CFPB’s (correct) decision to rescind payday limits comes at right time
The coronavirus pandemic has both revealed and dispelled a number of assumptions about consumer-spending habits during difficult times.
While popular wisdom would suggest that times of economic hardship lead more Americans to seek short-term, small-dollar loans, some states have reported the opposite with declining loan volumes at the start of the pandemic.
The drop in short-term, small-dollar demand dispelled some long-standing criticisms that consumers cannot make financial decisions for themselves. Customers know best how to manage their own finances and should be trusted to make their own financial decisions.
Thankfully, consumers were given more choice when the Consumer Financial Protection Bureau this week rescinded small-dollar restrictions placed on lenders by the former head of the agency, Richard Cordray.
This move will right many of the wrongs of the Cordray-era rule. Not least of which was the onerous ability-to-repay provisions that set requirements that no lender, especially a small business, could meet. More important, the reconsideration preserves access to credit for those who need it and will help them continue to properly handle their own finances.
Consider recent state-level reports that showed transaction volume dropped by 20% in Alabama from February to March and by 35% in Indiana from March to April, when the pandemic started in the U.S. As Americans find their financial situations changing this year, many consumers have paid off loans, curtailed spending and chosen not to seek out small-dollar loans. This goes to show that many of them are knowledgeable about their own financial lives and managing it to their best ability.
Furthermore, a recent CFPB study of consumer complaints it received that included “coronavirus” keywords found that less than 1% of those complaints were about a payday loan when compared to other financial products, such as mortgages, credit cards or debt collection.
Even though fewer people are currently choosing small-dollar loans, it is critically important that those who do need such loans are able to access licensed and regulated forms of credit from transparent and trustworthy lenders. That’s why most licensed and regulated small-dollar lenders were deemed essential businesses during the pandemic.
More broadly, this crisis has also underscored the importance of regulations that balance consumer protection with access to credit, and ensure that customers can get the loans they need during uncertain times.
The action by the CFPB to rescind its previous small-dollar, short-term loan restrictions was a step in the right direction. A one-size-fits-all approach would have eliminated consumer choice and undermined the progress state lawmakers and regulators have made to ensure safe, reliable credit options are available for their consumers.
Now that the CFPB has reconsidered its flawed 2017 small-dollar lending rule, the agency should continue listening to consumers who use these important financial products when deciding how to appropriately balance access to credit with consumer protection.