The new director of the Consumer Financial Protection Bureau, Rohit Chopra, began to shake his interventionist saber only two months after his confirmation in the Senate. Whether pushing the Federal Deposit Insurance Corp. Whether it’s blocking bank mergers or tackling bank overdraft fees, Mr. Chopra is acting aggressively. If the CFPB’s “buy now, pay later” credit and pawnbroking surveys are any leading indicator, it seems only a matter of time before Mr. Chopra looks back on the eternal progressive irritant of payday loans.
A study we recently completed questions the wisdom and legality of the CFPB’s latest attempt to regulate payday loans, a 2017 rule. This rule provides the blueprint for efforts to regulate payday loans. The massive rule limited payday loan customers to a maximum of six loans a year, unless they could meet a rigid government-mandated repayment capacity standard.
Our results show that the CFPB’s approach to payday loan regulation is poorly designed and needs adjustment. We have found that the CFPB’s emphasis on the number of payday loans allowed is not a reasonable consumer protection policy.
We looked at 2013 data on 15.6 million payday loans, issued to 1.8 million unique borrowers, to determine if the number of loans a consumer takes out in a year is a meaningful valuation of good – to be consumers. We examined the terms and use of payday loans and estimated the effects on consumers if they were prohibited from taking more than six loans per year. We focused on the interaction of this limitation with two common ways for states to regulate payday loans: limits on authorized loan fees and on loan amounts.
Our findings will surprise CFPB rule writers. Contrary to the research cited in the 2017 CFPB rule, which stated that “loans are almost always granted at the maximum allowable rate”, we found that neither fees paid nor loan amounts inexorably rise to the maximum allowable levels. when these authorized levels were reasonable.
We found that two otherwise identical consumers in different states might take out a different number of loans to acquire the amount of credit they need, simply because state laws differ as to how much a consumer can legally borrow on a loan. If a consumer in a state with a loan limit of 0 needs $600, the borrower will need to take out two loans. Without a ceiling, a loan would do.
We found that borrowers in states with low authorized loan amounts ($500 or less) take out approximately 50% more loans than borrowers in states with high authorized loan amounts (more than $500 or no loan amount cap). In low-value states, borrowers took an average of 9.31 loans. In high-value states, borrowers took out an average of 6.27 loans.
Moreover, despite tighter borrowing limits on loan amounts at any given time, borrowers from low-value states ended up borrowing the same total amount during the year as those from high-value states. Ultimately, consumers in low-amount states had to take out more loans to meet their needs. Overall, our research reveals the arbitrariness of the CFPB’s obsession with the number of loans as a useful measure of consumer well-being.
The CFPB’s concern in 2017 was borrowers who repeatedly “rollover” their loans. A rollover occurs when a consumer borrows, say, $500 with the promise to repay the full amount in two weeks. Within two weeks, however, if the borrower does not repay the entire loan, the loan can be “rolled over”, simply by paying the fee (usually around $19 to $21 per $100). The rigid standard of repayment capacity and the six payday loans per year seem, at least to us, to stem from the turnovers made by payday borrowers. Rollovers represent a large number of loans but are made by a minority of borrowers.
Fortunately, cool heads prevailed, and in 2020 the CFPB, under the leadership of Kathleen Kraninger, reversed the repayment capacity provision in the 2017 rule. The CFPB estimates that if the rule had gone into full effect, it would have eliminated 59% to 80% of all payday loans.
Unfortunately, the scrutiny of small loans is back on the CFPB’s enforcement menu. But our research is very clear: the CFPB should stop its efforts to impose uniform regulations on payday loans. Consumers manage their finances much better than Washington bureaucrats think.
Mr. Miller is a professor of finance at Mississippi State University and a senior fellow at Consumers’ Research. Mr. Zywicki is a professor at the Antonin Scalia Law School at George Mason University and a research fellow at the Law and Economics Center.
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