Big things are happening at the Consumer Financial Protection Bureau, a recently-created but unusually powerful government agency. Now temporarily headed by Trump's Director of the Office of Management and Budget Mick Mulvaney, the Bureau suddenly announced last week it would reopen the Obama-era rule that effectively blocks access to small dollar loans for millions of consumers.
But how much can Mulvaney achieve by revisiting the rule? It’s true that left intact, the rule will deprive too many people of a loan, right at the moment they need it most. It’s one of the most detrimental regulations the Bureau has issued. But the rule cannot be easily or quickly undone. A new rulemaking is governed by the Administrative Procedure Act, which requires the Bureau to go through a similar process as it did the first time around. The original rule took the Bureau five years to finalize.
There’s a simpler, more effective way of stopping the current rule. Congress can vote it down, but a big deadline is looming. The Congressional Review Act gives lawmakers 60 legislative days to overturn major regulations, and a simple majority vote by both chambers is all that is required. If successful, that vote would block the agency from doing a repeat without congressional authorization. A resolution of this kind was recently introduced by Rep. Dennis Ross’ (R-Fla.), with 3 Democrats and 2 Republicans co-sponsoring it. The CRA, however, must be used by early March.
Congress must use this unique power to preserve vulnerable American’s access to credit. Small dollar loans provide a means for the unbanked to join the financial mainstream, at a time when two-thirds of all Americans lack sufficient savings to cover an emergency expense. As long as you have a job, a checking account, and a valid form of identification, small dollar loans allow a person to borrow between $100 and $500 over a two-week period, for an average 15 percent fee.
Because they act as a financial safety net, 95 percent of small dollar loan users say they value having the option to take out a loan, even though they are relatively expensive. Nearly 90 percent of all borrowers report they were satisfied with their last transaction.
But the new regulation would drive many of those lenders out of business. In fact, it could render up to 80 percent of the industry unprofitable, eliminating almost $11 billion of consumer credit.
It’s hard to see how eliminating people’s already limited choices is going to make them better off. These consumers will still need financial services after these loans are no more, and the new rule doesn’t provide any better alternatives. At best, consumers will have to resort to their “second best” option, such as defaulting on other loans or working a second job — options they already had but decided against. At worst, however, they will be forced to pursue illegal or unregulated sources, perhaps even predatory loan sharks.
There are other problems with the rule. To date, the CFPB has not provided adequate evidence to justify its regulation. Instead of conducting a thorough cost-benefit analysis, the bureau merely assumed that because payday loans are expensive and frequently used, they must be harmful. Yet the academic literature shows that payday loans have a neutral effect on net, and may even have a slight general-welfare benefit. This is because borrowers typically use payday loans to avoid more expensive fees, like overdrawing a checking account. Indeed, less than 2 percent of the consumer complaints filed to the CFPB are related to payday loans. Simple distaste for a practice does not justify its elimination.
The rules also needlessly steps on state jurisdiction over payday loans. All 50 states and the District of Columbia extensively regulate the product, and 18 of those states have effectively prohibited them entirely. While there is substantial evidence that households in the latter states had bounced more checks, filed more complaints about loan sharks and debt collectors, and filed for bankruptcy at much higher rates, at least people in some states retained a measure of choice.
Taking away people’s choices is not consumer-protection. Regardless of whether federal regulators like small-dollar loans, those loans provide an important source of finance for millions of consumers. The last thing anyone should want is a prohibition that pushes people on the financial fringe into the arms of black market lenders. By using the Congressional Review Act, Congress can preserve vulnerable consumers access to credit and protect them from their biggest threat — the Consumer Financial Protection Bureau.
Originally published to The Hill.