensure that other products are regulated in a similar manner in the future. Out of all possible products, the ATR requirement is not appropriate for small dollar loans. In fact, the entire point of taking out such a loan is that you’re in a financial emergency and cannot access any other form of credit. If consumers had the ability to repay, they wouldn’t patronize payday lenders in the first place, but instead charge their credit card or dip into their savings. Small dollar loans are valuable because they are one of the only sources of credit for marginal borrowers.

On the other side of the lending spectrum, home mortgages have also been impacted. One of the CFPB’s first actions when it was established in 2010 was to issue the Qualified Mortgage rule, which imposed ATR requirements. Many community bankers and credit unions now report that they can no longer lend to borrowers with stellar credit whom they have known for many years, with 16 percent claiming they have stopped or are planning to stop making mortgages as a result of the new regulations.

The ATR standard provides a proscriptive, bureaucratic approach for how loans should be underwritten. This turns a historically specialized and inherently subjective practice into one that enshrines the preferences of government administrators. But these decisions should be negotiated between buyer and seller, who each know their own financial health and needs better than any bureaucrat in Washington. Yet, the CFPB and their supporters largely view the ability-to-repay requirement as the “gold standard.” It’s only a matter of time before it is proposed for other products.

Take the longer-term installment lenders, for example. The final payday loan rule likely exempted them to soften political resistance. The CFPB claimed it was exempting these loans for “further study.” In other words, the Bureau might eventually regulate these lenders in a similar way, as soon as it finds an opportunity.

Proscriptive ability-to-repay requirements are an affront to the business of lending. All kinds of lenders should oppose these rules, not just those directly involved.