On October 5, the Consumer Financial Protection Bureau (CFPB) finalized a rule that will upend the small-dollar lending industry. The final regulation encompasses payday, installment, and automobile title loans, all of which primarily serve consumers without access to traditional financing options. The CFPB may believe that restricting small-dollar lending is in the best interest of consumers, but the final rule will ultimately make credit more expensive and less accessible to the low-income borrowers that rely on these loans.
Despite the CFPB’s concern that consumers are unaware of the potential drawbacks of small-dollar lending, the agency provides minimal evidence that consumers are uneducated about how these loan products work. Much of the data on which the CFPB based its rule-making came from the Bureau’s “Consumer Complaint Database,” an online portal for consumers to lodge grievances of misconduct against financial companies. Even though the purpose of the database is to connect consumers and businesses in the hopes of dispute resolution, the CFPB does not verify the substance or validity of consumer complaints.
Pew Research estimates that consumers take out nearly 12 million payday loans every year. Throughout the six-year life of its database, the CFPB has received around 17,500 direct complaints about payday loans, which is less than one-tenth of a percent of the payday loans made over the same time frame. Furthermore, consumers submitted over 1.2 million total comments to the Consumers Complaint Database across the entire consumer lending industry, less than two percent of which relate to payday loans. Simply put, consumers express overwhelmingly less dissatisfaction with the short-term lending market than other sectors of the credit market.
As with other recent CFPB actions, unintended consequences often compromise the good intentions of the Bureau. According to the Bureau’s final rule, small-dollar loans are “typically used by consumers who are living paycheck to paycheck, have little to no access to other credit products, and seek funds to meet recurring or one-time expenses.” Buried on page 1,308 of the 1,690-page final rule, the CFPB makes it clear that it understands exactly what the rule will do to the consumers who rely on these products. The Bureau acknowledges that the rule will result in a “substantial reduction in the volume of short-term payday and vehicle title loans.”
Furthermore, the Bureau expects that “payday loan volumes will decrease by 62 percent to 68 percent, with a corresponding decrease in revenue,” and that the “decline may limit some physical access to credit for consumers.” Unfortunately, the news for rural consumers gets worse with the CFPB expecting “the decrease in storefronts is likely to impact small lenders and lenders in rural areas more than larger lenders and those in areas of greater population density.” It is troubling that the Bureau apparently foresees these particular consequences that threaten to restrict consumer access to credit, yet intentionally plowed ahead with the rule.
The CFPB does not say what it believes will fill the void for these borrowers, once this rule rids the marketplace of these financing options. Many small-dollar borrowers are unserved by the traditional U.S. financial system. These Americans are the most vulnerable to government intervention in the credit market, and yet the Bureau is knowingly taking action that will harm the very consumers the agency is trying to protect.
Without significant reforms to other aspects of the financial system, including changing how banks are allowed to lend to sub-prime borrowers, the CFPB’s rule will leave as many as 8.2 million borrowers without credit access. Instead of helping consumers avoid a debt trap, the regulator could potentially push these vulnerable consumers into a credit desert.
The CFPB’s desire to help borrowers avoid debt traps is valid, but the Bureau’s small-dollar lending rule only worsens the circumstances of America’s financially vulnerable consumers. The CFPB has once again ignored empirical data, and the result will harm the very consumers the Bureau is aiming to assist. It now falls to Congress to protect the consumers that rely on short-term lending products. Members of the House and Senate must come together and repeal the Bureau’s misguided rule.