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Actual Human Experience Missing from CFPB’s Short-Term Lending Rules

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Tony Pierce’s May 5 column, “CFPB Must Prioritize People Over Payday Lenders”, drips with unintended irony, for the CFPB never actually visited any stores or talked directly with borrowers (i.e. people) to learn what actually goes on in the trenches.


To review, the Consumer Financial Protection Bureau recently released its proposed rules for short-term small dollar loans, often known as payday loans and auto title loans. Despite the bureau’s repeated insistence that it recognizes the need for such products in the marketplace, its prescription to “eliminate debt traps” is akin to treating dandruff by decapitation.

The proposed rules indeed accomplish only one thing: they destroy the short-term credit business entirely. In any economy, when supply is restricted, consumers are forced to more expensive choices. In this case, they will return to the form of credit used before payday lending: deliberately writing bad checks until their next paycheck gets deposited. Instead of paying some $60 for a single $400 loan, the consumer will now incur $50-60 in merchant and overdraft fees for each check.

It brings to mind Ronald Reagan’s famous quotation, “The nine most terrifying words in the English language are: I’m from the government, and I’m here to help”.

How is it that an agency that has allegedly studied these products for some four years should ultimately deliver a death sentence to a $40 billion industry utilized by some 12 million Americans every year?

The more cynical insist it stems from an ideological hatred of short-term lending, that consumers lack the intelligence to choose from among credit products, for who would choose such loans? The more idealistic believe that the bureau crunched the numbers and honestly believes these rules serve the consumer.


Regardless of one’s perspective, both sides must agree that the CFPB committed the sin common to government – it never actually studied the issue from the trenches. Nobody from the bureau ever paid visits to payday or auto title lending stores. Nobody ever spoke directly to borrowers or lenders at the store level. The CFPB never engaged in the most common quality control tactics used by major corporations – consumer surveys, secret shopper programs, on-the-spot interviews. “Field hearings” are a poor substitute for real-life interactions.

Somehow, despite its $447 million dollar annual budget, the bureau just couldn’t be bothered to talk to the people it purports to be protecting.

I’ve never had a $447 million budget, yet in the first four years that I was learning about short-term small-dollar credit, I visited dozens of stores and spoke with hundreds of borrowers. I asked questions about why they chose payday loans over pawnbrokers, borrowing from friends, or bouncing checks. I asked if they truly understood the cost of the credit. I asked if they, or anyone they knew, had gotten into trouble with credit. I asked if lenders would work with struggling borrowers.

This is the human angle that CFPB completely ignored. Instead, it based its death sentence on only two methods.

First, bureau employees ensconced themselves like barnacles in the conference rooms of every major short-term lender for weeks, gathered data, and then published a fundamentally-flawed white paper. It isn’t the first time the bureau has generated flawed conclusions from its data-gathering. A report on “auto loan discrimination” was determined to vastly over-estimate loan pricing disparity by race.


Second, the CFPB set up a complaint database. It collected 2329 complaints for payday loans, while the industry makes about 100 million transactions every year. Show me another industry that generates a 99.997% satisfaction rate, yet receives proposed regulation that will put it out of business.

Then, bureau employees went into their hermetically-sealed chambers in Washington, and focused solely on unrepresentative numbers, not human beings. The automatons emerged with rules which sound fair to everyone who has never needed a payday loan, never studied the economics of short-term credit, and only listened to activist claims that payday and title loans are “bad”.

To put a cherry on top of the whole misguided affair, despite all the data the bureau collected, it has never once been able to establish that this data proves consumers have been harmed by these loans – much less issue rules designed for permanent “protection”.

That’s the ultimate irony of the CFPB’s failure to actually interact with the borrowers and their families. They may have found people who actually have struggled with debt, actually rooted out a few unscrupulous lenders, and more effectively learn how to help consumers make the best decisions possible, rather than tear the decision away from them.

The next step in the rulemaking process is for the CFPB to meet with small business owners to discuss the impact the proposed rules. That consists of a few meetings with “selected representatives” of the small business universe.


I’m somehow skeptical that this real-world interaction will compensate for four years of faceless government bureaucrats forcing their “protections” down the throats of every struggling American consumer and business.

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