CFPB Ignores Complaint Data in Targeting Payday Lenders
After several years of tussling with mortgage rules and their implementation, the Consumer Financial Protection Bureau is focusing on several areas that will primarily affect the nonbank market, including debt collection, payday-type loans and prepaid cards.January 6
The agency has struggled with how to regulate small-dollar and payday loans in recent years, pushing back its own deadline several times for completing a proposed rulemaking. That could be because the plan is so sweeping, some said.December 14
In one instance, a single complaint in the Consumer Financial Protection Bureau's database was counted as 35 different ones while in another, a complaint against a payday lender was filed against an unrelated bank. Current and former officials say that's par for the course, leading to inflated complaint numbers and inaccurate data.November 17
When the Consumer Financial Protection Bureau started releasing monthly consumer complaint data last year, Director Richard Cordray hailed the move, saying that "[c]onsumer 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." Given these comments, it is increasingly difficult to understand the CFPB's justification for the rulemaking process for payday lending currently underway. The bureau is investing considerable time, energy and resources on payday lending in spite of the fact that consumer complaints about these short-term loans are remarkably low — lower than almost every other financial services product.
Specifically, the 12,193 complaints regarding payday loans make up just 1.5% of all complaints received by the CFPB. These are eclipsed by the 205,915 complaints about mortgages, 83,255 complaints about credit cards, 77,290 complaints about bank services and hundreds of thousands of complaints about other products. True, these industries have been targeted in formal rulemakings and enforcement actions, such as the "Qualified Mortgage" rule and the CFPB's recent moves against companies engaged in illegal practices. But in light of the relatively fewer payday loan-related complaints, the sweeping nature of the bureau's payday loan proposal unveiled in March runs counter to its argument that it uses the complaints as a guide. (The proposal has yet to be formally released for comment subject to a small business advisory panel review.)
Meanwhile, payday lending complaints received by the bureau are often lodged against unregulated institutions or phantom companies — not against state-licensed and regulated businesses that will have to follow the CFPB's rules. Members of the Community Financial Services Association of America are licensed and regulated in every state in which they do business, and must adhere to a strict set of industry best practices which provide important consumer protections. Rather than pursuing the true bad actors in the industry through its rulemaking, the bureau is unfairly lumping lawful, licensed businesses together with unscrupulous, illegal enterprises.
In addition to departing from its own self-described "compass," the CFPB is mismanaging the complaint data. American Banker recently reported that the CFPB's data is "riddled with errors and distrusted by some of its own employees." We've seen complaints about non-payday loan debt collection and other consumer products incorrectly categorized as payday loan complaints. Complaints about fraudulent operators and scammers have been inaccurately portrayed as complaints against licensed payday lenders. The bureau needs to ensure the integrity of its data and clean up these glaring and embarrassing errors.
The CFPB has relied on advocacy groups while casting aside research showing that short-term loans enhance the financial welfare of consumers who use them. In addition, recently released documents showed that small business owners providing feedback to the CFPB through the advisory panel process "stated that the proposals under consideration by the bureau were unnecessary and onerous" and that they "would be unable to continue operating" if the CFPB proposals were enacted. But absent changes in the bureau's approach, those concerns have appeared to fall on deaf ears.
Indeed, a 2015 Charles River Associates report commissioned by CFSA examined the impact of the CFPB's proposals and estimated that five out of six lenders would experience overall losses under the proposals, and rural lenders would be the most adversely impacted. The report found that if the bureau continues to embark on a rulemaking that is not supported by its own data, millions of Americans may be left without access to credit, businesses will close and thousands will lose their jobs.
Many Americans live paycheck to paycheck and rely on short-term credit during financial emergencies. In fact, the FDIC estimates that 51 million Americans — a full 20% of American households — are underbanked and not served by traditional banking products. Many of these households turn to short-term credit when they are met with unexpected expenses, such as medical emergencies or car repairs, and have nowhere else to turn. Without the availability of a well-regulated short-term credit option in their communities, many consumers may be forced to turn to illegal, unregulated lenders and risk identity theft, unauthorized withdrawals from their bank accounts and other unlawful practices.
The CFPB was created to protect Americans from abusive practices. However, by forcing consumers into these inferior forms of credit, its proposals would leave many worse off. The CFPB should focus its efforts on the true problems in the financial marketplace rather than regulating out of existence financial products that work well for the vast majority of consumers who use them. Only then will the bureau live up to its name.
Dennis Shaul is the chief executive of the Community Financial Services Association of America, which represents nonbank lenders. He previously served as a senior advisr to former Rep. Barney Frank and as a professional staff member of the House Financial Services Committee.