The new director of the Consumer Financial Protection Bureau, Rohit Chopra, has started rattling his interventionist saber just two months after his Senate approval. From calling for Federal Deposit Insurance Corp. to block bank mergers to attacking bank overdrafts, Mr. Chopra has been aggressive. If the CFPB’s research on “buy now, pay later” loans and pawns are a leading indicator, it seems only a matter of time before Mr Chopra revisits the continuing appeal of payday loans.
A study we recently completed challenges the wisdom and legitimacy of the CFPB’s latest attempt to regulate payday loans, a rule made in 2017. This rule provides the blueprint for efforts to regulate payday loans that no longer exist. This massive rule limited payday loan customers to no more than six loans per year unless they could meet a strict government-mandated standard for repayment eligibility.
Our results show that the CFPB’s approach to regulating payday loans is poorly thought out and needs to be adjusted. We have found that the CFPB’s focus on the number of payday loans allowed is not an adequate consumer protection policy.
We examined 2013 data on 15.6 million payday loans to 1.8 million individual borrowers to determine whether the number of loans a consumer takes out per year is a meaningful estimate of consumer welfare. We have researched the terms and usage of payday loans, and assessed the impact on consumers if they are not allowed to take out more than six loans per year. We focused on the interaction of this restriction with two common ways that states regulate payday loans: restrictions on allowable loan fees and loan amounts.
Our results will shock the CFPB rule writers. In contrast to the research cited in the 2017 CFPB Rule, which claimed that “loans are almost always granted at the maximum allowable rate,” we found that neither the fees paid nor the loan amounts rose inexorably to the maximum allowable limits when these allowable amounts were reasonable.
We have found that two otherwise identical consumers in different states can take out different numbers of loans to get the loan amount they need, simply because state laws differ in the amount a consumer can legally take out on a loan. In a state with a $ 500 credit limit, if a consumer needs $ 600, the borrower must take out two loans. Without a cap, one loan would be enough.
We found that borrowers in states with low loan allowances ($ 500 or less) borrow approximately 50% more than borrowers in states with high loan amounts (more than $ 500 or no loan cap). In low volume states, borrowers took out an average of 9.31 loans. In high-volume states, borrowers took out an average of 6.27 loans.
In addition, despite the stricter credit limits on loan amounts, borrowers in low-amount states took out the same total amount at some point during the year as in high-amount states. Ultimately, consumers in states with small amounts had to borrow more to meet their needs. Overall, our research shows that the CFPB’s obsession with the number of credits as a useful measure of consumer wellbeing is arbitrary.
The CFPB’s concern in 2017 was borrowers who kept “overdrawn” their loans. A rollover occurs when a consumer borrows, for example, $ 500 and promises to repay the full amount within two weeks. However, if the borrower does not repay the loan in full within two weeks, the loan can be “rolled over” by simply paying the fee (usually around $ 19-21 per $ 100). The rigid standard of repayment and six payday loans per year seem to be due, at least to us, to rollovers by payday borrowers. Rollovers represent a large number of loans but are made by a minority of borrowers.
Fortunately, cooler heads prevailed, and in 2020, the CFPB, under the director Kathleen Kraninger, withdrew the repayment eligibility determination from 2017, as a rule. The CFPB Estimates had the rule come into effect in full, 59 to 80% of all payday loans would have been abolished.
Unfortunately, aggressive small dollar loan review is back on the CFPB’s enforcement menu. But our research is perfectly clear: The CFPB should stop its efforts to impose uniform regulation on payday loans. Consumers can manage their finances much better than Washington bureaucrats believe.
Mr. Miller is a Professor of Finance at Mississippi State University and a Senior Research Fellow at Consumers’ Research. Mr. Zywicki is a professor at the Antonin Scalia Law School at George Mason University and a research fellow at the Law and Economics Center.
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