Comment on the CFPB’s Rule on Payday, Vehicle Title, and Certain High-Cost Installment Loans

We appreciate the opportunity to respond to the proposed rulemaking by the Bureau of Consumer Financial Protection (CFPB or Bureau) on payday, vehicle title, and certain high-cost installment loans. The Mercatus Center at George Mason University is dedicated to bridging the gap between academic ideas and real-world problems and to advancing knowledge about the effects of regulation on society. This comment, therefore, does not represent the views of any particular affected party or special interest group but is designed to assist the Bureau as it considers whether—and, if so, how—to proceed with rulemaking regarding small-dollar lending. More generally, this comment seeks to assist the Bureau in embracing a regulatory approach that serves consumers by fostering competitive, innovative, accessible, and diverse credit markets.

I. Introduction

The proposed rule applies to loans with terms of up to 45 days and longer-term loans that (1) have an all-in annual percentage rate (APR) of more than 36 percent and (2) are secured by a vehicle title or are repayable through deductions from the borrower’s income or bank account. Under the proposal, making such a loan would be an unfair and abusive act or practice unless the lender assessed the borrower’s ability to repay or the loan satisfied certain parameters. The proposed rule also would (1) restrict the ability of lenders to provide additional credit to borrowers with outstanding loans and (2) impose requirements on lenders who sought repayment from a borrower’s account. In some circumstances, lenders would be required to presume inability to repay. A lender who took advantage of an exemption to make certain long-term loans without assessing the borrower’s ability to repay would be required to refund all borrowers’ origination fees in any year in which the annual default rate on loans made by that lender under the exemption was higher than 5 percent. The proposed rule also would place restrictions on lenders’ withdrawal rights. Moreover, lenders would have to provide information about covered loans to registered information systems.

The Bureau notes that the proposal is intended to cover loans “typically used by consumers who are living paycheck to paycheck, have little to no access to other credit products, and seek funds to meet recurring or one-time expenses.” As a foundational matter, the Bureau should consider whether the proposed rule would help or hurt these consumers. Consumers who have limited credit options already bear the cost of state-level consumer protection. They cannot afford an ineffective federal regulatory regime layered on top of existing state regulation.

Consumers who live paycheck to paycheck are remarkably talented at managing very difficult situations that would flummox people at higher income levels who have never had to deal with such hardship. We should not make this task any harder than it is now. Federal efforts, therefore, should focus on opening—rather than closing—the regulatory doors to competitors in the consumer credit space.

Small-dollar loans provide a lifeline for tens of millions of American families every year who rely on them to buy groceries, to put gas in the tank, or to pay the rent. The importance of these products to consumers and the economy has surged in the wake of the financial crisis and subsequent regulations, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009. Those regulations have resulted in a loss of access for many lower-income consumers to mainstream financial products, such as bank accounts and credit cards. Confronted with a dwindling array of options, consumers have increasingly turned to various small-dollar loans to make ends meet. The CFPB should not further restrict choices for those who already face limited choices.

This public interest comment identifies matters the Bureau should investigate as it considers whether the proposed rule will harm consumers. The Bureau should look at whether the proposed rule will limit access to, or raise the prices of, existing products. It should also consider whether the rule will prevent the emergence of innovative new products that could markedly improve these consumers’ lives. Specifically, this comment urges the CFPB to conduct additional research to better understand the following:

• What will consumers who use products covered by the proposal use if the supply of these products is constrained by the rule?
• How will consumers use the different consumer credit products covered by the proposal?
• Will mandating underwriting to prevent rollovers and defaults harm consumers?
• Is the APR an appropriate metric for short-term products, and how will interest rate caps—direct or indirect—affect consumers who have limited credit choices?
• How will interest rate caps affect consumers’ ability to understand their own risk profile? 
• How will the proposal interact with existing law developed by states and private organizations through a century of balancing competing considerations in the short-term consumer lending space?

The comment considers each of these issues in turn.

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