For all the Consumer Financial Protection Bureau’s (CFPB) villainization of the short-term lending industry, you’d think their complaint database would be chock full of angry consumers. It’s not. Commentator Dan Horowitz calls it the CFPB’s “inconvenient truth”:
“Consumer complaints are the CFPB’s compass and play a central role in everything we do. They help us identify and prioritize problems for potential action,” CFPB Director Richard Cordray said in a press release announcing the new public database.
The only problem? The database shows complaints about “payday lenders,” which are currently in Cordray’s cross hairs, composed less than one percent of all complaints, far outnumbered by mortgage (36 percent), debt collection (17 percent), credit reporting (15 percent) and other categories. Payday lending complaints were one of every 152 complaints the bureau received, 55 times less frequent than mortgage complaints.
Read more at TownHall.com.
Richard W. Rahn’s recent editorial in the Washington Times points out the dangers to our economy should the Consumer Financial Protection Bureau (CFPB) pass its proposed rules on short-term lending.
“On Sept. 29, Congress held a hearing on the rules proposed by the Consumer Financial Protection Bureau (CFPB) that would likely destroy much of the small-dollar loan industry and drive many low-income and poor credit-risk people into the arms of loan sharks. The CFPB rules are so costly that most lenders will likely go out of business — by government intent. The small-dollar loan industry has been criticized for charging high fees and engaging in aggressive collection practices. The problem is that it is expensive to lend money to poor credit-risk people, and if legitimate businesses are not allowed to make a reasonable profit because of government regulation, the black marketeers will be the only ones serving the poor. As Rep. Jeb Henslaring, chairman of the House Financial Services Committee, noted to CFPB Director Richard Cordray: ‘These are the very loans many need to keep their utilities from being cut off suddenly or keep their car on the road so they can, in turn, keep their jobs.’ Mr. Cordray had no answer as to how the poor will obtain necessary low-dollar loans once he has destroyed the legitimate lenders.”
Read more at the Washington Times.
Consumer satisfaction with short term loans continues to rise, according to a new federal report.
The Consumer Financial Protection Bureau’s (CFPB) Monthly Complaint Report showed a 12 percent decrease in the number of short term loan complaints from consumers from this summer compared to the summer of 2014, according to The Hill, a Washington-based news outlet.
“The report reaffirms what the industry has long known,” Dennis Shaul, CEO of the Consumer Financial Services Association (CFSA), told The Hill. “Consumers value payday loans as a high-quality source of credit during times of needs.”
In the story, Shaul said the report once again exposes the CFPB’s plan to saddle the short term lending industry with more federal regulations as “misguided.”
“The truth is banning payday lending does nothing to address the needs of consumers,” Shaul said. “Rather, it simply eliminates a responsible credit option and forces consumers to turn to inferior alternatives, including dangerous, illegally-operating lenders.”
Recently, the CFPB proposed “rules that would end payday debt traps by requiring lenders to take steps to make sure consumers can repay their loans.”
“What the rules actually would end is the availability of much-needed credit for millions of Americans,” says Andrew F. Quinlan, the cofounder and president of the Center for Freedom and Prosperity, in a recent editorial.
The rules, Quinlan believes, could cause more harm than good.
“Borrowers who rely on payday loans don’t generally have access to alternatives. Where others might cover an unexpected expense by using a credit card, for instance, they are forced to take out small, short loans to get to their next paycheck. This is because their financial history or income makes them too risky for traditional banks.
“The CFPB wants to protect such borrowers from digging themselves into an even deeper financial hole, but in so doing it will further restrict credit to the very people who may need it most to pay bills, visit the doctor, or repair a car needed to get to work. Even CFPB’s own analysis acknowledges that between 60 percent and 80 percent of the small-dollar loan market could be eliminated, which would force many to turn to even less desirable options.”
“It’s not fun living paycheck to paycheck,” Quinlan writes. “Millions of Americans struggle with that reality daily. The last thing they need is a nanny government pretending that it is to their benefit to have their already limited options restricted even further.”
Read more at Philly.com.
Critics of short-term lending often rally around a call to cap consumer loan interest rates at 36 percent. But in a recent post on the American Banker website, two scholars show why interest rate caps don’t work and aren’t financially feasible.
Thomas M. Miller Jr., a finance professor at Mississippi State University and a visiting scholar with the Mercatus Center George Mason University, and Chad Reese, assistant director of outreach for financial policy at Mercatus, write that “regulations limiting interest rates are the latest in a long series of misguided legislation and regulations that limit or deny access to important consumer credit products. Interest rate caps, like other price controls, have severe unintended consequences.”
In their column Miller and Reese addressed new regulations recently announced by the Obama administration that would expand the Military Lending Act of 2006, which caps some short term loans to military personnel at 36 percent. OCLA members don’t make loans to military personnel. But consumer groups and others have called for 36 percent interest rate caps on all consumer loans, including those made by OCLA members to millions of Ohioans, so the arguments made in the column easily translate to concerns over rate caps on other types of consumer loans.
“Is a 36 percent annual interest rate for a small-dollar loan too high?” Miller and Reese wrote. “Those who say ‘yes’ likely have a worldview shaped by large-dollar home mortgages or auto loans. But people need to borrow money for many reasons. Millions of Americans rely on nonbank-supplied small-dollar loans to meet wide-ranging credit demands like durable goods purchases or for unexpected automobile repairs.”
“With or without (short term lenders),” the scholars wrote, “the demand for short-term credit will still exist.”
To learn more about how capping interest rates on small term loans is bad policy and not feasible, read the entire article at:
New data from the Federal Reserve shows that 47 percent of Americans “can’t pay for an unexpected $400 expense through savings or credit cards, without selling something or borrowing money, according to the Federal Reserve.” That’s a big segment of the population.
Per Politifact: “Respondents indicate that they simply could not cover the expense (14 percent); would sell something (10 percent); or would rely on one or more means of borrowing to pay for at least part of the expense, including paying with a credit card that they pay off over time (18 percent), borrowing from friends or family (13 percent), or using a payday loan (2 percent).”
Should new CFPB rules limit access to short-term consumer loans, they could dry up credit for a large swath of the population. Please read more at Politifact.com.
Jeffrey H. Joseph, a professor at the School of Business at George Washington University, recently penned an article for The Detroit News pointing out major concerns with proposed payday lending rules from the Consumer Financial Protection Bureau (CFPB).
“One of the biggest myths about payday loans is that they’re much more expensive for consumers than other financial products,” Mr. Joseph writes. “Yet they are less expensive than fees incurred from bouncing checks or overdrawing their bank accounts and credit card late fees with high interest rates—products not being targeted as aggressively by the CFPB. Consumers also report they are well aware of the cost of their payday loan and interest rates are largely displayed at lending centers. …
“The CFPB’s quest to eliminate payday loans and other short-term lending options will leave low-income Americans with few legal options to turn to when an emergency expense arises. That’s hardly providing ‘financial protection’ to the Americans who need it most. Let’s hope these needy families have something they can sell the next time their car breaks down.”
Read the full article here.
George Mason University law Professor Todd Zywicki has written a compelling counter to a New York Times story on auto equity lending that was published Christmas Day.
Writing on The Volokh Conspiracy blog, which was posted on The Washington Post website, Zywicki does an outstanding job pointing out the fallacies, weaknesses and bias of the article with a full dissection of the arguments made in the story.
“As I have illustrated previously,” Zywicki writes, “The New York Times has come completely off the rails when it comes to ‘news’ coverage of consumer credit issues. Indeed, it appears that the paper is not even making an effort to distinguish news reporting from editorializing, as its Christmas Day article, “Rise in Loans Linked to Cars Is Hurting Poor” indicates. (The title in the url is equally suggestive — “Dipping into auto equity devastates many borrowers.”).
You can the entire blog post here:
Briefly, here are the major points Zywicki makes in the post:
- Those who use auto title equity loans have limited options;
- Consumers use auto title equity loans for pressing expenses;
- Auto title equity loans provide limited risk of financial breakdown;
- The risk and consequences of repossession are not as extreme as might be supposed:
- Consumers generally understand the costs and risks.
“At root, the fundamental problem with The New York Times’s article is that people are not as stupid as the Times reporters think that they are,” Zywicki writes. “Consumers use (auto equity loans) for a variety of complex reasons and those who use these loans typically do so because they are better than the alternatives – eviction, utility cutoffs, or the like.”
It is refreshing, and frankly rare, to read a fair and balanced article on our industry, members and products let alone a full-throated defense of the services we provide to consumers.
A study was released last Tuesday by Kennesaw State University’s Center for Statistics and Analytical Services on the effect payday loans have on a consumer’s financial welfare. The study, which examined the transactions of 37,000 borrowers over a four-year period, found no adverse relationship between repeated refinancing of payday loans and the borrower’s credit score.
Additionally, the study also found that borrowers who live in states with fewer refinancing restrictions are better off than those in more heavily regulated states.
Key findings from the report include:
- Borrowers who engaged in protracted refinancing (rollover) activity had better financial outcomes (measured by changes in credit scores) than consumers whose borrowing was limited to shorter periods.
- Borrowers experienced a net positive financial welfare impact when they faced fewer regulatory restrictions on rollovers. State-law limitations on rollovers appeared to contribute to adverse changes in credit scores for borrowers.
Read the full study here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2534628
Law professor and author Todd Zywicki has been a longtime vocal critic of the Consumer Financial Protection Bureau (CFPB). “When it comes to consumer credit, Washington’s approach is to wish away unintended consequences,” the author told ThinkAdvisor.
The problem, Zywicki believes, is that the government has a tendency toward “market-replacing regulation.” They want to eliminate certain products or create entirely new product categories. What the government can’t change, though, is consumer demand, and there is an undeniable need for payday loans or short-term consumer credit.
If the government regulates payday lenders out of business, the demand for payday-like products still exists, and it’ll find its outlet elsewhere; with online or offshore lenders, for example. A better solution, Zywicki says, is to create regulations that are “market-reinforcing.” That is, create regulations that increase rather than decrease competition and thereby promote consumer choice.
“We need to respect consumers as grown-ups,” Zywicki concludes. “Recognize that consumers make mistakes, but understand that people know better what to do with their lives than well-intentioned bureaucrats.”