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Overcoming Regulatory Barriers to Serving the Underserved

How many people are pushed to the fringes of the banking system by Dodd-Frank regulations? How will the CFPB's new regulations prevent the underserved from accessing financial services? Iain Murray discussed these issues and more as the keynote speaker at the Financial Service Centers of America Annual Conference and Exposition held October 5, 2017 in Las Vegas, Nevada. Read an excerpt below or view his full remarks here

Our research tells us that the overall burden of regulation on the American economy now reaches $1.9 trillion annually. That’s almost $15,000 per household, and a quarter of the average household expenditure budget of $56,000. We spend more per household on regulation that we do on health care, food, transportation, and entertainment.

Those costs translate into real problems. Households face hardship. Jobs are not created. Businesses are not started.

Worse, jobs can be eliminated, services closed off, and businesses shuttered when regulation increases – leading to yet more hardship for the people affected. You know this, because you are all under threat from the regulation the Consumer Financial Protection Bureau finalized yesterday.

It’s all the more ridiculous when we consider the good work you do. As I mentioned before, I used to find it hard to get cash when I needed it. For a variety of reasons, the number of people underserved by traditional banking arrangements has increased since then – about 80 million people, as Joanne noted.

One important factor besides immigration and unemployment was the Dodd-Frank Act of 2010. According to work by Todd Zywicki and colleagues at George Mason University, up to a million people may have been pushed to the fringes of the banking system by regulations introduced by Dodd-Frank. The law increased fees and reduced eligibility for services. Banks drove away marginal customers. Such simple features as checks and overdrafts became too expensive for them.

It was entrepreneurs like you who filled the void. Financial Service Centers have become the go-to places for the underbanked to handle their financial needs. Nor is it just the presence of ready cash – I am sure you all know about  Lisa Servon, a professor of city planning at the University of Pennsylvania, who wrote in her book “The Unbanking of America,” about how financial service centers fill a vital community and human need.

People who use your businesses like them because they get a sympathetic ear and find a willingness to work with them to meet their individual needs. She discovered this after working for four months as a teller at a center in the South Bronx. It surprised her because she had the typical impression that your businesses are predatory.

Of course, the academic literature also shows this is completely untrue. As a study my organization published last year shows, academics who have researched the effects of payday loans and other similar services have found that their effects on consumer welfare are at worst neutral and probably positive overall. You are doing good work, and you are helping people. We *know* this – anecdotal and empirical evidence supports it.

And yet, as you know, your very existence is under regulatory threat. The CFPB itself admits that its new rule could wipe out 75% of loan value.

The CFPB's new rule will do more to *stop* people from getting urgently needed funds than it will to *help* consumers avoid prolonged debt. Imposing a new 'ability to repay' standard is wholly inappropriate for small-dollar loans, because if borrowers truly had an immediate 'ability to repay,' they would most likely use a credit card instead of getting a loan.

The CFPB is simply attempting to circumvent Congress. Dodd-Frank bars the CFPB from capping interest rates on loans. Lawmakers of both parties viewed that as a state rather than federal decision.

And as you know, Consumers have said in multiple surveys that they were satisfied with their loan products, and they reported repayment difficulties only in a small minority of cases. For those minority of cases, the CFPB could simply have issued rules improving disclosure, rather than limiting options for lower-income consumers and those who need cash in emergency circumstances.

How could this happen? How can the CFPB issue such a rule, so harmful to low-income men and women?

View the full text of the keynote.