Cash Advance Industry Under Siege as CFPB Violates Dodd-Frank
Cash advance companies are being wrongfully targeted by the Consumer Financial Protection Bureau, or CFPB. The CFPB was created as a tool of financial reform in the legislative package that was authorized by the Dodd-Frank Act, but the law specifically includes terms that prohibit setting interest rate limits, as they are trying to do with the cash advance business, which is contrary to the 36-percent limit that the CFPB is currently trying to mandate as a universal limit on short-term rates. The specifics of the Dodd-Frank Act, according to the www.dodd-frank-act.us, state that the legislation grants, “NO AUTHORITY TO IMPOSE USURY LIMIT” unless such a limit is first passed through due legal processes.
Reform of Cash Advance Lending Requires Due Legal Process and Can’t Be Short-Circuited by the CFPB
The CFPB wasn’t set up to legislate. Laws involve delicate negotiations, compromises and finding a way to pay for the measures, and a single agency isn’t subject to the legal checks-and-balances that the country’s founders wrote into law. The executive, legislative and judicial branches of government have their own powers and limitations, and financial policies are among the most complex of all government initiatives.
The U.S. economy operates at the mercy of market forces, government policies, other countries’ decisions and the financial industry’s actions. Just because interest rates have been artificially low for years doesn’t mean that hyperinflation can’t or won’t occur. In this case, the CFPB’s proposed 36-percent cap on interest rates could hamstring business and industry and prevent them from taking essential steps to correct a severe economic downturn.
Recent financial news includes Britain’s decision to leave the European Union and Japan’s flirtation with the idea of stimulating its economy by releasing helicopter money, or money that’s not tied to gross national output. An agency like the CFPB simply isn’t equipped to deal with the political realities of legislating complex financial policy, and the agency’s arbitrary decision to cap interest rates at 36 percent has drawn criticism from banks, traditional lenders and a range of politicians from both parties.
Learning How to Use Cash Advance Loans Responsibly Makes More Sense than Imposing Arbitrary Limits
Cash advance-type loans have always been intended as short-term solutions for emergency cash needs. Unfortunately, people don’t always use the loans as intended, and some lenders do take advantage of customers who don’t know how to use credit responsibly. That’s true with all kinds of lending and not just cash advances.
The CFPB can serve as a complaint agency for illegal and unscrupulous lending practices, but it was never intended to legislate interest caps or to decide which financial products people can choose to meet their goals and obligations. Legislating arbitrary interest rates could prove counterproductive when the agency doesn’t have the legal mandate or financial expertise to analyze complex economic conditions.
For example, Investopedia.com, quoting The Wall Street Journal, reports that bank loans often cost borrowers an average APR of 39 percent. This figure is already higher than the CFPB’s proposed cap on short-term loans, and these loans aren’t even short-term. Credit.com reports that cash advance loans, though costly, are good tools for getting emergency cash when borrowers need cash quickly or don’t have other resources.
Although cash advance lending is controversial and banned in some states, consumers appreciate being able to get cash quickly. The fees seem high percentage wise, but many experts admit that the rates are reasonable under the circumstances under which the loans are offered. Forbes.com reports that 300- and 400-percent interest rates are misleading because the average length of these loans are usually about two weeks.
However, it still takes almost as much work to process these small loans as it does to finance larger amounts over longer repayment periods. About 6 percent of short-term loans default, so cash advance lenders need to cover this cost as well. The flat fees for the loan are also added into the interest rate, and since the repayment period is very short, the interest rate becomes correspondingly high.
The main problem that most critics have with cash advance lenders is that many people recycle their loans and become trapped in cycles of debt. Some people use the loans irresponsibly or get loans from multiple lenders to buy things that they don’t need or to enable unhealthy personal habits. These loans were never intended to be used in these ways, so some people get in trouble. The same holds true for all kinds of credit.
The CFPB Consistently Draws Criticism for Exceeding Its Charter
The CFPB has draw criticism from a range of politicians, consumer groups, banks and other stakeholders in financial and government circles for exceeding its mandate. For example, the agency’s own CFPBJournal.com reports that its rule banning arbitration clauses could prevent many consumers from getting justice in consumer fraud cases. Knoxblogs.com reports that legislating the small cash loan industry out-of-business would encourage borrowers to seek money from organized crime and unsavory underground lenders.
ChicagoTribune.com reports that the CFPB’s mortgage interest rate tool for consumers has been criticized for allowing consumers to gauge interest rates without considering issues like points, closing costs and other details. This pattern of high-handed consumerism repeats the pattern of not taking into account the real-world costs of doing business. Congress never intended for the CFPB to legislate, impose interest rate limits or exceed its charter by limiting interest rates. Learn more about the CFPB exceeding its mandate at the PersonalMoneyStore.com.