The White House Can Save the Small-Dollar Loan Industry
Big things are happening at the Consumer Financial Protection Bureau. Just this week, the Bureau announced that it would reconsider its controversial small-dollar loan rule by undertaking a new rulemaking.
The announcement is certainly encouraging, but there’s a catch, as acting director Mulvaney is potentially limited in what he can achieve. As I have discussed previously, the Bureau must abide by the Administrative Procedure Act in reconsidering the rule, which means it must go through a similar procedure as it did when it promulgated the rule. This could include opening a new public notice-and-comment period, administering economic impact analysis, and consulting with industry and small business, among other actions.
The original rule took the Bureau five years to finalize, and could be a lengthy task for the new leadership to undertake again. The agency also would likely have to provide a thorough case to show that the Bureau’s data or analysis was inadequate in the original rulemaking. For flaws in the Bureau’s analysis, you can check out my latest report: How the Consumer Financial Protection Bureau’s Payday Loan Rule Hurts the Working Poor. Another way this could be achieved would be to outsource the analysis by publically releasing the data that the CFPB has available.
Yet there is a much easier way to kill the payday-lending rule than the arduous task of a new rulemaking—the little known Paperwork Reduction Act.
The PRA was designed to prevent federal agencies from overloading citizens and businesses with paperwork requirements, as the agencies bear no cost for imposing a new record-keeping requirement or reporting mandate. The paperwork reduction analysis is required by the Office of Management and Budget—which Mulvaney also heads—which must approve of each “information collection request” before the agency can enforce it.
As Andrew Grossman and David Rivkin wrote for The Wall Street Journal, the CFPB’s small dollar loan rule likely violates the PRA:
Every single provision of the short-term lending rule is structured around information collection requests subject to the PRA. The rule’s central requirement is that lenders determine a borrower’s ability to repay by demanding financial information from the borrower, verifying it, and then recording the result of various calculations. Each step is its own paperwork burden.
Structuring the entire rule around information collections and paperwork burdens is a sign that careful PRA analysis is required. CEI therefore submitted a formal petition to the Office of Information and Regulatory Affairs, a body within OMB, last week which explored the substantial paperwork violations involved in the rule. For a full account of the PRA violations, you can find our submission here. CEI General Counsel, Sam Kazman, also had a statement on the submission here. A quick summary is below.
First of all, given the vast amount of information collection requirements, it would be expected that the Bureau provided a focused, comprehensive justification and quantification of paperwork burdens. Yet the Bureau’s analysis under Section IX of the Paperwork Reduction Act in the final rule is limited to a three-page discussion, out of a nearly 1,700-page rule. This was almost identical to the analysis provided in the proposed rule, despite significant changes in finalizing it. The paperwork burden discussions that are included are ad hoc, spread out over nearly 1,300 pages, and are predominately in response to public comments.
Second, the Bureau imposes unreasonable burdens on lenders and consumers. The annual time burden of the final rule is 8,199,819 hours and the annual cost burden is $100,844,367, with both drastically underestimated. Numerous commenters pointed out that the Bureau’s rule required significant collection of consumer’s personal data, such as income, employment, housing expenses, child care payments, debt obligations, and much more, that the total constituted more information collection than a mortgage. Such an extensive procedure is an unreasonable burden for a loan as low as $50.
Lastly, the CFPB severely underestimates the paperwork burden amounts, when it doesn’t fail to account for them entirely. For example, despite an incredibly complex rule that runs nearly 1,700-pages, the Bureau completely disregarded the costs of lawyers and vendors that would assist in compliance. Not only did they fail to estimate the cost, but the Bureau even regarded the employment of these vendors and law firms as cost savers. Despite the Bureau failing to acknowledge that hiring lawyers would be exceptionally costly, lenders stated that it would cost them at least $80,000 in onetime costs and $10,000 annually to seek such assistance in complying with the rule.
The CFPB’s small dollar loan rule should be retracted on Paperwork Reduction Act violations alone. Because the rule relies almost entirely on information collections, disapproving of such requests would effectively nullify it. At the very least, the most burdensome paperwork aspects of the rule, such as the ability to repay requirements, should be reconsidered. The PRA is a much easier and perfectly legitimate way to rescind the CFPB’s small dollar loan rule.