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Since Acting Director Mick Mulvaney announced his decision to review the Consumer Financial Protection Bureau’s payday lending rule, detractors have demanded that he explain himself.
Fortunately, the flimsy research underpinning the rule in the first place reveals that no explanation is needed. The evidence shows that CFPB’s haphazard conclusions led to a rule that, if left in place, will destroy over 60,000 American jobs and cut off an important credit option for 12 million consumers.
The mythology of the CFPB’s vaunted payday lending rule has been greatly exaggerated, including most recently in a letter by my congressional colleagues, Sen. Elizabeth Warren (D-Mass.), and Rep. Maxine Waters (D-Calif.). To hear them tell it, CFPB “spent five years honing the Payday Rule, conducting research and reviewing over one million comments from all types of stakeholders.”
Unfortunately, that “research” was deeply flawed, and no member of Congress should hail a regulatory approach as slipshod as this one. To make things right, I have introduced a Congressional Review Act resolution to rescind the rule.
Not only does the CFPB’s research fail to establish that payday lending is harmful to consumers across the country in the long term, it also fails to prove that this rule might be effective in alleviating that purported harm.
Let’s start with the research. Sound regulation requires an evidence-based approach, and there’s an abundance of data available from the states. Legislators, myself included, offered this data to the CFPB to ensure that the bureau based its actions on reality.
Unfortunately, the CFPB ignored it in favor of rule-making in the dark. Instead of gathering as much data as possible from different regulatory agencies, the CFPB’s study took a broad view rather than a deep dive into the data. You don’t get a clear view of what’s happening by quickly glancing at several lenders across multiple jurisdictions with different rules and regulations.
The CFPB further restricted its pool of data by looking at a mere one-year period rather than taking a long-term holistic look at how users of these loans behave. In its own study, CFPB admitted that it needed to analyze data over a longer period of time, but it’s unclear whether such an analysis was ever undertaken.
Reputable studies that bothered to look (such as one by economists with the Federal Reserve Board in 2013) found that over the long term, payday loans provide a net benefit to a consumer’s financial situation.
Further, if consumers really were getting caught in a “debt trap,” the data would show consumers “trapped” in the market. But Florida, South Carolina, and Illinois each found that payday loan consumers leave the marketplace over time.
States have used such data to craft regulations to determine problem areas — tailoring rules to the unique needs of their communities. Fourteen states have effective regulations that address the “debt trap” problem, but the CFPB chose instead to focus on lenders who operate storefronts across 33 states with different regulations. There is a massive difference between states that enforce regulations in real time and states that rely on licensee and borrower self-compliance, yet CFPB officials couldn’t be bothered to learn the distinction.
In fact, the CFPB never asked for or reviewed a single piece of consumer data from my home state of Florida. Instead, they simply skimmed published aggregate data and assumed that there must be consumer harm because some Florida consumers take out more than one loan a year. Based on this rinky-dink research, former Director Richard Cordray still proclaimed in congressional testimony that the CFPB had found problems in Florida.
Unsurprisingly, the payday lending rule’s ill-considered beginnings extend to its disastrous consequences. The CFPB has made no accounting for what borrowers should do in the absence of access to affordable credit. After all, a ban on the industry would not eliminate the need, and whatever replaces payday lending could be worse.
Whether this rule might force borrowers into the grip of loan sharks is a prospect unexplored by CFPB. Shouldn’t that be of primary concern to an agency charged with protecting consumers and their finances?
Payday lending is a vast industry used by millions of Americans across the country, regulated in one way or another by all 50 states. A heavily funded, heavily staffed federal regulatory agency such as the CFPB should at least have the capacity to develop a more informed assessment on which to base a rule. With that in mind, my colleagues should work with me to use the Congressional Review Act to rescind the rule.
Americans should not have their choices eliminated by Washington regulators who claim to know better but fail to do the work. Whether it be disavowing court rulings about President Donald Trump’s lawful ability to make appointments, blowing past the statutory limits placed on the CFPB or demonstrating willful ignorance while rule-making, it’s ironic that bureaucrats would then claim that consumers are incapable of making informed decisions when it comes to short-term, small-dollar loans. Consumers may rightly wonder: “I know what you are, but what am I?”
Rep. Dennis A. Ross is a Republican member of the House Committee on Financial Services. He represents the 15th District of Florida.
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