October 22, 2015

The Consumer Financial Protection Bureau Should Stop Hurting the Poor

Veronique de Rugy

George Gibbs Chair in Political Economy
Summary

Combating bad ideas would be much easier if they were all backed by ill intent. More often than not, however, the opposite is true, and the worst government policies are enacted with the intention to help. Such is apparently the case with the aggressive campaign by the Consumer Financial Protection Bureau to eliminate the payday lending industry.

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Combating bad ideas would be much easier if they were all backed by ill intent. More often than not, however, the opposite is true, and the worst government policies are enacted with the intention to help. Such is apparently the case with the aggressive campaign by the Consumer Financial Protection Bureau to eliminate the payday lending industry.

Overstepping statutory boundaries to go outside the agency's originally intended scope of power, CFPB regulations for payday lenders would, among other things, require them to verify the income, financial obligations and financial history of potential borrowers before offering a loan. That's not an unreasonable cost for a mortgage, but it's an excessive and unjustifiable burden for a small-dollar loan.

Besides, the overbearing, paternalistic agency fails once again to consider the unintended consequences of its requirements. The rules would, for instance, place an arbitrary cap on the interest rate financial institutions can charge. That might seem reasonable to those who balk at the high rates payday lenders charge compared with traditional loans, but it makes little sense to compare a relatively small two-month loan to a substantial sum repaid over several years or even decades.

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