Let’s put some perspective around the small-dollar loan debate
As the debate continues over how to appropriately regulate small-dollar loans, some commenters have asserted the implausible theory that the small-dollar loan rule is necessary to prevent another meltdown of the nation’s financial system.
Looking back, it is absurd to argue that loans averaging $350 had anything to do with the financial crisis.
Yet the level of hyperbolic pitch being injected into the most recent debate obscures the reality that unrestrained, heavy-handed regulation of financial products creates barriers to credit availability for consumers. This result is completely inconsistent with the Dodd-Frank Act of 2010 that directed the Consumer Financial Protection Bureau to ensure the availability of credit in underserved communities.
Thanks to regulators like CFPB Director Kathy Kraninger, who is conducting a measured regulatory rollback of the 2017 small-dollar rule, access to such credit products will be preserved for millions of Americans who rely on it to meet their everyday needs.
Panicked consumer advocates insist upon stricter regulations but fail to recognize that the paternalistic, prescriptive rules of the Obama-era CFPB would make it harder for consumers, particularly those at low income levels, to qualify for much-needed credit.
Kraninger’s efforts are guided by the well-founded principle that financial decisions of consumers should be based on their own decisions and no one else. Many consumer advocates wrongly define consumer protection measures as only those that limit consumer choices.
But Kraninger has approached consumer financial protection on the basis that: while disclosure, transparency and fairness are essential, consumer sovereignty should be protected from government intrusion, and individual decisions are reserved as a right to consumers.
Kraninger’s actions are correct and the financial service center industry sees this principle in operation every day, as consumers carefully weigh options and choose products that are right for them.
Her efforts are also meritorious. The CFPB’s proposal to rescind the mortgage-like requirements of the small-dollar loan rule provided a critical examination of the flawed underpinnings of the “underwriting” requirements once set forth by the previous director under the Obama administration, Richard Cordray.
The Cordray-led CFPB had a misplaced reliance upon and manipulation of academic research, and expansion of the lightly defined “abusive” term in Dodd-Frank. This strategy ignored the well-established state laws permitting small-dollar loans, creating a draconian result imposed by underwriting provisions.
In any policymaking process, reliance on isolated, manipulated evidence results in bad policy. It limits consumer choices, often destroying jobs and businesses.
Still, former CFPB Director Cordray chose to press ahead, bowing to political pressure from consumer groups and others bent on destroying the industry while ignoring Dodd-Frank’s direction that credit access must be preserved.
Opponents of Kraninger’s rescission efforts to the small-dollar rule have focused on extreme abuse stories in order to justify Cordray’s rule. This ignores the vast majority of consumers who rely on small-dollar loans to pay bills, meet emergency expenses and keep families afloat.
Nothing in Kraninger’s rescission proposal limits the CFPB’s ability in any way to pursue bad actors, an effort that would be supported by the industry and consumer advocates alike.
Opponents of the rescission have also attempted to manipulate the discourse by publishing false and misleading claims about the authentic stories submitted by consumers who rely on these loans. Even worse, political groups disguised as advocates launched coordinated efforts to oppose the rulemaking by submitting thousands of duplicative comments that added nothing to a critical discussion on the merits of the proposal.
The motivation of these groups, who profess to represent consumers, is not to strive for balanced regulation but to simply eliminate an entire industry while consumers be damned.
Contrary to some perception, the industry wants smart regulation that ensures access to fair and transparent financial services for consumers; regulation that promotes an equal playing field among providers and affords businesses the certainty they deserve.
As an industry, we are encouraged by the CFPB’s efforts to reconsider and where appropriate, rescind harmful regulations that eliminate consumer choice. We are also confident that our business goals are consistent with the goals of the current CFPB, which are to provide consumer protection while ensuring basic financial freedoms for consumers.