For the last 2 decades, state attorney generals have increasingly associated themselves with national policymaking. The most recent example being 8 AGs signing a letter to call on the CFPB (Consumer Financial Protection Bureau) to go more further with their already proposes lending rule regarding payday advance loan. The agency should not only ignore such advice, but also altogether scrap the paternalistic regulations.
The rules proposed by CFPB are aimed at damaging the small-dollar loan industry in June. Since the formation of the industry in 2011, they have asked for the complete elimination of the industry. The “Ability to Repay” language is one of the provisions of the 1,300 pages of rule that can potentially destroy the industry. As per the proposal, the lenders need to determine the repayment ability of a consumer before lending. In effect, this already happens and still, CFPB wants a really paperwork-intensive and exhaustive process to be carried out. This is making consumers turn to much less savory loan options because they do not have the patience or the time to fill out so much paperwork for $500 loan.
Regulators are citing the high rates of interest as a reason for them to step in. But, lenders have to charge a high percentage of interest for small amount loans because they are lending money to a high-risk clientele. It is not the same as taking out a million dollar mortgage. Lenders will be forced to leave the market if CFPB continues to raise their cost of operations or compel them to charge a low rate of interest.
To government bureaucrats, the outcome may seem very dandy. But, it is actually detrimental to millions of Americans who find themselves in the need of temporary financial boost. Approximately, 11 million Americans rely on small-dollar lenders for taking care of their basic necessities until the arrival of their next paycheck.
The proposed rules of CFPB would need an extensive financial assessment of every prospective customer. The lender will have to analyze if the borrower has the ability to repay the loan, along with paying other expenses and bills. The argument behind such requirements is absolutely absurd because no lender would lend money to consumers who cannot pay back their money.
The 8 AGs who have signed the letter represent those jurisdictions that have already removed the industry by setting a limit for interest rates that is so low that small-dollar loans were rendered unprofitable. CBFC’s proposed rules allow states to make more strict standards if they want and the AGs are concerned that the rules may promote further efforts to remove strict state usury caps. But, that is a political issue and federal regulators should not give it much weight.
According to their letter, small-dollar lenders earn millions by exploiting and targeting financially vulnerable consumers. However, evidence suggests something else. People know what their financial situations are better than the government. They resort to short-term loans because they genuinely benefit from them. In fact, CFPB’s very own research, which they tried to hide, supports this.
CFPB called upon the borrowers to “Tell Your Story” and then quickly wanted to hide the results. When a Freedom of Information Act request compelled them to show the 12,000 or more comments that they received over 5 years that it was learned that 98% of them were positive and supportive of the industry.
It is time for CFPB to stop concerning themselves with the ideologically-driven AGs or even succumbing to the pressures from Obama administration and instead listen to the suffering Americans and relax the regulations on the lenders offering payday advance loan.
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