That new oven is a little expensive to pay off in one lump sum on your income. So is the furniture for the living room and the den. In a few months, you might also need a new washer and find yourself in the market for a new car. What’s needed is a little flexibility and dexterity on the part of creditors who are willing to allocate loans to help cover unexpected expenses.
There is an answer to these financial challenges currently available in the form of short-term, small-dollar, high-interest loans that you may decide to roll over as circumstances change. Millions of Americans have entered into voluntary, mutually beneficial arrangements with small-dollar lenders who have filled an important niche for low- and middle-income consumers who are in need of essential items and willing to borrow under short-term arrangements. Moreover, the latest research shows that the majority of consumers who take advantage of small-loan packages have exercised sound money management.
Unfortunately, President Obama’s federal regulators are now poised to step in with a laundry list of new rules that would put an end to what they describe as “predatory” lending practices — as the director of the Consumer Financial Protection Bureau (CFPB) recently put it. In reality, the lenders who operate as an alternative to big banks greatly benefit the very Americans of modest means Team Obama claims to represent.
In June, the CFPB, which was set up under the 2010 Dodd-Frank legislation, issued a proposed rule targeting short-term, small-dollar lenders with burdensome new requirements built around the “Ability to Repay.” The CFPB bureaucrats who crafted the regulatory scheme now have it running in excess of 1,300 pages. But that hardly compares with the paperwork requirements that could go into effect next year if the CFPB has its druthers. In a nutshell, the new rules will compel lenders to certify, before any transactions take place, that prospective borrows have the ability to repay.
The potential legal fallout attached to even the smallest errors a lender might incorporate into the paperwork will most certainly deter them from entering into agreements with consumers who benefit from their services. The new rules would make it possible for a borrower to sue a lender if that lender in any way miscalculates the borrower’s ability to repay the loan. So would it still be worthwhile for small-amount lenders to dole out $200 to $500 a pop, which is the typical range, if the instruments of litigation can be unleashed over the smallest details? Moreover, under the proposed “ability to repay” requirements, lenders who deal in these small sums must now submit paperwork that is on a par with mortgages that run as high as $500,000.
An analysis of the CFPB proposal finds that small-dollar lenders “must make a reasonable determination of the consumer’s ability to repay the loan according to its terms” and that it “must determine that residual income is sufficient to make loan payments and cover basic living expenses during the loan term.” The lender must also “make reasonable projections about the amount and timing of net income, debt payments, housing expenses, and child support.” There’s more where that came from. The paperwork requirements for that $500,000 mortgage are much shorter and more cogent by comparison.
But shouldn’t the government provide oversight of private lending services that could potentially get consumers locked into a cycle of debt they can’t afford to pay? There are already state regulations in place that mitigate against abusive practices on the part of lenders who do not operate in good faith.
But why assume that government agencies are the oracle where debt is concerned? We are talking about the same federal government that continues to pile up trillions of dollars on top of our already bloated national debt.
What appears costly and unworkable in the eyes of Obama’s centralized planners may actually turn out to be a win-win for consumers who need appliances and private lenders who are willing to fill a lacuna that larger financial institutions have declined to touch. Yet, Richard Cordray, director of the CFPB, made it clear during a “field hearing” in June in Kansas City, Mo., that he does not have enough faith in “we the people” to negotiate our own private agreements:
The proposal further protects against debt traps by making it difficult for lenders to press distressed borrowers into rolling over the same loan or reborrowing shortly after paying it off. And it would cap the number of single-payment loans that lenders can offer to a consumer in quick succession.
Keep in mind that the same agency Cordray runs answers to no one — not Congress, not the American people. So do we really need a lecture from Cordray about accountability and oversight? The Competitive Enterprise Institute, a free-market, libertarian think tank, has joined with the 60 Plus Association and State National Bank of Big Spring, Texas, in filing a lawsuit challenging the constitutionality of the CFPB and several other provisions of the Dodd-Frank bill.
“The Consumer Financial Protection Bureau’s lack of checks and balances violates the Constitution’s separation of powers,” CEI senior attorney Hans Bader has said. “Its director is like a czar. He is not accountable to anyone, and can’t be fired even if voters elect a president with different ideas about how to protect consumers.”
Recent court actions could provide CEI’s case with added momentum. On July 13, the U.S. district court for the District of Columbia issued an opinion that postponed ruling on the major constitutional issues CEI raised in its litigation. The district court said it is awaiting the outcome of a D.C. Court of Appeals’ decision from a three-judge panel in a case involving PHH Corp., a financial-services corporation based in Mt. Laurel, N.J. CFPB has accused PHH Corp and its affiliates of organizing a mortgage-insurance kickback scheme that is harmful to consumers. PHH has argued that Cordray’s ruling against the company is “arbitrary” and “capricious.”
“That case was heard on April 12th, and the panel appeared to be quite interested in those constitutional issues,” Sam Kazman, a legal counsel to CEI, said in an e-mail. “We look forward to seeing the decision in that case.”
Meanwhile, CEI continues to apply all the right pressure points. On Monday, two of its policy analysts submitted public comments with CFPB in opposition to a rule that would take away the rights of consumers and financial professionals to fall back on binding arbitration as an alternative to cumbersome class-action lawsuits when disputes arise over financial products such as credit agreements, credit cards, and bank accounts and loans.
While CEI’s free-market advocates continue to make the case against Cordray and other unelected, unaccountable federal agents, it is worth asking about the larger policy goals of the Dodd-Frank legislation. Even as he postures as the great champion of American consumers, it’s evident that Cordray and crew have committed a logical fallacy in making their case against the small-loan industry.
CFPB’s real goal is to have taxpayer-subsidized agencies step in when private lenders are squeezed out by regulations.
From a business perspective, it would make no sense for these lenders to deliberately seek out customers who could not afford to repay on their loans. That’s not what you call a viable long-term business strategy. Furthermore, the most recent facts and figures, including CFPB’s own database of complaints, provide hard evidence against any kind of comprehensive, systemic problems with the industry. Pew Charitable Trusts reports that more than 12 million Americans borrow more than $7 billion a year from small-dollar lending operations. The CFPB database shows that between July 2011 and August 2015 consumers filed about 10,000 complaints. That’s what you call a paltry percentage.
But it’s now evident that the CFPB bureaucrats who are out to expand their own power and influence beyond the Constitution’s system of checks and balances remain unmoved by objective facts. The goal here is not to provide consumers with viable alternatives for loans. The real goal is to have taxpayer-subsidized agencies step in when private lenders are squeezed out by regulations. Senator Elizabeth Warren (D., Mass.), who is a major proponent of the CFPB, is already on record proposing that the U.S. Post Office provide banking services.
Congress should instead take up the legislation Senator Ted Cruz (R., Texas) and Representative John Ratcliffe (R., Texas) have put on the table calling for the elimination of the CFPB. For sure, people can stumble along the way and make poor financial decisions. But they can learn from their decisions in an unfettered free market. And along the way, they won’t burn a hole in anyone else’s wallet except their own. Can Obama’s federal goons say the same?