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Payday Lending, Bank Overdraft Protection, and Fair Competition at the Consumer Financial Protection Bureau
The Consumer Financial Protection Bureau (CFPB) is considering new regulation of payday lending and bank overdraft protection. The Dodd-Frank Act, which established the CFPB, recognizes that consumers benefit from competition among providers of consumer credit products. That law requires the CFPB to preserve fair competition by providing consistent regulatory treatment of similar products offered by both bank and nonbank lenders. We illustrate how this mandate for fair competition applies to the regulation of payday lending and bank overdraft protection, products that are offered by different entities but attract an overlapping customer base, compete with each other directly, and raise similar consumer protection concerns. Unequal regulation would provide a competitive advantage for one product over another, resulting in reduced choice and higher prices for consumers, without a corresponding increase in consumer protection. Therefore, as the CFPB considers new regulation of these products, it should be careful to regulate them similarly to preserve fair competition.
As a reaction to the financial crisis that began in 2008, President Obama signed into law the 2010 Wall Street Reform and Consumer Protection Act, commonly referred to as the Dodd-Frank Act.1 A centerpiece of the new law was the creation of the Consumer Financial Protection Bureau (CFPB), which was established in response to the perception that the federal consumer protection regime had failed with respect to financial products and the belief that these regulatory failures contributed to the financial crisis. But the CFPB’s mandate goes far beyond mortgages and other financial products that were at the heart of the recent recession and reaches all consumer credit products, including small-loan products such as payday loans and pawnshops as well as nonlenders such as mortgage brokers and debt collectors.
In the wake of the financial crisis and the subsequent political response, short-term consumer lending products such as payday loans, bank overdraft protection, and pawnshops have grown in both popularity and regulatory scrutiny.2 The crisis-induced recession, the retrenchment in retail banking, and the consequences of many of the regulations enacted in the period since the recession began have reduced access to mainstream consumer credit products such as credit cards, home equity loans, and mortgages, thereby increasing demand for alternative credit products. The CFPB’s mandate to advance the goal of heightened consumer protection is multifaceted. The one on which we focus here is Dodd-Frank’s requirement to “enforce Federal consumer financial law consistently for the purpose of ensuring that all consumers have access to markets for consumer financial products and services and that markets for consumer financial products and services are fair, transparent, and competitive.” 3 Dodd-Frank further requires the CFPB to implement a regulatory regime that treats comparable products consistently, regardless of whether they are offered by a bank, a nonbank lender, or some other provider of consumer financial products.4 The CFPB, in turn, has interpreted this mandate to require it to “[p]romote fair competition by consistent enforcement of the consumer protection laws in the Bureau’s jurisdiction.” 5
In short, in pursuing its rulemaking, enforcement, and research capabilities, Dodd-Frank requires that the CFPB not provide a competitive advantage for one product over rival products simply because the rival products happen to be offered by different institutions through different distribution channels. As the architects of Dodd-Frank recognized, providing unequal regulatory treatment to similar products could harm consumers by pushing them to choose among various competing products based on their degree of regulation rather than on their relative economic benefits.6 In fact, in light of the explicitness of this mandate, failing to take account of this requirement to preserve fair competition could expose the CFPB to litigation risk in the future.