If you were hoping that the Consumer Financial Protection Bureau had learned from the million-plus comments submitted to the agency on its proposed small-dollar lending rule, then you would have been disappointed to hear CFPB Director Richard Cordray’s recent testimony before the House Financial Services Committee.

The CFPB’s prevailing mindset is apparently not affected by convincing evidence regarding options for borrowers looking for small-dollar credit. In the hearing, Cordray doubled down on the bureau’s comingling of legal and illegal small-dollar lending, as well as the refusal to acknowledge the negative consequences of effectively banning regulated lenders.

First and foremost, there is no such thing as a state without payday lending. Cordray noted in his testimony that 14 states ban payday loans, adding that people in these states “seem to get by just fine.” However, on the day of Cordray’s hearing, at least 11,600 consumers in these 14 states went online seeking a payday loan, according to data from the nonprime credit bureau Clarity Services Inc. Further, in the fourth quarter of 2016, an estimated 2.7 million payday loan applications were submitted online from these same states.

The consumers in these states presumably turned to a lender that marketed loans illegally, including offshore lenders. The CFPB’s proposed rule limiting access to legal small-dollar loans would do nothing to protect these consumers.

The bureau’s own consumer complaint portal data has for years blurred the line between legal and illegal lenders, unfairly lumping state-licensed and regulated businesses together with unscrupulous, unregulated enterprises. Nearly one-third of complaints attributed to payday lending come from the 14 states without legal, licensed lending. These complaints received by the bureau are often lodged against unregulated institutions — many of which are phantom companies — rather than the state-licensed and regulated businesses that my organization represents.

Even with the comingling of legal and illegal lenders, payday loan complaints have steadily declined in every one of the bureau’s monthly complaint snapshot reports over the past two years. The most recent report states that payday loan complaints are down 28%. Overall, payday lending complaints make up only 1.5% of all bureau complaints, which is far below many other products like student loans, credit cards, debt collection, mortgages and other services.

In the five years that the bureau has existed, there have been approximately 550 million payday loan transactions and only 17,207 complaints to the CFPB. That equates to one complaint for every 32,000 loan transactions.

Director Cordray made clear that the bureau still has no good answers for where consumers should turn for credit in the absence of payday lending. When pressed multiple times on the subject, he punted: “[I]t’s a legitimate discussion, it’s something we’re thinking hard about.”

The truth is, in the states that do not permit regulated payday lending, people find many other ways to meet their need for small-dollar credit. They bounce more checks, complain more about illegal lenders and debt collectors, and file for bankruptcy at a higher rate than in states where short-term loans are available, according to a Federal Reserve staff study. These consumers find fewer alternative financial options and resort to costlier, unregulated options for short-term credit, according to reports from the U.S. Department of the Treasury in concert with The Urban Institute.

Meanwhile, regulators in states such as Montana, Oregon and Washington — which have all implemented restrictions on small-dollar lending — have reported consequences such as consumers seeking credit from online lenders and filing related complaints.

The risk to consumers from illegal, unlicensed lenders is of grave concern, and we have long advocated for a simple fix to this national problem: a national registry of state-licensed and regulated lenders. This basic solution was specified in Dodd-Frank yet it has not been a CFPB priority. Such a registry would help protect borrowers from the cash-grab scams that pose as legitimate lenders online. The bureau should be focused on stopping these worst offenders, rather than attempting to use the bad acts of illegal lenders to justify its war on law-abiding, state-licensed businesses.

Director Cordray’s testimony told us that nothing has changed the bureau’s predetermined mindset. Even though nine out of 10 comment letters on the bureau’s proposed rule criticize it, Director Cordray testified that “[W]e’ve gotten, as I said, many, many comments on both sides of that issue.” That is a disingenuous statement that suggests the number of comments for and against the rule are even.

Until the bureau gets serious about tackling the issue of illegal lending and recognizes that many consumers demonstrate a desire and need for small-dollar loans, the misguided opinions of unelected regulators will take precedent over the views of millions of hardworking Americans around the country.

Dennis Shaul

Dennis Shaul

Dennis Shaul is the chief executive of the Community Financial Services Association of America.

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