Payday Loan Industry Mounts Challenge to CFPB Research

Inside the Consumer Financial Protection Bureau, Richard Hackett helped lay the groundwork for the highly anticipated upcoming regulations on payday lending. Then in August he left his job at the consumer agency.

Five months later, Hackett has moved into a private-sector role he's uniquely qualified to fill: heading a research project that will probe the limitations of the CFPB's payday-loan research.

Hackett is working for Clarity Services, a niche credit bureau that serves the payday industry and has a big stake in staving off tough new restrictions. Clarity's chief executive, Tim Ranney, has sought to debunk the idea that payday borrowers get trapped in a so-called cycle of debt.

For his own part, Hackett says he's operating independently and he's keeping an open mind about what his research will show.

"The data will say what the data says. My goal is to look at the data every way that I can think might be important, and then publish the outcomes without argumentation," he said in a recent interview.

"I have complete editorial control. Because that's the only way that I can do work that I think will have credibility."

There is ample precedent for financial services firms commissioning research that's meant to influence the outcome of pending regulations. In the wake of the Dodd-Frank Act, such studies have been ubiquitous.

The twist here is that the man hired to run the industry-funded research project knows where the bodies are buried, so to speak, after having served as CFPB's assistant director responsible for the Office of Installment and Liquidity Lending Markets.

Hackett argues that CFPB's payday loan research — which the agency has presented as evidence of a debt trap — has been hampered by data limitations.

The CFPB data only covered 12 months and did not allow researchers to determine which borrowers used multiple lenders, Hackett says. What's more, the CFPB's published research has relied only on data from storefront payday lenders, so online payday lenders have not been included.

"The research that was done was accurate and conducted with integrity and a great deal of thought, but was using a limited data set. And that's one of the motivations that I have in this effort, which is to bring to bear information that tries to answer the same questions in a bigger data set, in a broader data set," says Hackett, a lawyer who is getting assistance from statistics experts.

The data that Clarity is compiling on the U.S. payday loan industry is believed to be some of the most extensive anywhere. It includes a large database on online payday loans — which covers not only state-licensed online lenders, but also firms that are affiliated with Indian tribes or based offshore.

Hackett is using that database to replicate for online loans some of CFPB's research on storefront payday loans; his projects include an analysis of the cost of online payday loans, as well as a look at how often borrowers roll over into a new online loan. He is also researching whether state-level restrictions on storefront payday lending lead more borrowers to turn to online lenders.

It's unclear whether the findings from Hackett's research will be useful to payday lenders — either online or storefront — as they seek to persuade CFPB to write looser rules.

Clarity declined to reveal its budget for Hackett's research, saying that the total figure is hard to calculate, in part because Clarity staffers are contributing to the research.

Hackett, a partner at the law firm Hudson Cook who separately has a consulting contract with Clarity, hopes that his research will be finished and released to the public by the early fall, before the start of the CFPB's multi-stage rulemaking process for payday loans.

"There's a certain urgency to all of this," he says. "The bureau has said in public that by the end of the year the rulemaking on small-dollar lending will be under way."

Clearwater, Fla.-based Clarity is also compiling a database on storefront payday lending that Hackett says will vastly exceed CFPB's existing set of data. That trove may eventually be used by industry-backed researchers to challenge some of CFPB's findings.

"The current regulatory debate on payday loans has almost solely focused on the duration of use and has lacked any evidence of consumers' financial outcomes and welfare," Amy Cantu, a spokeswoman for the Community Financial Services Association of America, a payday lending trade group, said in an email.

"While many critics of payday loans have based their conclusions on a presumption of harm, rather than evidence of harm, such presumptions are not grounded in scientific data, and current research about payday lending as a whole leaves room for further analysis."

To be sure, firms in the payday industry are not alone in their efforts to use research to shape CFPB's actions. Studies by the Pew Charitable Trusts and consumer groups including the Center for Responsible Lending have long been at the center of the policy debate over payday lending.

"In terms of industry-funded research, I think that generally the more data that's out there, the better," said Rebecca Borne, senior policy counsel at the Center for Responsible Lending. "With any research, you just have to dig in as much as you can to really understand the conclusions that are being drawn."

Sam Gilford, a CFPB spokesman, declined to comment specifically on the agency's interest in research conducted by industry participants and consumer groups, but said in an email: "The bureau will take a wide range of relevant information into account in the course of any payday rulemaking, including the bureau's own research."

Clarity, which does not make payday loans but compiles reams of data on the industry's borrowers, may see a potential business opportunity in the looming CFPB regulations.

Ranney, the company's CEO, says there's an opportunity to provide lenders better data on how to segment the borrower population. Depending on how the CFPB rules are written, data providers might sell information to lenders to help predict which loan applicants are most likely to use a payday loan responsibly.

"Ultimately," Hackett says, "the question that will need to be answered is: Is there a way to preserve access to this product, while diminishing the size of the substantial minority of consumers who appear to run into trouble?"