Using regulatory authority granted to it by a Congress, a recently created federal agency will soon hand down proposed regulations that would just about eliminate the small-dollar lending industry out of existence. Acting on what it believes is public sentiment to regulate providers of such products like payday and title loans, this agency would legislate into effect, in direct violation of the separation of powers of the federal branches of government, complex and heavy-handed regulations that might well destroy the small-dollar lending industry. At a time when the economy struggles to recover, the worst that can be done is to enact legislation and regulations that could entirely destroy an industry.
The Consumer Financial Protect Bureau (CFPB) is that very federal agency, funded by the
Federal Reserve and not subject to budgetary review by Congress, and created under the Dodd-Frank financial legislation, that will soon release its proposes regulations on small-dollar lenders. Implemented under the Obama Administration by Director Richard Cordray, appointed by Barack Obama, the agency has become a rogue, out of control runaway train of an agency that has asserted very broad and extensive authority to not just regulate but change the very nature of how financial industries operate.
Dodd-Frank gave the CFPB limited regulatory authority but it did not, and nor does the Constitution allow, Congress to delegate legislative authority for an agency to have unlimited authority to all but rule out of business an entire industry via the process of making regulatory rules. Furthermore, these regulations are so detailed and specific that they are more appropriate for legislative action rather than action by a bureaucracy that does not answer to Congress through the traditional appropriations process.
The new rules would recognize loans that are shorter than 45 days or longer, and as are typically the case with payday or title loans often used by lower or middle-income consumers, the APR is above 36 percent and the loans are repaid with lender access to a checking account via a post-dated check, or cashing of a payroll check, or holding of a car title.
The proposed rules further complicate the process requiring the lender to determine if the borrower can repay the loans when due, including interest, principal and any added fees, without reborrowing within the underwriting period, which is defined as the loan term plus 60 days. These requirements will add additional paperwork, adding to the cost of providing the loans, which will only be passed on to the consumers paying the loans.
The rules also impose a residual income test, which requires the lender to collect detailed household budget information from the borrower to determine how much residual income will be left for paying back the loan. While this sounds reasonable, the details of the regulation will imposed on borrowers and lenders requirements that are not even required under the CFPB’s Qualified Mortgage rules. But these regulations do require this kind of test for a small short-term loans such as a payday or title loan.
Consumers often get into short-term financial binds due to illness or unemployment or other emergency, and lacking access to more traditional credit products, turn to payday or title loans to meet their short-term financial needs. Even if consumers do not have enough income on paper, most still manage to repay these loans – for example, by prioritizing their other payments and obligations until a temporary shortfall in income or increase in expenses passes. The proposed ability to repay standard is too narrow. It focuses only on whether there is enough residual income to make the payment, and does not consider other means by which consumers successfully repay – such as by prioritizing other obligations. The residual income test also does not consider consumers who might anticipate and plan for renewal of the loan.
Additionally, the rules will require that the borrow doesn’t already have another loan of this type with another small-dollar lender, as well as requiring the lender to pull a credit report, from a CFPB-approved credit bureau, to check for the existence of another loan. These short term loans are often advertised as loans consumers can get without having their credit reports checked, so that ability to market payday and title loans that way will be eliminated by the proposed CFPB regulations. These rules could seriously stifle and hinder the ability of small-dollar lenders to be innovative and creative in offering new credit products to lower and middle income consumers who are under-served by more traditional credit products.
The proposed rules would place a number of other restrictions on the terms of the loans offered by small-dollar lenders, including prohibitions of how soon the borrower could sign another loans with such lenders, and limits on how many loans could be taken out in a “sequence” of loans, and a number of other detailed regulations of small-dollar lenders. Clearly the complex and detailed nature of the regulations will impose several restrictions on small-dollar lenders, and will likely cause it to be less-than-profitable for most of them to stay in business.
The CFPB’s Residual Income Test stifles innovation, mandates the use of untested residual income underwriting standards, and sets in stone antiquated, unsafe, and unreliable methods of data collection and verification. Such an approach is hardly what regulated entities or the general public should expect from a regulator that prides itself on being a forward-looking, 21st century agency.
Lower and middle-income consumers, who are under-served by the traditional credit products that require credit check with credit bureaus, have found their credit needs well served by the products offered by small-dollar lenders. But these lenders, and their credit products, will likely cease to exist or be available if the proposed CFPB regulations are implemented. While the proposed regulations should at least be set aside for further review and study, the CFPB should also take more time to review the successful models of regulating the small-dollar lending industry implemented in some of the states, such as the regulations implemented in Florida. Clearly there is middle ground to be found that would protect the interest of these consumer, and their access to these needed credit products, without putting the small-dollar lending industry out of business entirely.]]>
CFPB Could Legislate a Financial Services Industry Out of Existence
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