The Consumer Financial Protection Bureau’s “payday rule” is on the chopping block.
Consumers everywhere can rejoice. The payday rule not only undermined short-term lenders, but it also erected barriers to capital for low-income Americans, who rely on payday loans to pay a month’s rent, cover health care costs, and manage other recurring expenses.
To understand why, it’s important to understand the payday rule’s origin. That story begins in 2016, when then-CFPB director Richard Cordray first issued a mandate to regulate short-term lenders and rein in, according to the agency, interest rates of 300 percent or higher.
In Cordray’s words, “The CFPB’s new rule puts a stop to the payday debt traps that have plagued communities across the country.”
In reality, the average two-week payday loan of $100 comes with a $15 fee, which Cordray’s CFPB equated with an annual percentage rate of 400 percent. Of course, the $15 fee is standard practice for two reasons: Not only do short-term loans provide credit with a quicker turnaround than other loan options, but the borrowers often have risky credit histories.
Short-term lenders tend to service low-income communities, which saddle them with more financial unpredictability. As a lender, should you treat C-suite executives and part-time restaurant workers with the same level of scrutiny?
The CFPB’s “debt trap” narrative could use some scrutiny of its own — because it’s just not true. A 2009 study from Clemson University found that payday loans do not lead to higher rates of bankruptcy. According to economics professor Michael Maloney, one of the study’s co-authors, payday loans actually “appear to increase the welfare of consumers by enabling them to survive unexpected expenses or interruptions in income.” He noted that only two percent of payday borrowers file for bankruptcy.
More recently, Virginia Commonwealth University’s Chintal Desai and the Federal Reserve’s Gregory Elliehausen found that Georgia’s ban on certain payday loans undermines borrowers’ ability to pay other debts. In their words: Payday loans “do not appear, on net, to exacerbate consumers’ debt problems.”
Nonetheless, Cordray’s CFPB finalized the payday rule at the expense of lenders and borrowers alike. Slated to go into effect next year, the mandate would require short-term lenders to conduct a “full-payment test,” which involves verifying a borrower’s income, borrowing history, financial obligations, and other personal information before providing any credit.
The red tape is designed to slow down the transaction process — which, as it stands now, is quick and transparent — and drastically reduce the number of loans issued. Moreover, the CFPB — which is not subject to congressional oversight — abused its power by extending the mandate to non-payday employers, including “banks, credit unions, non-banks, and other service providers.”
Low-income Americans who rely on their service stand to benefit most from the payday rule’s repeal. Four in 10 Americans are unable to cover an unexpected $400 expense, claiming they don’t have the cash on hand to set aside. Even more Americans are unable to handle a $500 expense, relying on an emergency fire sale or short-term loans to make up the shortfall.
The last thing they need is the federal government getting in the way of that money. Mulvaney’s CFPB would be wise to repeal the payday rule –and protect America’s credit for good.
Jeff Joseph is an adjunct professor at George Washington University and George Mason University.
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