As expected, the CFPB issued its proposed payday loan rule, in a release running 1,334 pages.  The CFPB also issued a fact sheet summarizing the proposal.  On June 15, 2016, from 12 p.m. to 1 p.m. ET, we will hold a webinar on the proposal: The CFPB’s Proposed Payday/Auto Title/High-Rate Installment Loan Rule: Can Industry Adapt to the New World Order?  Information about the webinar and a link to register are available here.

Like the proposals under consideration that the CFPB outlined last year in preparation for convening a SBREFA panel, the proposed rule is broad in terms of the products it covers and the limitations it imposes.  Lenders covered by the rule include nonbank entities as well as banks and credit unions.  In addition to payday loans, the rule covers auto title loans, deposit advance products, and certain high-rate installment and open-end loans.

The proposed rule establishes limitations for a “covered loan” which can be either (1) any short-term consumer loan with a term of 45 days or less; or (2) a longer-term loan with a term of more than 45 days where (i) the total cost of credit exceeds an annual rate of 36%, and (ii) the lender obtains either a lien or other security interest in the consumer’s vehicle or a form of “leveraged payment mechanism” giving the lender a right to initiate transfers from the consumer’s account or obtain payment through a payroll deduction or other direct access to the consumer’s paycheck.  The rule excludes from coverage purchase-money credit secured solely by the car or other consumer goods purchased, real property or dwelling-secured credit if the lien is recorded or perfected, credit cards, student loans, non-recourse pawn loans, overdraft services and overdraft lines of credit, and apparently credit sale contracts.

The proposed rule is very restrictive for covered short-term credit, requiring a lender to choose between:

  • Making a reasonable determination of the consumer’s ability to repay, which would require the lender to take account of the consumer’s basic living expenses and obtain and verify the consumer’s income and major financial obligations.  Some additional liberality is provided, however, insofar as lenders are permitted to verify housing expenses by records of expense payments, a lease or a “reliable method of estimating” housing expenses in the borrower’s locality.  The rule includes certain presumptions, such as a presumption that a consumer cannot afford a new loan when the consumer is seeking a covered short-term loan within 30 days of repayment of a prior covered short-term loan or a covered balloon payment longer-term loan.  To overcome the presumption, a lender would have to document sufficient improvement in the consumer’s financial capacity.  A lender would be prohibited from making a covered short-term loan to a consumer who has already taken out three covered short-term loans within 30 days of each other.
  • Making up to three sequential loans in which the first loan has a principal amount up to $500, the second loan has a principal amount that is at least one-third smaller than the principal amount of the first loan, and the third loan has a principal amount that is at least two-thirds smaller than the principal amount of the first loan.  A lender could not use this option if it would result in the consumer having more than six covered short-term loans during a consecutive 12-month period or being in debt for more than 90 days on covered short-term loans during a consecutive 12-month period.  A lender using this option cannot take vehicle security.

For covered longer-term credit, the rule requires a lender to choose between:

  • Making a reasonable determination of the consumer’s ability to repay, with the requirements for making such a determination similar to those that apply to short-term loans.
  • Using one of two options (both of which limit the number of loans a lender can make to a consumer under the option in a 180-day period and, in any event, seem of limited utility at best to “traditional” high-rate lenders):
    • An option modeled on the National Credit Union Administration’s program for payday alternative loans.  Requirements include a principal amount of not less than $200 and not more than $1,000, repayment in two or more fully amortizing, substantially equal payments due no less frequently than monthly and in substantially equal intervals, a term of at least 46 days and not more than six months, an annualized interest rate of not more than 28%, and an application fee of not more than $20, reflecting the actual cost of processing the application.
    • An option under which the total cost of credit does not exceed an annual rate of 36% (excluding a single origination fee of up to $50 or one that is a “reasonable proportion” of the lender’s underwriting costs), the loan term is at least 46 days and not more than 24 months, the loan is repayable in two or more payments that are fully amortizing, substantially equal, and due no less frequently than monthly and in substantially equal intervals, and the lender’s projected default rate on all loans made using this option does not exceed 5%.  If the default rate in any year exceeds 5%, the lender would be required to refund all origination fees paid by all borrowers whose loans were included in the default rate calculation.

For all covered short-term and longer-term credit, the rule would make a lender subject to the following collection restrictions:

  • A lender would generally have to give the consumer at least three business days advance notice before attempting to collect payment by accessing a consumer’s checking, savings, or prepaid account. The notice would have to include information such as the date of the payment request, payment channel, payment amount (broken down by principal, interest and fees), and additional information would be required for “unusual attempts” such as when the payment would be for a different amount than the regular payment or initiated on a date other than the date of a regularly scheduled payment.
  • If two consecutive attempts to collect money from a consumer’s account made through any channel are returned for insufficient funds, the lender could not make any further attempts to collect from the account unless the consumer provided a new authorization.

The rule also contemplates the CFPB’s registration of consumer reporting agencies as “registered information systems” to whom lenders would be required to furnish information about certain covered loans and from whom lenders would be required to obtain consumer reports for use in making ability to repay determinations.

Comments on the proposal are due by September 14, 2016 and the CFPB will undoubtedly require considerable time to address the comments it receives.  The CFPB has proposed that, in general, a final rule would become effective 15 months after publication in the Federal Register.

 

On March 26, the CFPB held a public hearing on payday and auto title lending, the same day that it released proposed regulations for short-term small-dollar loans. Virginia Attorney General, Mark Herring gave opening remarks, during which he asserted that Virginia is perceived as the “predatory lending capital of the East Coast,” suggesting that payday and auto title lenders were a large part of the problem. He said that his office would target these lenders in its efforts to curb alleged abuses. He also announced several initiatives aimed at the industry, including enforcement actions, education and prevention, legislative proposals, a state run small-dollar loan program, and an expanded partnership with the CFPB. The Commissioner of Virginia’s Bureau of Financial Institutions, E. Joseph Face, also gave brief remarks echoing those of the Attorney General.

Richard Cordray, director of the CFPB, then gave lengthy remarks, which were published online the morning before the hearing took place and are available here. His remarks outlined the CFPB’s new “Proposal to End Payday Debt Traps.” Cordray explained and defended the CFPB’s proposed new regulations. While most of what he said was repetitive of the lengthier documents that the CFPB published on the topic, a few lines of his speech revealed the impetus behind the CFPB’s proposed regulations and one reason why they are fundamentally flawed.

In discussing the history of consumer credit, he stated that “[t]he advantage[, singular] of consumer credit is that it lets people spread the cost of repayment over time.” This, of course, ignores other advantages of consumer credit, such as closing time gaps between consumers’ income and their financial needs. The CFPB’s failure to recognize this “other” advantage of consumer credit is a driving force behind several flaws in the proposed regulations, which we have been and will be blogging about.

Following the opening remarks, the CFPB moderated a panel discussion during which participants from industry and consumer advocacy groups had the opportunity to comment on the proposed regulations and answer questions. The CFPB panel included:

  • Richard Cordray, Director, CFPB
  • Steven Antonakes, Deputy Director, CFPB
  • Zixta Martinez, Assistant Director of Community Affairs, CFPB
  • Kelly Cochran, Assistant Director for Regulations, CFPB.

On the consumer advocate panel were:

  • Paulina Gonzales, Executive Director, California Reinvestment Coalition
  • Michael Calhoun, President, Center for Responsible Lending
  • Dana Wiggins, Director of Outreach, Virginia Poverty Law Center
  • Wade Henderson, President and CEO, The Leadership Conference on Civil Rights and Human Rights

The industry panel included:

  • Lisa McGreevy, President & CEO, Online Lenders Alliance
  • Edward D’Alessio, General Counsel (former), Financial Service Centers of America
  • Lynn DeVault, Board Member, Community Financial Services Association of America
  • Stanley P. Leicester, II, Senior Vice President and CFO, BayPort Credit Union

After the panelists’ opening remarks, they answered questions posed by the CFPB such as: (i) What should the role of “ability to repay” standards be in the payday loan market?; (ii) How do payday loans’ rollover feature impact the ability to repay?; and (iii) “What is the appropriate balance between protecting consumers and ensuring that they have access to credit?”

Not surprisingly, in answering these questions, the consumer advocate panel took every opportunity to condemn payday and auto title products. They generally cited anecdotal evidence of consumers who became financially and emotionally distressed when they found themselves unable to repay their loans. One panelist purported to cite “data” compiled by his own organization in support of the proposed regulations. Unfortunately, these consumer advocates offered no viable alternatives to payday and auto title products to help consumers who find themselves in need of money and with nowhere else to turn.

The industry panelists generally expressed concern over the CFPB’s proposed regulations. Ms. McGreevy, speaking for online lenders, stated that any new regulations should not stifle innovation, rely on outdated underwriting methods, or dictate when consumers would be allowed to take out a loan. All of the industry panelists, in some way or another, expressed concern that new regulations not be implemented in a way that defeats the purposes of payday and auto title products. If, for example, the new regulations dramatically increase the time it takes to get a loan, they may strip away the value that these loans provide to consumers who need them.

After the panel concluded, the CFPB entertained comments from approximately 40 members of the public who had registered in advance. The speakers were each afforded one minute to comment. Employees of payday and auto title loan stores made up the largest group of speakers, followed closely clergy and consumer advocacy groups. A fair number of consumers also made remarks. One consumer claims to have taken out a $300 loan on which she now owes more than $5,000. Others expressed gratitude towards the payday and auto title lenders whose loans allowed them to stay out of financial peril or to respond to an emergency situation.

The CFPB has moved a step closer to issuing payday loan rules by releasing a press release, factsheet and outline of the proposals it is considering in preparation for convening a small business review panel required by the Small Business Regulatory Enforcement Fairness Act and Dodd-Frank.  The CFPB’s proposals are sweeping in terms of the products they cover and the limitations they impose.  In addition to payday loans, they cover auto title loans, deposit advance products, and certain “high cost” installment and open-end loans.  In this blog post, we provide a detailed summary of the proposals.  We will be sharing industry’s reaction to the proposals as well as our thoughts in additional blog posts.

When developing rules that may have a significant economic impact on a substantial number of small businesses, the CFPB is required by the Small Business Regulatory Enforcement Fairness Act to convene a panel to obtain input from a group of small business representatives selected by the CFPB in consultation with the Small Business Administration.  The outline of the CFPB’s proposals, together with a list of questions on which the CFPB seeks input, will be sent to the representatives before they meet with the panel.  Within 60 days of convening, the panel must issue a report that includes the input received from the representatives and the panel’s findings on the proposals’ potential economic impact on small business.

The contemplated proposals would cover (a) short-term credit products with contractual terms of 45 days or less, and (b) longer-term credit products with an “all-in APR” greater than 36 percent where the lender obtains either (i) access to repayment through a consumer’s account or paycheck, or (ii) a non-purchase money security interest in the consumer’s vehicle.  Covered short-term credit products would include closed-end loans with a single payment, open-end credit lines where the credit plan terminates or is repayable in full within 45 days, and multi-payment loans where the loan is due in full within 45 days.

Account access triggering coverage for longer-term loans would include a post-dated check, an ACH authorization, a remotely created check (RCC) authorization, an authorization to debit a prepaid card account, a right of setoff or to sweep funds from a consumer’s account, and payroll deductions.  A lender would be deemed to have account access if it obtains access before the first loan payment, contractually requires account access, or offers rate discounts or other incentives for account access.  The “all-in APR” for longer-term credit products would include interest, fees and the cost of ancillary products such as credit insurance, memberships and other products sold with the credit.  (The CFPB states in the outline that, as part of this rulemaking, it is not considering proposals to regulate certain loan categories, including bona-fide non-recourse pawn loans with a contractual term of 45 days or less where the lender takes possession of the collateral, credit card accounts, real estate-secured loans, and student loans.  It does not indicate whether the proposal covers non-loan credit products, such as credit sale agreements.)

The contemplated proposals would give lenders alternative requirements to follow when making covered loans, which vary depending on whether the lender is making a short-term or longer-term loan.  In its press release, the CFPB refers to these alternatives as “debt trap prevention requirements” and “debt trap protection requirements.”  The “prevention” option essentially requires a reasonable, good faith determination that the consumer has adequate residual income to handle debt obligations over the period of a longer-term loan or 60 days beyond the maturity date of a short-term loans.  The “protection” option requires income verification (but not assessment of major financial obligations or borrowings), coupled with compliance with specified structural limitations.

For covered short-term loans (and longer-term loans with a balloon payment more than twice the level of any prior installment), lenders would have to choose between:

Prevention option.  A lender would have to determine the consumer’s ability to repay before making a short-term loan.  For each loan, a lender would have to obtain and verify the consumer’s income, major financial obligations, and borrowing history (with the lender and its affiliates and with other lenders.)  A lender would generally have to adhere to a 60-day cooling off period between loans (including a loan made by another lender).  To make a second or third loan within the two-month window, a lender would need to have verified evidence of a change in the consumer’s circumstances indicating that the consumer has the ability to repay the new loan.  After three sequential loans, no lender could make a new short-term loan to the consumer for 60 days.  (For open-end credit lines that terminate within 45 days or are fully repayable within 45 days, the CFPB would require the lender, for purposes of determining the consumer’s ability to repay, to assume that a consumer fully utilizes the credit upon origination and makes only the minimum required payments until the end of the contract period, at which point the consumer is assumed to fully repay the loan by the payment date specified in the contract through a single payment in the amount of the remaining balance and any remaining finance charges.  A similar requirement would apply to ability to repay determinations for covered longer-term loans structured as open-end loans with the additional requirement that if no termination date is specified, the lender must assume full payment by the end of six months from origination.)

Protection option.  Alternatively, a lender could make a short-term loan without determining the consumer’s ability to repay if the loan (a) has an amount financed of $500 or less, (b) has a contractual term not longer than 45 days and no more than one finance charge for this period, (c) is not secured by the consumer’s vehicle, and (d) is structured to taper off the debt.

The CFPB is considering two tapering options.  One option would require the lender to reduce the principal for three successive loans to create an amortizing sequence that would mitigate the risk of the borrower facing an unaffordable lump-sum payment when the third loan is due.  The second option would require the lender, if the consumer is unable to repay the third loan, to provide a no-cost extension that allows the consumer to repay the third loan in at least four installments without additional interest or fees.  The lender would also be prohibited from extending any additional credit to the consumer for 60 days.

Although a lender seeking to utilize the protection option would not be required to make an ability to repay determination, it would still need to apply various screening criteria, including verifying the consumer’s income and borrowing history and reporting the loan to all commercially available reporting systems.  In addition, the consumer could not have any other outstanding covered loans with any lender, rollovers would be capped at two followed by a mandatory 60-day cooling-off period for additional loans of any kind from the lender or its affiliate, the loan could not result in the consumer’s receipt of more than six covered short-term loans from any lender in a rolling 12-month period, and after the loan term ends, the consumer cannot have been in debt for more than 90 days in the aggregate during a rolling 12-month period.

For covered longer-term loans, lenders would have to choose between:

Prevention option.  Before making a fully amortizing covered longer-term loan, a lender would have to make essentially the same ability to repay determination that would be required for short-term loans, over the term of the longer-term loan.  In addition, an ability to repay determination would be required for an extension of a covered longer-term loan, including refinances that result in a new covered longer-term loan.  To extend the term of a covered longer-term loan or refinance a loan that results in a new covered longer-term loan (including the refinance of a loan from the same lender or its affiliate that is not a covered loan), if certain conditions exist that indicate the consumer was having difficulty repaying the pre-existing loan (such as a default on the existing loan), the lender would also need verified evidence that there had been a change in circumstances that indicates the consumer has the ability to repay the extended or new loan.  Covered longer-term loans with balloon payments are treated the same as short-term loans.

Protection option.  The CFPB is considering two alternative approaches for a lender to make a longer-term loan without determining the consumer’s ability to repay.  Under either approach, the loan term must range from a minimum of 45 days to a maximum of six months and fully amortize with at least two payments.

  • The first approach is based on the National Credit Union Administration’s program for payday alternative loans, with additional requirements imposed by the CFPB. The NCUA program would limit the loan’s terms to (a) a principal amount of not less than $200 and not more than $1,000, and (b) an annualized interest rate of not more than 28% and an application fee of not more than $20, reflecting the actual cost of processing the application.  Under the NCUA’s screening requirements, the lender would have to use minimum underwriting standards and verify the consumer’s income.  The CFPB would also require the lender to verify the consumer’s borrowing history and report use of the loan to all applicable commercially available reporting systems and would prohibit the lender from making the loan if the consumer has any other outstanding covered loan or the loan would result in the consumer having more than two such loans during a rolling six-month period.  Under this alternative, a lender that holds a consumer’s deposit account would not be allowed to fully sweep the account to a negative balance, set off from the consumer’s account to collect on the loan in the event of delinquency, or close the account in the event of delinquency or default.
  • The second approach limits each periodic payment to 5 percent of the consumer’s expected gross income over the payment period.  No prepayment fee could be charged.  The lender would also have to verify the consumer’s income and borrowing history and report use of the loan to all applicable commercially available reporting systems.  In addition, the consumer must not have any other outstanding covered loans or have defaulted on a covered loan within the past 12 months and the loan cannot result in the consumer being in debt on more than two such loans within a rolling 12-month period.

Restrictions on  collection practices.  For all covered short-term and longer-term loans, lenders would be subject to the following restrictions:

  • Advance notice of account access.  A lender would be required to provide three business days advance notice before attempting to collect payment through any method accessing an account, including ACH entries, post-dated signature checks, RCCs, and payments run through the debit networks.  The notice would have to include information such as the date of the payment request, payment channel, payment amount (broken down by principal, interest and fees), and remaining loan balance.  Notice by email would generally be permitted.
  • Limit on collection attempts.  If two consecutive attempts to collect money from a consumer’s account made through any channel are returned for insufficient funds, the lender would not be allowed to make any further attempts to collect from the account unless the consumer provided a new authorization.

In the latest semi-annual update of its rulemaking agenda, the CFPB officially confirmed that it plans to propose a rule to define “larger participants of a market for auto lending.”  The official confirmation follows statements made by Steven Antonakes at a Consumer Bankers Association meeting in April 2014 that the CFPB’s next larger participant rule would relate to auto finance.  At that time, Alan Kaplinsky, who spoke at the CBA meeting, wrote that he anticipated seeing the proposal during the summer and, consistent with Alan’s expectations, the agenda gives an August 2014 timetable for the proposal.

The CFPB’s Spring 2014 rulemaking agenda describes payday loans/deposit advance products, overdrafts, and debt collection as in the “prerule stage,” and prepaid cards as in the “proposed rule stage.”  The agenda gives a June 2014 timetable for a prepaid card rule proposal.  For payday loans and deposit advance products, the agenda gives a September 2014 timetable for further “prerule activities.”  For debt collection and overdraft practices, the agenda gives timetables of, respectively, December 2014 and February 2015 for further “prerule activities.”

The agenda also indicates that further amendments to the CFPB’s 2013 mortgage rules are in the “proposed rule stage” but gives no timetable for further proposed clarifications or amendments beyond those already issued.  With regard to revisions to Regulation C to implement amendments made to the Home Mortgage Disclosure Act by Dodd-Frank that included expanded data collection requirements, the agenda references the CFPB’s plans (on which we previously reported) to convene a Small Business Review Panel and begin developing a proposed rule.  With regard to the Gramm-Leach-Bliley annual privacy notice, the agenda references the CFPB’s plans to issue a proposed “streamlining rule.”  The CFPB issued the proposal in May 2014.

The CFPB has announced that it will be holding a field hearing on payday loans on
March 25, 2014 in Nashville, Tennessee.  The event will feature remarks by Director Cordray and testimony from consumer groups, industry members, and the general public. 

The CFPB’s rulemaking agenda issued at the end of last year included “prerule activities” concerning payday loans and deposit advance products targeted for this month.  It is possible that the CFPB will use the field hearing to unveil a further “white paper.” (In its white paper on these products issued in April 2013, the CFPB stated that it would be conducting further research and analysis.)  Another (and more ominous) possibility is that the CFPB will use the event to announce the issuance of an advance notice of proposed rulemaking on payday loans and deposit advance products.

We found much to criticize when the CFPB issued its White Paper this past April on payday and deposit advance loans.  However, we remain hopeful that the CFPB will make good on its commitment that any rule-making on these matters will be evidence-based. 

Unfortunately, the OCC and FDIC have not taken that approach.  Instead, the two agencies have carried out their threat in their proposed guidance to kill deposit advance loans by issuing final guidance that may make it impossible for banks they supervise to continue offering these products on a large-scale basis, if at all.  We have prepared a legal alert discussing the final guidance.

 

David Silberman, the CFPB’s Associate Director of Research, Markets and Regulations, made the CFPB’s April 2013 white paper on payday and deposit advance loans the focus of his testimony at the hearing held on July 24 by the Senate’s Special Committee on Aging entitled “Payday Loans: Short-term Solution or Long-term Problem?”  

As we previously reported, the paper’s methodology and data has been criticized by industry, which has labeled it “demonstrably incomplete and misleading.”  Many of these flawed findings were presented by Mr. Silberman, such as the paper’s finding that only a “fairly small segment of consumer use payday loans or deposit advances on an occasional basis.”  

Like the CFPB’s paper, Mr. Silberman repeatedly referred to payday and deposit advance loans as “traps.”  We have previously commented that such pejorative language ignores the reality that payday and deposit advance loans have very real benefits, and for many consumers, such products may be better than the alternatives.   

We have also previously commented that for the CFPB to truly be the “data-driven” agency it claims to be, it must conduct a cost-benefit analysis before engaging in any rule-making on payday and deposit advance loans.  However, also like the CFPB’s paper, Mr. Silberman’s discussion of the CFPB’s next steps does not mention conducting such an analysis.

A friend brought to my attention a two-page comment letter from Senators Elizabeth Warren and Bill Nelson, commenting on the OCC’s proposed deposit advance guidance, the subject of a prior blog.  For a letter co-authored by the single person most responsible for the creation of the CFPB, this is a remarkable. 

The letter urges the OCC to discourage banks from using government benefits as proof of income in their underwriting of deposit advance loans.  Are Senators Warren and Nelson really unaware that the Equal Credit Opportunity Act flatly bans discrimination against applicants and borrowers based on the fact that all or part of their income derives from public assistance?  Do they believe the OCC has the power to override this statutory mandate?

Additional problems with the letter include the following:

  • The letter expresses consternation that (according to the Center for Responsible Lending) “most deposit advance customers take out more than eleven loans a year.”  One loan a month does not strike me as excessive, especially if the loans are used wisely (for example, to avoid late fees or overdraft fees).  Like the OCC and FDIC, Senator Warren and Senator Nelson fail to give a second of consideration to what these customers would do in the absence of deposit advances.
  • The letter makes the ritual claim that “we strongly believe in consumer choice” but simultaneously supports the OCC guidance.  As members of a Committee that has been investigating these products, Senators Warren and Nelson should surely know that the guidance will eliminate deposit advances from the market, even without the regulatory enhancements the Senators are proposing.
  • The letter characterizes the proposed deposit advance guidance as “a productive start in restoring safety and soundness in the banking system.  As I have previously observed, the claim is preposterous that deposit advance loans are a threat to the banking system’s safety and soundness.
  • Far from expressing any concern about the OCC’s and FDIC’s usurpation of the CFPB’s authority to adopt consumer credit regulations under Dodd-Frank and federal consumer credit laws, including the Truth in Lending Act, the letter supports an OCC and FDIC initiative to adopt UDAAP rules and additionally recommends that the OCC adopt, in effect, a TILA rule that would require banks to make a closed-end APR disclosure for an open-end loan.

The tack taken by Senators Warren and Nelson is disappointing.  Hopefully, the CFPB will adopt a more considered, evidence-based approach to issues of this type.

Jeff Sovern and I come at most issues from different sides of the street but I want to credit him for the open mind he showed in his recent blog post on deposit advance loans.  Unlike many of his colleagues in the consumer advocacy business (to say nothing of the staff at the FDIC and OCC), Jeff is not prepared to eliminate deposit advance loans before someone gives serious consideration to “what would the borrowers who are now taking out such loans do if they could no longer get them.” 

Jeff worries about whether deposit advance borrowers recognize that credit card and family loans are cheaper than deposit advances.  I have much more confidence in the ability of the average borrower to know what is in their financial interest.  If they could borrow more cheaply, they would.  In any event, some sort of enhanced disclosure regimen would serve as a much better approach than eliminating the deposit advances and payday loans entirely.

Jeff asks who should make the judgment whether deposit advances are in the consumer’s interest—the consumer or regulators?  Respectfully, I think this is an easy question, at least based on present knowledge.  The FDIC and CFPB have not even attempted to show that, on balance, the costs of deposit advances exceed the benefits and the CFPB has effectively promised regulation of payday loans prior to completing any cost-benefit analysis.  They don’t like features of the products—primarily the high rates—and are way too willing to impose their views on the consumers they claim to represent. 

As to the Elizabeth Warren analogy Jeff cites, deposit advances and payday loans are not defective toasters in danger of burning down houses.  If there are problems with these products—and the problems need to be established, not assumed—the CFPB should deal with them.  But let’s not burn the house down in the name of consumer protection.

The CFPB’s white paper on payday and deposit advance loans received well-deserved criticism in a letter to Director Cordray from the Community Financial Services Association of America (CFSA), a national trade organization for payday lenders.  

The CFSA’s letter characterizes the paper’s data as “demonstrably incomplete and misleading” and indicates that the paper’s “tone, conclusions, and specific language [seem] aligned with the type of rhetoric that more often comes from advocacy groups that are not always driven by facts, but rather are driven by agendas and unsupported, anecdotal information.” 

The letter comments that, by excluding from its discussion of usage payday customers who elect to use the payday advance one time, the paper “paints an incomplete and inaccurate picture of the product, its use and the consumer’s experience.”  The CFSA also comments on the absence of “vital real world context” from the report, observing that the paper “does not consider the totality of the short-term credit marketplace, including the many available options that consumers consider and choose not to employ.”  Most significantly, the CFSA states: 

The Bureau cannot draw any meaningful conclusions to inform policy until it follows up this preliminary review with the difficult work of understanding the choices and consequences faced by those in need of short-term credit and the risks of driving people to higher-cost products, expensive penalties or less-regulated providers.  In short, it is irresponsible and arbitrary to look at payday lending and deposit advances in a vacuum, as the Bureau has done in this report. 

We have expressed similar concerns about the white paper’s failure to address the very real benefits of payday loans or the question whether (and when) such benefits outweigh the costs. 

As it continues to look at the short-term credit marketplace, we hope the CFPB will engage in the thorough analysis urged by the CFSA and attempt to address the shortcomings in its white paper that the CFSA has identified.