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.
Oppose the short-term lending rules being considered by the CFPB. These rules will limit our access to payday and other short-term loans and take away our financial freedom. Some of the rules would limit our ability to borrow money to 90 days a year and force us to wait 60 days between loans. This doesn’t work for us. If the rules become law, many of us will have no credit. The rules won’t apply to other forms of credit, so why are we being unfairly targeted? How we manage our money is our responsibility-not the federal government’s. We use these loans responsibly. Payday and other short-term loans are legal under state law and work for us. Regulation that makes it nearly impossible for us to obtain or to qualify for a small loan is the same as eliminating these loans.
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.”
Operation Choke Point is garnering headlines for impelling banks to close accounts controlled by legal businesses like gun shops, short-term lenders and fireworks dealers. The effects of this governmental pressure could be more far-reaching than we realize.
“The end result of the government’s action (is) the remaining financial institutions used by underserved consumers may no longer be available,” writes the editorial board at the Milwaukee Courier.
That’s because some banks have chosen not to serve low- and middle-income communities, or they have overpriced many of their vital services like checking accounts. That means check cashers, bill payment centers and payday lenders now fill a role for consumers who have chosen not do business with banks, can’t afford to, or have chosen to severely limit the amount of business they are willing to conduct.
While we can’t know the ultimate intentions behind Operation Chokepoint, we do know that it threatens legal businesses and could cut off access to credit for a large swath of the population.
“The policy is ill-advised,” the Courier writes. “The tactics are thuggish. The results are devastating. We urge the Administration to stop Choke Point’s focus on legitimate companies providing access to financial services in underserved communities.”
In January, the U.S. Postal Service Office of Inspector General proposed that the USPS start offering financial services to the “underserved.” Bill payments, small loans and money transfers are among the proposed offerings. The Cato Institute’s Mark Calabria takes on the proposal in a recent blog post. Opponents believe “the USPS could offer payday ‘without taking nearly as big a cut,'” he writes.
Now “big” is subjective but scholars have examined this question. In research reported in 2012 in Regulation, UC-Davis Professor Victor Stango compared the performance of traditional payday loans to those offered by credit unions. Some of his conclusions: “there is little to suggest that credit unions can offer a payday loan with competitive terms. Existing credit union payday loans often have total borrowing costs that are quite close to those on standard payday loans.” Maybe the USPS has a better cost structure than the typical credit union, but that seems unlikely as the USPS isn’t exactly known for its efficiency.
Professor Stango also reports survey evidence that payday borrowers highly value the convenience of payday lender’s hours and locations. Yglesias doesn’t address this, but last time I went to a Post Office, the hours were about as convenient (or less so) than that of a traditional bank. And of course USPS isn’t exactly known for its consumer friendly approach. In all, it seems highly unlikely that without a major revamp and cultural change that the USPS could be a serious competitor to payday. Perhaps as important, the USPS would likely be viewed as “too big to fail”, so that allowing USPS to make high risk payday loans could easily result in a taxpayer bailout. Getting USPS into payday makes about as much sense as getting Fannie Mae into subprime mortgages.
Oh wait, we did that.
Read more at the Cato Institute. Photo by Vasti_Krug.