In the current uncertainty surrounding the future of the Consumer Financial Protection Bureau (CFPB), several issues require urgent attention. While the most pressing may be who exactly is to lead the agency, another is what will be the future of the small dollar loan rule, a controversial new regulation published by the CFPB on November 17.
The CFPB’s rule, covering payday, vehicle title, and certain high-cost installment loans, is one of the most pernicious regulations issued by the Bureau. Payday loans are a short-term, small dollar loan used by about 12 million people each year who find themselves in a financial emergency, perhaps to pay an unexpected medical bill, fix a broken car, or just to keep the lights on at home. While they may not be an ideal form of finance, they provide a reliable and essential service to millions of people each year who have no better financial options.
Despite this, the CFPB has set out to all but eliminate the product. Industry studies estimate that the new regulation will render up to 80 percent of all payday loan shops unprofitable, eliminating almost $11 billion of consumer credit.
To defend vulnerable consumers who desperately need access to credit, the rule needs to go. In this regard, Richard Cordray’s recent exit as head of the CFPB provides two possible opportunities.
First, a new CFPB director has the authority to reconsider and potentially withdraw the rule. This can be executed simply due to a change in administration and policy direction, as provided for under the Supreme Court case FCC v. Fox. A new director would also have the authority to reconsider the rule due to a new interpretation of the intentions of Congress.
The CFPB is statutorily limited from regulating the interest rates of small-dollar loans, yet the Bureau has sought to eradicate the industry through onerous regulations, creating a de facto usury cap. New leadership could appropriately determine that this is not what Congress intended the CFPB to do.
The catch with the CFPB reconsidering and possibly withdrawing the rule is that it would have to go through the same procedure as it did when it created the rule. This would include opening a new public notice-and-comment period, administering economic impact analysis, and consulting with industry and small business, among other actions. This originally took the Bureau five years, and would likely take the new leadership several years to do again.
Were Mick Mulvaney to be confirmed as acting director, he would have the authority to do this immediately. Given that he has shown a willingness to critically reflect on the agency’s actions, by putting a 30-day freeze on all new hiring, rulemakings, and enforcement actions, this should be an immediate concern to him.
The small dollar loan rule was based on an assumed, rather than proven, harm to consumers, disregarding vast amounts of empirical evidence that contradicts the CFPB’s claims. It would be perfectly valid to revisit it. However, it is far from clear whether the new leadership would be willing to undertake such a task. If the new leadership were to need any further convincing, they could consult CEI’s previous studies and comments to the agency for all the reasons why the rule is deficient and in need of review.
The second opportunity is for Congress to pass a joint resolution of disapproval under the Congressional Review Act (CRA) to block the rule from coming into effect. The bonus of this approach is that a successful CRA resolution would prohibit the CFPB from conducting a new rulemaking on a similar topic for the next five years—when there may be a new Democratic administration and CFPB director. Under the CRA, Congress has 60 legislative days to pass the joint resolution. A rough estimate brings this until at least the beginning of March 2018, and quite possibly even until April, depending on how many days Congress is in session next year.
So, what should be done about the small dollar loan rule? While new leadership under Mulvaney or another Trump appointee has the potential to roll back the rule, Congress should not become complacent in its responsibility to protect consumers. A review of the rule by the CFPB may simply be too costly to undertake for the new leadership. It remains imperative that Congress pursue a CRA on the small dollar loan rule.