In early June the Consumer Financial Protection Bureau released its proposed rule to regulate payday lenders and other forms of credit, preempting existing payday lending regulations already in place in 36 states. This proposal, spanning an unbelievably convoluted 1,334 pages, was seemingly written to end what the bureau believes is an abusive product specifically designed to ensnare consumers in cycles of debt.
Unfortunately, the proposed rule is evidence the bureau repeatedly failed to perform the due diligence required to study how states like Colorado have worked in this area to create a balanced regulatory framework that both protects consumers from true predatory lending and maintains their ability to access short-term credit.
Credit access continues to be a crucial issue for low- and moderate-income Americans as well as the millions of unbanked and underbanked in this country. According to a study by the Federal Reserve published in May 2015, close to half of all American households do not have $400 available in case of an emergency. Short-term, small-dollar credit oftentimes is that bridge for an unforeseen expense, whether it is a medical bill or car repair, or can be used by an hourly worker that did not get enough shifts to cover all the monthly expenses.
It is vital to understand both the product and borrowers in this context when discussing regulating small-dollar lending. Thankfully, Colorado undertook the effort necessary to strike the appropriate balance between consumer protections and access to affordable credit when crafting its small-dollar lending regulations.
In 2010, the Colorado state legislature passed a bipartisan set of reforms designed to increase protections for consumers while also ensuring the viability of lenders and access to credit. This was the state's second attempt at passing legislation to meet this objective. A previous law passed in 2007 failed to achieve these desired goals but proved to be a useful learning experience in what does and does not work. The 2010 law replaced the two-week loan with a six-month installment loan, requiring more time for the loan to be paid back and spreading costs over the life of the loan. Other reforms also created protections for borrowers' checking accounts, prohibited excessive costs and ensured early repayment was not penalized.
These changes have proven to be a success for Coloradans. According to data from the Colorado Attorney General's Office, industry abuses have fallen, consumer complaints have fallen, and although the industry experienced some consolidation, it has remained viable without limiting consumer access to credit.
The new reforms also combated the issue of "debt traps." In 2009, about 61% of all payday loans in Colorado were "refinance-type" transactions, either a renewed loan or a new loan originated on the same day an old loan was paid off. However, the Attorney General's Office reported that in 2012 all small-dollar loans originated were "new," meaning they were not refinanced or renewed. The Pew Charitable Trusts released a brief in 2014 applauding Colorado's efforts and championing the reforms as the model on which to base future regulatory efforts. Pew's research showed that Colorado's new law produced $42 million more in cost savings for borrowers than in the previous law, while cutting bounced-check fees from lenders by more than half.
Unfortunately, the bureau's proposed rulemaking for small-dollar loans would override all of Colorado's successful reforms.
The impetus for this rule, presumably, is that the CFPB does not approve of states' current efforts in this area. During a February hearing for the House Financial Services subcommittee on financial institutions and consumer credit, CFPB Acting Deputy Director David Silberman testified that the purpose of the rulemaking is to address "gaps" in state laws regulating payday lending. One of these gaps, according to the proposed rulemaking, is instituting ability-to-repay requirements for lenders. Ignoring the presumption that lenders are engaging in a fundamentally flawed business model of lending to borrowers that cannot repay, these burdensome requirements would negatively impact the lending process. Instituting regulations for small-dollar, short-term loans that mirror mortgage requirements will not only drive up prices for lenders and borrowers, but it will also unnecessarily elongate the lending process.
This rulemaking only demonstrates once again that the bureau does not understand the product and consumer needs. A more expensive, lengthy lending process does not work for emergency credit situations and will ultimately drive vulnerable consumers to unregulated online lenders where they will be a prime target for scams or at risk for identity theft.
Left unchanged, the CFPB's current proposal will disproportionately harm the 12 million people who use small-dollar loans to cover unanticipated emergency expenses in instances where they would otherwise lose their financial footing. The final rule should accommodate states, like Colorado, that have already successfully achieved a balanced regulatory framework for safe, small-dollar, short-term loans. For this reason I introduced the ACCESS Act — legislation that would create a waiver program for states fearful that the CFPB's regulation will preempt their own efforts to regulate short-term credit. The legislation allows states and federally recognized Indian tribes to obtain a five-year waiver from any CFPB rule regulating payday, vehicle title or any other small-dollar loans.
It is my hope that the House moves swiftly to pass the ACCESS Act, because left unchanged, the bureau's proposal will only deepen the struggles of Americans who are already suffering from the lack of access to financial services that has been created by federal overregulation.
Rep. Scott Tipton, R-Colo., is a member of the House Financial Services Committee.