October 31, 2017 at 5:00 am ET
The Consumer Financial Protection bureau has released its final rule on small-dollar lending after what it says was “five years of research, outreach and a review of more than a million comments.” Unfortunately, there is nothing to indicate that during this five-year period the bureau took the time to genuinely consider the points of view of small-dollar loan consumers nor the real-life impact its rule will have.
The shoddy research the bureau used to craft its rule, the consideration given to outside special interests over the needs of consumers and the lack of consideration with which the CFPB treated the millions of comments it received on the rule make it no surprise that this rule will do nothing to help consumers. In fact, it will undoubtedly hurt the millions of consumers who use small-dollar loans as it effectively eliminates a vital source of credit that many rely on to manage unexpected expenses or bridge financial gaps.
Government research and data demonstrate that there is a widespread need for small-dollar credit, and the CFPB’s own complaint portal data have consistently shown a very low level of consumer complaints about small-dollar loans. Yet the CFPB relied heavily on research models developed to support a predetermined outcome, which will cripple the providers of short-term credit.
By the CFPB’s own admission, 66 percent of the small-dollar lending industry will be impacted by its rule, and this impact goes beyond mere numbers. Small storefront lenders will be forced out of business, and jobs will be lost, leaving millions of hard-working Americans with no choice but to seek out dangerous alternatives such as unscrupulous, unlicensed, offshore or otherwise illegal lenders. And although this rule creates a regulatory regime that favors banks and credit unions over nonbank credit providers, it does nothing to address that in many communities, these options simply do not exist.
It is downright insulting that the CFPB claims to have considered the needs of consumers when developing this rule. Consumers spoke out in record numbers against the rule, and more than 1 million submitted comments opposing the CFPB’s rule. This unexpected outpouring of customer opposition did not fit within the CFPB’s pre-determined agenda, and it is clear that the CFPB ignored these customers, many of whom sent handwritten letters and told personal stories of how small-dollar loans helped them through hardships.
These consumers fully understand what this rule would do and the impact it would have on them and their families. Nevertheless, the CFPB dismissed the input of these consumers and instead chose to rely primarily on supportive comments from so-called consumer activists.
Dozens of ideological consumer advocacy groups and other special interests used the ex-parte process to meet with senior CFPB officials and urge them to eliminate the legal, licensed and regulated small-dollar lending industry. In fact, Center for Responsible Lending President Mike Calhoun demonstrated the level of influence special interests have over the bureau when he advocated for bifurcation of the rule in a May 2017 closed-door meeting.
It has been long known that Calhoun and CRL have “cozy ties” with CFPB leadership, and the group even provided an initial draft of the proposed rule to the bureau. The blind acceptance of the opinions of advocacy groups and special interests, and the care with which the CFPB considered them, sits in stark contrast with the lack of consideration given to everyday Americans.
It seems unlikely, if not impossible, that in less than a year the CFPB actually read and considered 1.4 million comments submitted as it is required to do under the law. The bureau hired an unnamed government contractor to process the customer comments submitted, thereby delegating its statutory duty to a third party.
The bureau’s inability to follow rule-making standards as set out in the Administrative Procedure Act, which governs the federal rule-making process, played to the wishes of interest groups who have a biased agenda and no real concern for the customers they purport to represent.
In addition to consumers, the CFPB also disregarded the voices of small business owners across the country and treated the Small Business Regulatory Enforcement Fairness Act review process as a check-the-box exercise rather than the Congressionally-mandated examination that it is. As it is, the rule stands to force 82 percent of small storefront lenders to close, putting thousands out of work. The lack of consideration for the impact on small businesses even led the U.S. Small Business Administration to soundly criticize the CFPB and its rule.
The bureau ignored consumers and small businesses that will be directly impacted by its rule, while it actively sought the input of special interest groups to help achieve its rulemaking agenda. This resulted in a rule that is beneficial to the political agenda of Director Richard Cordray, not the consumers the bureau was created to protect.
This utter disregard for rule-making duties and the abject partisanship that permeates the CFPB have revealed the structural limitations and dangers of a bureau with a single, politically appointed director at its helm. One must question whether the CFPB deliberately released its rule in conjunction with an artificial and politically motivated timeline, hanging a cloud of suspicion over the entire rule-making process.
The CFPB must answer questions about the political underpinnings of the rule and whether Cordray deliberately curried favor with certain groups, such as consumer advocates, knowing that they would help him politically in the future.
The bureau’s structure and faulty rule-making process led it to produce a fundamentally flawed rule that stands to leave millions of Americans without a vital source of credit in their greatest times of need. In doing so, the CFPB will force people into more expensive or dangerous alternatives that will severely harm their financial well-being. Is that really what the bureau thinks “protecting” consumers looks like?
Dennis Shaul is the chief executive of the Community Financial Services Association of America, a trade organization representing the small-dollar lending industry.
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