Payday lending rules that work
Consumer protections must be balanced with their needs
It is an unfortunate reality that many people live paycheck to paycheck in this country. For these individuals, any unexpected bill, whether it is a car repair or a medical emergency, can wreak havoc. Short-term, small-dollar loans are essential resources for those who need just a little help overcoming these types of unexpected expenses.
Payday loans are not just for unforeseen short-term financial emergencies. Five-and-a-half percent of all Americans have used short-term loans in the past. I happen to be one of them. I used a short-term loan to start my law practice, because that was the only loan available to me at the time. It is because of my own personal experience that I know how critical this type of credit can be. As the federal government works to update consumer protections in the marketplace, I believe it is critical that we balance new regulations with the need to protect consumers’ abilities to access capital and credit.
The Consumer Financial Protection Bureau (CFPB) recently announced a rule to better protect consumers from unscrupulous small-dollar loan practices. Like my colleagues in Congress, I welcome new protections that will ensure consumers do not fall into debt traps. However, if the CFPB imposes regulations without carefully balancing the needs of consumers, it will fail to provide financial protection to those who need it most. I fear that in trying to protect consumers, the CFPB’s rule will cut off access to short-term credit without providing another avenue for those who need these types of loans. This, in turn, could force consumers to turn to more expensive alternatives, or worse, unregulated or otherwise illicit venues for securing loans.
This concern was rightly noted by Drew Breakspear, commissioner of the Florida Office of Financial Regulation. In his letter to CFPB Director Richard Cordray on June 1, 2015, Mr. Breakspear wrote that the CFPB’s proposal will “probably eliminate access to small loans and credit, and will force consumers to turn to more expensive and potentially unlicensed financial service providers, subjecting them to greater risks of financial fraud.”
The State of Florida knows all too well that there can be dishonest actors in the payday industry. That is why, 16 years ago, the Florida legislature acted unanimously to reform the state’s payday loan system to protect consumers from falling into debt traps. In the years since, Florida consumers have been able to get short-term, low-dollar loans to help them pay a bill before the electricity gets cut off, or help them cover a car payment, pay the rent, or purchase a sick child’s prescription medication. By and large they are satisfied with their experience in the marketplace.
To confirm this, one simply needs to look at the CFPB’s own data on the number of complaints that have been received against the industry. According to the CFPB’s May 2016 Monthly Complaint Report, the payday loan industry is one of only two industries to see a drop in consumer complaints. In Florida specifically, a mere 1 percent of payday consumers have complained about their experiences.
That’s not to discount the experiences of the thousands of Americans who have fallen into debt traps. We can always do better to keep consumers safer from predatory lending. However, just as we cannot paint with a broad brush regarding dishonest actors, we must also not overly generalize those who run their businesses in accordance with the law as unfair.
My friend and former colleague, Rep. Barney Frank — one of the principle architects of consumer protection and financial reform — recognized this need. When Mr. Cordray was appointed as director of the CFPB, Mr. Frank noted, “This does not mean that the majority of payday lenders … are dishonest or unscrupulous.” He described the appointment of Mr. Cordray as meaning that “consumers can now be protected against a full array of financial practices.” Such oversight is as necessary now as it was when the CFPB was created in 2011.
When the CFPB announced that it would be proposing a rule on payday lending, I was hopeful that it would take the same balanced approach that the Florida legislature took. I met with Mr. Cordray on June 2, 2015, to weigh in on the CFPB’s rulemaking process. At that meeting, Mr. Cordray acknowledged the success story of the Florida model and suggested it be considered as part of any regulatory framework established by the CFPB. He further indicated that he was in contact with Mr. Breakspear, whose is responsible for implementing the Florida law. I urged Mr. Cordray to travel to Florida to see firsthand the implementation of Florida’s model, and to meet with the consumers utilizing these services.
On July 31, 2015, a number of my colleagues on both sides of the aisle joined me in sending a letter to Mr. Cordray asking him to work in consultation with industry stakeholders to ensure a fair and transparent process. I urged him to conduct field trials in specific markets to gain a better understanding of how any proposed regulation will work in practice. To my knowledge, neither has taken place as of now.
The rulemaking process continues. Hundreds of comments will be submitted and reviewed by individuals, organizations and other stakeholders. As this process progresses, the CFBP must bear this question in mind: If access to short-term, small-dollar loans is gone, where is one supposed to turn? I sincerely hope that before the final rule is issued, Mr. Cordray ensures this question is addressed. I am ready to help however I can to ensure that consumers are given the protections they deserve without sacrificing access a full-range of financial products. Alcee L. Hastings, a Florida Democrat, serves as senior member of the House Rules Committee, Ranking Democratic member of the U.S. Helsinki Commission, and cochairman of the Florida congressional delegation.