Chalk up another win for President Trump’s deregulatory agenda - the Consumer Financial Protection Bureau last week announced a plan to reconsider an Obama-era regulation that would have made it harder for working Americans to access credit.
Without reform, the CFPB’s rule governing payday and vehicle-title loans would have all but eliminated the industries, wiping out around $20 billion worth of credit from the economy and stripping away loan options from countless consumers.
Payday loans may not be suitable for everyone, but they help millions of people bridge a gap during hard times. For example, a recent Federal Reserve survey found that 40 percent of American adults do not have enough savings to cover a $400 emergency expense.
For those on the financial fringe who lack savings or access to credit, paying a past-due utility bill or fixing a broken-down car can be tough. Small-dollar loans can get those vulnerable consumers through to their next paycheck, and they beat having the electricity shut off or being stranded without a car.
So what was the CFPB’s justification for the near-elimination of a valued industry? The Obama-era CFPB said that “consumers lack the requisite level of understanding” of these loans. That is, consumers are incapable of grasping the risks of short-term, high-interest loans.
To support that claim, the CFPB relied on a study from Columbia Law School professor Ronald Mann. The problem is that Mann’s study showed a majority of consumers do appreciate the risks of short-term, small-dollar loans, and rationally decide to take them out anyway, concluding that the majority of borrowers “have a good understanding of their own use of the product.”
Professor Mann even went so far as to criticize the original rule in a letter to the bureau, stating that it was “frustrating” that the CFPB’s summary of his work was “so inaccurate and misleading,” torturing the analysis to the extent that it was “unrecognizable.”
Despite the CFPB’s claims, the fact is that small-dollar loan products are remarkably simple. So long as a borrower has an income, a checking account, and an ID, a short-term loan can provide between $100-500 for a 15 percent fee, with no required collateral and no hidden fees or terms.
For example, a customer could take out a loan for $300 and owe $345 in two weeks time. It’s that straightforward. No payday lender that is abiding by long-established law is doing anything more complicated.
This is perhaps why a mere 1 percent of all complaints received by the CFPB are related to payday lending. In fact, the overwhelming majority of small-dollar loan borrowers value them.
No wonder the Trump administration wanted to set the record straight. The empirical evidence underpinning the rule was scant, while the impact on consumers and businesses would be disastrous.
Even so, leading Democratic opponents such as Sen. Sherrod Brown, D-Ohio, and Rep. Maxine Waters, D-Calif., claim that the bureau is now betraying its mission to protect consumers. But that is mistaken. A crucial part of improving consumers’ lives is ensuring that they have access to competitive credit markets - something that is an express legal requirement of the CFPB.
You don’t make people better off by taking away their choices. You make people better off by offering them more and better choices.
The decision by the Trump administration to preserve consumer choice and access to credit is the right one. Rescinding the payday loan rule is a win for consumers, allowing individuals - and not Washington bureaucrats - to decide what is best for themselves.
Daniel Press is a financial policy analyst with the Competitive Enterprise Institute, a free market public policy organization based in Washington, D.C.