State attorneys generals serve as the chief legal advisers for their respective governments, but over the last two decades have increasingly inserted themselves into national policymaking. In the most recent example, eight AGs signed a letter calling on the Consumer Financial Protection Bureau (CFPB) to go even further with its already onerous proposed Small-Dollar Lending Rule. CFPB should ignore their advice and instead scrap the paternalistic regulations altogether.
The CFPB proposed rules that would effectively gut the small-dollar loan industry in June, but has targeted the industry for elimination since the agency was formed in 2011. The one provision buried in the 1,300 pages of rules that will greatly harm—and possibly destroy—the industry, is so-called “Ability to Repay” language. The proposal mandates that lenders “make a reasonable determination of” a consumer’s financial ability to repay. This in effect already happens, yet the CFPB is mandating an exhausting and paperwork-intensive process that will result in consumers turning to less savory sources for loans, as they have neither the time nor the patience to fill out paperwork for a $500 loan as if they are applying for a million dollar mortgage.
Regulators like to cite high annual percentage rates as evidence of a need to step in, but in so doing are being deliberately obtuse. A two-week loan for a couple hundred dollars can’t be meaningfully compared to a mortgage or other conventional loan instrument. Lenders must charge a higher percentage rate simply because the loans are so small, and also because they serve a higher risk clientele. Forcing on them a low price point as many states have done, or dramatically raising their operational costs as CFPB is preparing to do, will simply cause lenders to leave the market.
That outcome might sound fine and dandy to overpaid government bureaucrats, but it will be to the detriment of millions of Americans each year who find themselves in need of a temporary financial boost with nowhere else to turn. For the 1 in 20 adults—approximately 11 million Americans—who use short-term loan services each year, the option can mean the difference between covering an unexpected expense without major lifestyle disruption or having to forgo basic necessities until their next paycheck or beyond.
CFPB’s proposed rules would require a comprehensive financial analysis of every potential customer. The lender is expected to assess whether the borrower not only can repay the loan, but also cover all their other bills and expenses. The premise behind these requirements is absurd. No lender is seeking out customers who can’t pay them back—that’s not a sound business model. It’s also an insult to borrowers to imply that having a low-income and sometimes needing help means they are too stupid to know how best to manage their financial affairs.
The eight AGs that signed the comment letter represent jurisdictions that have already effectively eliminated the industry by setting interest rate caps so low as to render small-dollar loans unprofitable. And though the CFPB’s current proposed rules permit states to set more stringent standards if they desire, the AGs are worried that the rules “might encourage future efforts to eliminate stringent state usury caps.” That’s a political concern—properly a matter for legislatures—and therefore shouldn’t be given any weight by federal regulators.
Their letter also claims that small-dollar lenders “earn millions of dollars by targeting and exploiting financially fragile consumers.” The evidence suggests the opposite is true.
People understand their own financial circumstances better than government nannies. They turn to short-term loans because they need and benefit from them. CFPB’s own research supports this, which is why they tried to bury it.
The agency called on borrowers to “Tell Your Story” about their experiences, and then promptly buried the results. Only when a Freedom of Information Act request forced them to produce the more than 12,000 comments they received over five years was it learned that 98% of them were positive toward the industry.
It’s time for CFPB to stop listening to ideologically-driven attorneys generals, or succumbing to political pressure from the Obama administration, and instead listen to the Americans who stand to suffer most if these unnecessary and paternalistic rules are brought into force.