As Consumer Financial Protection Bureau Director Richard Cordray testified before the House Financial Services Committee last week, he faced tough questions about whether the Bureau is listening to the concerns of small businesses. A new report obtained from CFPB indicates the Bureau is shirking its legal responsibility to assess and avoid harm to small businesses and turning a deaf ear to their concerns.
Small businesses from all across the country – including Illinois, Kentucky, Virginia, Louisiana, California – spent at least three months providing data and feedback to the CFPB regarding its payday lending proposals. This process yielded a 528-page report that the Community Financial Services Association recently obtained under a Freedom of Information Act request. Despite many small businesses voicing valid concerns about the CFPB’s payday lending proposals, there is only one sentence in the released report acknowledging, and quickly dismissing, the views of these small businesses as these relate to state laws and regulations.
When the CFPB was created, one of the very few checks placed upon it was the requirement that its regulatory proposals be subject to the Small Business Regulatory Enforcement Fairness Act. This act requires the CFPB to assess formally in the early stages of a rulemaking how its proposals will impact small businesses.
From April through June of this year, the CFPB’s payday lending regulatory proposals were examined and considered by a SBREFA panel, made up of small business owners from around the country. These businesses analyzed the impact of the CFPB proposals and shared their company data with the CFPB. In addition to the CFPB and small business owners, the Small Business Administration and the Office of Management and Budget participated in the process to understand the impact of regulatory concepts and ensure regulation doesn’t suffocate small businesses.
Almost every small business involved in the process pointed out fundamental flaws in the CFPB proposals, including a lack of information about how the CFPB’s plans will coincide with state permitting, licensing and regulatory requirements. Payday loans have been successfully regulated at the state level for more than a decade, and states have vastly more experience regulating payday loans than the CFPB. Yet, CFPB officials appear to have failed to involve, or seek advice from, their state counterparts.
Unlike some industry operators, all CFSA members are licensed and regulated in the states where they conduct business. We take compliance with state laws very seriously and meeting state requirements is a major cost for small businesses. But the CFPB’s proposals have not explained how the eventual rules would interface with state laws. Would CFPB rules preempt and weaken state laws that are more restrictive? Would small businesses need to interpret, adhere and comply with two uncoordinated compliance regimes?
The dismissive one-sentence answer from the CFPB is this: whatever we do in the federal rule, it will “coexist” with state law.
This answer is simply unacceptable.
With the final SBREFA report in hand, we can say definitively that the CFPB did not treat SBREFA as a real regulatory process to improve its eventual rulemaking. Rather, it viewed its legal requirement as a check-the-box exercise and has disregarded the views of the small businesses this very process was designed to protect.
What the CFPB missed, or apparently dismissed, is that its proposal would cause many lenders to cease their operations altogether. Two recent economic reports have found nearly all small payday lenders would be forced to close existing stores, and those in rural areas would be the hardest hit. These findings clearly show that the CFPB is on track to shutter small businesses, force thousands into unemployment, and restrict access to credit for millions of Americans.
When Congress created the CFPB under The Dodd-Frank Act, it was with the intention of strengthening consumer financial protections. Instead, it is clear the agency is using its enforcement authority in ways never intended by the law, committing unprecedented regulatory overreach designed to eliminate, not improve, on financial products the CFPB views unfavorably.
For example, the CFPB continues to presume that consumers are harmed by short-term credit products, but there has been no rigorous, empirical research released to support this presumption. Instead, the CFPB has relied on anecdotes and advocacy groups to craft its agenda. Meanwhile, the CFPB has ignored objective, academic research that indicates the opposite of what the agency believes – that short-term credit may actually enhance the financial welfare of consumers.
If the CFPB wants its rule to protect consumers, it must consider the real-world impact on access to credit. In fact, for millions of borrowers, the CFPB’s proposed rules would further constrict their already limited credit options. Consumers fare well with choice; without it, they are imperiled.
We hear new statistics every day showing that income inequality is growing. Millions live paycheck-to-paycheck in America already and more than 40 million households lack access to traditional banking services, according to the FDIC. Financial services like payday, installment or title loans are often the best option and at other times the only option for these households when in need of credit.
The CFPB mistakenly operates with a single-minded, one-size-fits-all resolve that they “know what consumers need.” However, such a regulatory model stifles opportunities for state and local public policy innovation, where for decades state policymakers have effectively crafted and debated balanced consumer protections that allow access to short-term credit for consumers while protecting them from economic harm.
CFPB had the opportunity to maintain the integrity of the rulemaking process and protect small businesses and consumers. Unfortunately, it has squandered that chance. It’s now time for Congress to step in and hold the CFPB accountable. The fate of small businesses, their thousands of employees and millions of consumers across America hangs in the balance.
Dennis Shaul is the Chief Executive Officer of the Community Financial Services Association of America, which represents non-bank lenders offering payday loans, installment and title loans. He previously served as a senior advisor to former Representative Barney Frank (D-Mass.), and was the chief financial regulator in the State of Ohio.