Last Friday, we posted a summary of the contemplated CFPB proposals taking aim at payday (and other small-dollar, high-rate) loans (“Covered Loans”). In this blog post, we share our thoughts on the CFPB’s grounds for the proposals. Over the next few days, we will be publishing several additional blog posts to share our reactions to the proposals’ details.
As discussed in our summary, the contemplated rules are sweeping. We believe that, if they are adopted, the rules will lead to many lenders exiting the business of making Covered Loans and radically contract consumer access to Covered Loans.
The sweeping nature of the rules under consideration is premised on the CFPB’s conclusion that Covered Loans are “debt traps that plague millions of consumer across the country.” See Press Release, “CFPB Considers Proposal to End Payday Debt Traps” (Mar. 26, 2015) (“Press Release”). In the CFPB’s view, Covered Loans present borrowers with the “risk that they will lose their transportation to work, incur bounced check fees and other charges, or experience other bank account problems if they fall behind.” See Outline of Proposals under Consideration and Alternatives Considered (Mar. 26, 2015) (“Outline”), pp. 3-4. The CFPB warns that “consumers may take costly measures to avoid reborrowing or defaulting on the loan. A consumer may default on other obligations or forgo basic needs.” Id., p. 9. Further, “consumers may lose control over their financial choices” if the lender is able to access the consumer’s bank account or take a security interest in the consumer’s vehicle. Id., p. 3.
Consistent with its past statements, the entire CFPB focus is on the dangers of Covered Loans. The reality of the situation is that, without access to Covered Loans, consumers will frequently “default on other obligations or forgo basic needs,” Id., p. 9, whether or not they obtain Covered Loans, and the CFPB has not shown that the frequency of default or severity of financial hardship increases with Covered Loans. Covered Loans can help borrowers obtain needed car repairs (or medical care) and avoid bank account NSF and overdraft fees, late payment charges and even utility disconnection and reconnection fees. Thus, the CFPB has not established that any consumer injury resulting from Covered Loans exceeds the benefits provided by Covered Loans.
In fact, the unsupported CFPB belief that Covered Loans are bad for consumers conflicts with a number of recent empirical studies. (See our blog posts about the Navigant, Toth, and Mann and Priestley studies.) This is critical from both a policy and legal perspective because, under Dodd-Frank, a practice cannot be “unfair” if any injury it causes is outweighed by countervailing benefits. And generally, an “abusive” practice must take “unreasonable” advantage of consumers. It is hard to see how a practice can take “unreasonable” advantage of consumers if the benefits it provides outweigh any injuries it causes. Accordingly, the cost-benefit analysis the CFPB has thus far eschewed would seem to be a necessary precondition of regulation of the contemplated type. If the CFPB moves forward based on the current record and without regard to the benefits of Covered Loans, its actions will presumably be challenged in court under the Administrative Procedures Act.
In our next blog post, we will focus on how the proposals will impact “short-term” Covered Loans and the flaws we see in the CFPB’s contemplated ability to repay analysis.