CFPB Continues War on Cash Advance Loans
The Consumer Financial Protection Bureau, more commonly referred to as the CFPB, can trace its origins to the 2008 financial meltdown. Authority for the creation of the CFPB stems from the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was named for the bill’s sponsors, Sen. Chris Dodd and Rep. Barney Frank. The Dodd-Frank was aimed primarily at regulating banks, the stock exchange, mortgage lenders and similar high-value financial markets. However, the CFPB was also given the power to combat “abusive, unfair or deceptive” practices that impacted average consumers. It is this power that the CFPB has invoked in its war against cash advance loans and other small-dollar, high-risk, short-term loans. The war began almost as soon as the CFPB was formed, and the agency shows no sign that it is willing to retreat.
CFPB Appears Determined to Continue Its War on Cash Advances
In June 2016, the CFPB released its long-awaited proposed regulations covering cash advance loans, auto title loans, payday loans and certain installment loans. The regulations apply to private lenders as well as credit unions and banks. The new rules also apply to lenders offering a payday loan or cash advance online and some installment loans that are offered online as well as through physical locations.
The new regulations have been described as an attempt by the CFPB to drive cash advance lenders out of business. The day after the new regulations were released, an opinion piece appeared on Forbes.com with the title, “The CFPB Is Not Regulating Payday Loans, It is Abolishing Them.” Within the month, the Credit Union National Association, or CUNA, sent a letter to the CFPB warning that the new regulations would make it impossible for credit unions to continue to help their members with short-term, small-dollar loans. The Independent Community Bankers of America echoed CUNA’s concerns. The Small Business Administration’s Office of Advocacy expressed its concerns over the proposed regulations and urged the CFPB to make several changes. In November 2016, CUNA sent another letter to the CFPB, urging an immediate moratorium on all of the agency’s future rulemaking as well as all pending regulations.
Apparently, none of this matters to the CFPB. In September 2016, Richard Cordray, the agency’s director, addressed the National Association of Federal Credit Unions, and his remarks concerning the pending rules for small-dollar loans gave no hint that he was wavering in his commitment to see the proposed regulations enacted. That same month, the CFPB filed suit against no fewer than five lenders who offered auto title loans.
CFPB Is Ignoring Evidence and History
In 2011, the CFPB launched on online complaint portal entitled, “Tell Your Story.” Consumers could log in and report their experiences with cash loans of all types as well as all other financial products. Apparently, the CFPB was disappointed that consumers taking out cash advance loans did not submit the types of horror stories that the agency needed to garner additional support for the new regulations. The CFPB only released the data due to a Freedom of Information Act request filed by the Consumer Financial Services Association of America.
According to the analysis of the data report on CFPBMonitor.com, 12,546 comments regarding short-term loans were submitted — and 12,308 of those reported positive experiences or praised products such as cash advance loans. Of the 240 comments received that were negative, 84 were actually under the incorrect category, bringing the true number of negative comments to 156. The CFPB found that only 1.5 percent of all the complaints that the agency received were related to cash advance loans, payday loans, title loans and similar financial products. This is consistent with a report from the Federal Trade Commission revealing that in 2015, the agency received over 3 million complaints, but only 0.003 percent of them were related to cash advance loans.
The data from the CFPB and FTC provides evidence that most borrowers are happy with the services provided whether they secured a cash advance online or through a payday lender’s storefront. Additional proof can be found in the results of a survey conducted of people who actually use cash advances. Harris Interactive, an internationally respected polling company, conducted telephone interviews with more than 1,000 customers who had received cash loans. Approximately 91 percent of the respondents reported that they were satisfied or very satisfied with their experience, and 89 percent stated that they had “done the math” to compute the overall cost of the loan prior to signing a contract. When asked about the time required to repay the loan, 94 percent stated that they had been able to repay the loan within the time that they had expected it would take. Perhaps the most telling statistic was that 95 percent stated that using cash loans should be their choice rather than the government’s decision.
By ignoring the needs and wants of consumers, the CFPB stands poised to repeat the error made by the Office of the Comptroller of the Currency regarding advance deposit loans, which were very similar to payday loans but were issued by banks. The OCC regulations required that lenders ensure the borrower’s ability to repay, limited loans to one per month per borrower, required a minimum of one month between loans and required lenders to review the borrower’s financial situation every six months to see if it had improved. As William M. Isaac, who previously chaired the Federal Deposit Insurance Corporation, reported in his article appearing in American Banker, within days of the OCC’s rules, every major bank offering advance deposit loans pulled them from the market. Many of the OCC’s rules that bankers found too burdensome to allow them to continue making advance deposit loans also appear in the CFPB’s regulations for cash advance loans and are even more stringent. The fact that banks could not deal with all of the restrictions placed on them by the OCC suggests that private lenders will not be able to deal with the restrictions placed on them by the CFPB. Many storefronts will likely close, and since the new regulations cover all types of lenders, cash advance online loans will likely disappear or become much more difficult to obtain.
The OCC rules did not solve the credit needs of borrowers. Instead, they eliminated a valuable source of emergency cash for millions of borrowers. The CFPB regulations on cash advance loans are also going to restrict many Americans’ access to credit, hurting the very people that the agency claims it is on a mission to protect.
Is the CFPB’s Approach Cold-Hearted?
Director Corday has stated on numerous occasions that millions of American need access to small-dollar loans and that most do not have relatives willing or able to help them. The CFPB has stated that many cash advance loans are not taken out to cover true emergencies but normal expenses such as food, utility bills or rent. Furthermore, the CFPB cites studies that indicate that borrowers report that if cash advance loans were unavailable, they would have to reduce their spending. Given that these borrowers have nowhere else to turn, which category of spending would the CFPB have them eliminate — food, rent or utilities? The CFPB’s “Hobson’s choice” approach to cash advance loans will create more problems than it will solve.
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