The Consumer Financial Protection Bureau is at it again. In the name of protecting consumers, it would like to ban or heavily restrict a tool that is very useful to them. This time the target is payday lending – high-interest, low-dollar “payday loans” – that the federal government wants to regulate out of existence. Yet, no matter how horrible the well-intentioned bureaucrats at the CFPB think it is, the $38.5 billion payday-lending market is used daily by many customers for whom it is the only source of credit available.
The WSJ reports:
The crackdown on the payday industry—largely storefront lenders extending credit to 12 million lower-income households paycheck to paycheck—follows a series of actions by President Barack Obama and his aides to cement a change in the balance of power between consumers and financial institutions during their last year in office.
The payday rule, proposed by the Consumer Financial Protection Bureau, imposes a complex set of requirements on the payday industry, mandating that lenders assess a borrower’s ability to repay and making it harder for lenders to roll over loans—a practice that often leads to escalating borrowing fees—or to take fees out of a borrower’s bank account . . .
In this week’s new edict on payday loans, the CFPB seeks to overhaul the corner of the financial market largely abandoned by banks, where borrowers take out short-term loans of a few hundred dollars, paying effective annual interest rates over 300%. Vehicle-title loans and certain types of installment loans also would be targeted.
It sounds well intentioned but the consequences of those rules won’t be. While the costs imposed on the lenders may make sense for a mortgage, they are an excessive and unjustifiable burden for a small-dollar loan. It means that many of these companies that can make a profit only under the current conditions will be run out of business. Also, all the complaints about how high the rates are seem to ignore that payday lenders service riskier borrowers with short-term loans, and must therefore assess higher interest rates to cover the greater likelihood of default. Some call this predatory, while others call it good economics. Turning a profit on such high-risk loans requires much higher percentage rates. That’s why the short, small-dollar loans wouldn’t be economically viable at lower rates or after the CFBP is done imposing extra costs.
Mark Calabria at Cato had a great piece a few years ago on the issue. He reminds us that the idea that you could offer payday loans at much lower rates and overall costs sounds nice but it doesn’t hold water:
[Matt] Yglesias’s alternative [offered at Vox] is at least a little more thoughtful than stealing: he suggests allowing the postal service to offer short term loans, because apparently he believes the USPS could offer payday “without taking nearly as big a cut”. Now “big” is subjective but scholars have examined this question. In research reported in 2012 in Regulation, UC-Davis Professor Victor Stango compared the performance of traditional payday loans to those offered by credit unions. Some of his conclusions: “there is little to suggest that credit unions can offer a payday loan with competitive terms. Existing credit union payday loans often have total borrowing costs that are quite close to those on standard payday loans.” Maybe the USPS has a better cost structure than the typical credit union, but that seems unlikely as the USPS isn’t exactly known for its efficiency.
To the bureaucrats working for the nanny state, these facts do not matter. They also live in a world where there are only benefits to reducing access to loans that a few people may use irresponsibly by getting stuck in so-called debt traps, where new loans are taken out just to pay off old ones, but that most people use responsibly.
In the real world, of course, there are costs too. The demand for payday loans exists for a reason. Those of limited means or who live paycheck to paycheck often have no other option for accessing credit when facing unexpected costs, and they would be worse off by having their choices limited even further. This explains not only the existence of payday lenders but also their popularity.
Unfortunately, CFPB is loaded with excessive powers, such as its authority to prohibit “unfair, deceptive, or abusive acts and practices.” The WSJ notes that “company officials and lawyers have complained that authority—known as Udaap—is overly broad and could make the bureau’s actions unpredictable.” Adding insult to injury is the fact that there is barely any oversight of CFBP from Congress and the bureaucrats are left to fulfill their worse instincts.
And then there is this gem:
“Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt,” CFPB Director Richard Cordray said in a statement released to reporters Wednesday. “It’s much like getting into a taxi just to ride across town and finding yourself stuck in a ruinously expensive cross-country journey.”
No, it’s not. If it were, there wouldn’t be more payday-lender locations in the United States than McDonald’s restaurants because consumers wouldn’t go there anymore. Cordray is the same guy who while being grilled by members of Congress last year, defended his attempt to gut the industry by arguing that he “can’t in good conscience” not take action. That he justifies what he and his agency are trying to do as an act of compassion does nothing to change the fact that Washington bureaucrats are trying to deny Americans access to services that make their lives easier.
For more against the restrictions on payday lending, I recommend this study by George Mason University law professor Todd Zywicki. You can also read this great piece by Thaya Brook Knight of the Cato Institute from last month.