Critics of CFPB’s revised payday rule miss the mark

The Consumer Financial Protection Bureau recently released its proposed revisions to small-dollar lending rules. Public backlash was predictable and immediate, as politicians and commentators denounced the bureau for enabling “predatory lending” while spinning stories of “debt traps” and ruined lives.

The CFPB should ignore that criticism, however. Its rule revision was a victory for evidence-based governance and credit-starved consumers.

Small-dollar lending, including so-called payday loans, provides millions of underbanked Americans with needed lines of credit. As originally constructed, the rule set deliberately burdensome underwriting requirements so as to shut down the industry starting in August — but new CFPB leadership reversed course by releasing revised rules earlier this month.

What’s most revealing about the public debate surrounding payday lending is the gap in experience between those who denounce payday loans and those who use them. Reflecting on the public perception of small-dollar loans, "Hillbilly Elegy" author J.D. Vance muses, “Powerful people sometimes do things to help people like me without really understanding people like me.”

The CFPB’s original small-dollar lending rule, which also regulates installment and automobile title loans, was finalized in 2017 under CFPB Director Richard Cordray, an Obama appointee. The rule’s ostensible goal was “to help people like” Vance from the supposedly consumer-harming lending practices of payday lenders and others.

According to numbers used by the bureau, an estimated 12 million Americans use payday loans each year. Through the 2017 rule, the CFPB would have knowingly cut the number of these loans by 62% to 68%. It justified the move using the research of professor Ronald Mann, claiming consumers who typically use the loans “are not able to predict accurately how likely they are to reborrow.”

In other words, consumers were taking out these loans in ignorance of the economic particulars. The problem? Mann didn’t agree with how the CFPB used his work.

“The Bureau has stated a commendable intention to found its rulemaking on empirical evidence collected in the academic context,” Mann said through public comment on the original rule. “I only wish that the implementation of that statement reflected an even-handed assessment of evidence rather than a distortion of the evidence to suit policies that the Bureau has pre-selected for implementation.”

That’s pretty damning, and the CFPB’s recent revision, under new Director Kathy Kraninger, cites misuse of the Mann study as justification for rolling back the small-dollar lending rule.

This “distortion” of evidence included a glaring and indisputable fact about small-dollar loans: Millions of people use them. According to the CFPB’s own admission, buried deep within the 2017 rule, these loans are “typically used by consumers who are living paycheck to paycheck, have little to no access to other credit products, and seek funds to meet recurring or one-time expenses.”

Little to no access to other credit products is the key phrase here. Far from solving demand for credit, destroying small-dollar lending would have eliminated some of the few options available to millions of consumers, potentially driving them into the arms of less scrupulous lenders. The 2017 rule would almost certainly have been a boon for loan sharks.

While rolling back the stringent underwriting requirements, the CFPB’s revisions leave in place new rules relating to payment collection but extend their compliance date to 2020. After 90 days of public comment, the CFPB will make final revisions to the regulation.

Some lenders are concerned that the CFPB left the collection rules untouched, but rolling back just the underwriting requirements would provide plenty of benefits to businesses and consumers alike. Under the new rule, the CFPB estimates “loan volumes would increase between 104 percent and 108 percent” relative to the 2017 requirements. In other words, lenders get more business and consumers get more credit access.

By revising rules that had been based on dubious premises, the CFPB’s actions are a victory for anyone who believes government regulations should have a firm foundation on solid evidence. The onus should be on government regulators to prove products and services cause harm, particularly if, like payday loans, they are used by millions of Americans. Twisting studies to implement “pre-selected” policies is a recipe for generating unintended consequences, not enhancing consumer welfare.

Through its restraint, the CFPB is keeping credit available for low-income Americans with limited options. Netflix reportedly just bought the rights to Vance’s memoir for $45 million, so presumably he will never need payday loans again. Thanks to the rule revisions, though, they will be there if he does.