In an epic, down to the wire vote last week Congressional Republicans narrowly overturned a regulation that would have enriched lawyers at the expense of consumers. But now lawmakers must intervene once again against another consumer-busting rule: the rule put forward by the Consumer Financial Protection Bureau against payday loans.
Unlike the defeated CFPB anti-arbitration rule, which unfairly targeted people who already have access to the traditional financial system, the CFPB small-dollar loan rule unfairly targets people who don’t enjoy that access. Payday loans are used by about 12 million people each year who find themselves in dire need of funds to cover urgent expenses, perhaps to pay an unexpected medical bill, fix a broken car, or just to keep the lights on at home.
Payday loans work for a lot of people because, so long as a borrower has an income, a checking account, and an ID, a short-term loan can provide between $100-500 with a 15 percent fee. The truth is that such loans help millions of people bridge a gap during hard times.
Many borrowers prefer payday loans, as revealed by both academic studies and surveys of payday loan customers. Customers prefer payday lenders to traditional banks because they're more affordable, transparent, and have better customer service. And the overwhelming majority of such borrowers (95 percent) say they value having the option to take out a payday loan, because they provide a financial safety net.
Despite their popularity, government bureaucrats have long despised small-dollar loans. This is reflected in the new rule, which effectively bans lenders from offering loans to anyone with bad credit or no savings — precisely the people who need these loans so badly. In doing so, the CFPB itself estimates that at least 75 percent of the industry will be eliminated, leaving desperate consumers $11 billion short of credit.
But while the supply of small dollar finance will be drastically reduced, millions of low-income people will still demand them. At best, they will resort to defaulting on other loans or working a second job, options they had always had but decided against. At worst, they will be pushed underground into the hands of illegal, predatory lenders who charge even higher rates of interest and enforce them with violence.
We know this from experience, "thanks" to states such as Georgia and North Carolina that have heavily regulated payday loans for more than a decade. A New York Federal Reserve study found that households in those states had bounced more checks, filed more complaints about loan sharks and debt collectors, and filed for bankruptcy at much higher rates than states that had not prohibited payday lending.
It’s hard to see how eliminating the already-limited choices of consumers will make them better off. For an agency supposedly committed to consumer protection, forcing millions of people who are down on their luck into the hands of predatory loan sharks is outrageous. You don’t eliminate hardship by taking away people’s choices. You eliminate hardship by offering more and better choices, something achieved through financial deregulation.
Overturning the arbitration rule was a significant victory for Republicans, standing up for consumers and against the CFPB. But this time, the stakes are higher because the people being hurt are more vulnerable. All Congress has to do is use the Congressional Review Act to vote down the CFPB’s small dollar loan rule. While Republicans are often wrongly-accused as sticking up for Wall Street, they have a perfect opportunity to help out the little guy against this rogue, unaccountable agency.
Daniel Press (@danielpress94) is a policy analyst for the Competitive Enterprise Institute.
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