When Consumer Financial Protection Bureau Director Kathy Kraninger told lawmakers earlier this month that the bureau had “additional research” on the payday lending rule, some experts sat up and took notice.
Research on whether consumers understand the risks of payday loans goes to the heart of the CFPB’s original 2017 final payday rule — and of Kraninger’s efforts to unwind it.
But observers said they were baffled by Kraninger’s comments. They know of no new research or independent literature that has come out since Kraninger
"They didn't reference any new research in the proposal. They just took a different interpretation of existing research," said Corey Stone, entrepreneur-in-residence at the Financial Health Network and a former CFPB assistant director in its research division.
In her Oct. 16 testimony, Kraninger told members of the House Financial Services Committee that the agency was reviewing research as part of public comments it collected after the February proposal, which would rescind requirements that lenders verify borrowers' ability to repay.
"We are working our way through the 19,000 comments that we received including some additional research that has come to bear," Kraninger said.
Her comments raise new questions about the agency's thinking as it works to finalize an overhaul that consumer groups say is already on shaky ground.
The CFPB can re-analyze and reinterpret publicly available research and any data it previously acquired to support the payday rule. But if the bureau engages in a new data collection, it would have to provide public notice and comment to comply with the Administrative Procedure Act.
“New research would have no bearing on a final rule unless they are planning to re-propose the rule,” said Alex Horowitz, a senior research officer at the Pew Charitable Trusts’ small-dollar-loan project. “They can cite something new in the final rule to acknowledge it, but they can’t rely on it in any way.”
Horowitz added that the APA guidelines on new research would extend to research the bureau analyzed through the public commenting process. But he said he knows of no new research that has come out this year on payday loans.
Up to now, the CFPB had indicated that it carried out no new research efforts in advance of the February proposal. Rather, officials have argued that the agency under former Director Richard Cordray misinterpreted the research it cited in the 2017 rule. Yet the CFPB has sounded open to relying on new outside sources of research.
“We have decided to reconsider the rule, in part, because the research that was done — [there was] nothing wrong with it in and of itself — is not a very strong basis for addressing all vehicle title lenders nationwide and all payday lenders nationwide and for that reason we have questions about it, and that’s why we put it out for public comment to see if there are other sources of information on this point before the bureau makes a final determination,” Thomas Pahl, the CFPB’s policy associate director for research, markets and regulations, told a House subcommittee in May.
The agency under both Cordray and Kraninger has referred to a 2012 survey by Columbia University law professor Ronald Mann.
In developing strong underwriting requirements, the Cordray-led CFPB pointed to the 40% of borrowers in the study who were unable to predict when they would be able to repay a loan. But to the Kraninger-led agency, the majority of borrowers who could predict that bolstered the case to ease the rule.
Consumer advocates argue Kraninger still has not presented enough evidence for revamping the 2017 regulation.
“The 2019 [proposal] essentially said credit is valuable and it seems like a lot of borrowers know what they are going to get, but it doesn’t substantiate the argument with research,” Horowitz said.
When the CFPB published the first payday notice, in 2016, the bureau also released new research the same day so that it could be part of the basis for the final rule, Horowitz said.
"If they had waited a day longer to release it, they legally could not have relied on it as a basis for either the proposed or the final rule," he said.
Research on the payday rule has remained a contentious issue that could form the basis for litigation when a revised rule is issued next year.
Two payday trade groups that sued the CFPB last year claimed Cordray had cherry-picked the facts, but consumer groups have implied that they could accuse Kraninger of the same thing.
Many payday loan industry supporters say that the CFPB’s original research was faulty and that it could have been used to show that consumers need payday loans and understand how they work.
“The research I’ve seen to date fell well short of the kind of material that you would want to use to support a rule that would decimate the industry,” said Jeremy T. Rosenblum, a partner at Ballard Spahr. “They have a proposal to eliminate the ability-to-repay part of the rule, but they haven’t adopted it yet. I suspect the research will go to that issue.”
Under Cordray, the CFPB produced two research reports that looked specifically at payday loan rollovers. That research led the bureau to conclude that unaffordable payday loans trap borrowers in cycles of debt that is “unfair” and “abusive.” But the CFPB also acknowledged in its original rule imposing ability-to-repay requirements on lenders could have forced 85% to go out of business.
Under Kraninger, the CFPB is expected to walk back the core concept that payday loans constitute a practice that is prohibited under the Dodd-Frank Act.
Jamie Fulmer, a senior vice president at Advance America, a large payday lender that is owned by Grupo Elektra in Mexico, said he interpreted Kraninger’s congressional testimony to mean she was looking at the full record of the previous rulemaking.
“The more new research that can help inform the rulemaking process the better,” Fulmer said. “Our contention all along is that they didn’t do a good enough job of understanding the costs and benefits associated with their remedy, and they knew [the 2017 final rule] would reduce the cost of credit by $7 billion.”
Some argue that Kraninger missed an opportunity in the revised proposal to provide an in-depth cost-benefit analysis of payday loans, and that will provide a basis for overturning the previous rule.
"I don’t think the CFPB made their best argument, which was that they had to measure any costs to industry," Rosenblum said.
