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The Consumer Financial Protection Bureau Should Stop Hurting the Poor

Why overregulation of payday lenders is a bad idea

Elizabeth WarrenTim Pierce/FlickrCombating 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.

Also, payday lenders service riskier borrowers with short-term loans and must therefore assess higher interest rates to cover the greater likelihood of default. Some call this predatory, while others call it good economics. Turning a profit on such high-risk loans requires much higher percentage rates. That's why the short, small-dollar loans wouldn't be economically viable at rates the CFPB would impose, and the agency's own analysis confirms that most small-dollar loans simply wouldn't be offered at all if the rules were to be adopted.

To the bureaucrats determined to protect Americans from themselves, it's a benefit to reduce access to loans that some use irresponsibly by getting stuck in so-called debt traps, where new loans are taken out just to pay off old ones. Yet the demand for payday loans exists for a reason. Those of limited means or who live paycheck to paycheck often have no other option for accessing credit when facing unexpected costs, and they would be worse off by having their choices limited even further.

This explains not only the existence of payday lenders but also their popularity; there are more payday lender locations in the United States than McDonald's restaurants.

CFPB Director Richard Cordray, while being grilled last month by members of Congress, defended his attempt to gut the industry by arguing that he "can't in good conscience" not take action. That Cordray has the opportunity to clear his conscience, however, is little comfort to the millions of Americans who would be negatively impacted by his agency's proposed regulations.

Someone struggling to get by with limited access to credit whose car suddenly breaks down won't be thanking Cordray for his nannyism when it means being unable to repair the only means for getting to work.

Compounding the issue is the fact that the CFPB, which was designed by Congress to have an unprecedented level of independence and power with very little oversight, is overriding existing state regulations of the industry. So onerous and out of proportion with current rules are CFPB's proposals that not a single state currently comes close to matching them.

Cordray wishes to impose his personal judgment for how to manage finances on individual Americans everywhere, and he justifies this as an act of compassion. But there's nothing compassionate about Washington bureaucrats denying Americans access to services that make their lives easier.

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  • ||

    Absolutely.

    We need to weed from the narrative that bureaucrats are 'compassionate.'

    They're just nannies who care little for the unintended consequences of their actions.

  • sarcasmic||

    There are no unintended consequences. There are only market failures as a result from not enough rules.

  • Win Bear||

    And if adding some rules cause "market failures", the obvious fix is to add more!

  • sarcasmic||

    No, no, no. The new rules didn't cause market failures, they revealed them. And yes, the solution is always more rules.

  • Akira||

    I think we should consider replacing the word "nanny" when referring to meddling statists. Most nannies actually care, or pretend to care, about the children they're hired to look after. At the very least, a nanny has a financial incentive to treat the child well.

    Most of these politicians couldn't give two flying shits about the poor, nor do they have an incentive. In fact, they have an incentive to keep them poor so that they can grandstand on their plight for decades to come.

    I think that a very, very tiny portion of these politicians actually do care about the poor, but they still care far more about the public applause that they get for playing the valiant savior of the downtrodden on primetime television.

    There's got to be a word for someone who pretends to care, but actually uses the poor as a stepping stone to their own personal fame and fortune.

  • retiredfire||

    Except that the people being talked about, here, aren't politicians. They are far worse, they are bureaucrats, who don't face election no matter how badly they do their job.
    On top of that, for some cockamamie reason, this bureaucracy avoids virtually all Congressional scrutiny. IOW politicians, who DO face elections, can't do anything about it.

  • jrom||

    Elizabeth Warren, is a far left nut job! And she could care less about other people. She only cares about expanding her own power and influence. She is a danger to society, like most government crooks. The biggest danger to society is always the government assholes at all levels. They must be reigned in!

  • jrom||

    I agree, government assholes are usually never held accountable for their actions.

  • jrom||

    They are nannies, and they are above the law!

  • Fist of Etiquette||

    ...government policies are enacted with the intention to help.

    OBJECTION. Assumes facts not in evidence.

  • ||

    Oh come on. There's gotta be, like, one policy where that's true.

  • Win Bear||

    Those of limited means or who live paycheck to paycheck often have no other option for accessing credit when facing unexpected costs

    Sure they do: they'll get them on the black market. When they do, interest rates will likely be higher (since lenders face legal risks in addition to default) and "compliance" will likely be enforced in more traditional, violent ways.

  • retiredfire||

    What the author fails to mention is that FEDGOV's solution to this is to use the Post Office to provide the kinds of services Payday Loan companies do.
    Yeah, like that'll go well.

  • Procrastinatus||

    I wonder what the government will do when people start defaulting and shrugging off these uber convenient Post Office payday loans?

    Like Win said, more traditional, violent enforcement.

  • bassjoe||

    Reason is actually defending payday lenders? Are you fucking serious? This is seriously the most disgusting financial industry in America, preying on poorer and desperate Americans with 500%+ interest rates, deceptive marketing practices, and absolutely outrageous one-sided contracts. Just because a government agency you do not like is proposing rules for it does not mean Reason should rush to its defense.

  • sarcasmic||

    Buyer beware.

  • Eric Bana||

    Care to actually address any of the arguments from the article?

  • Scarecrow & WoodChipper Repair||

    HA HA HA! Of course he already did, didn't you read his feelz just pouring out of him?

  • MokFarin||

    There are those like that, yes. Just like there are those like that in all financial services. Do you want to destroy Wells Fargo and Chase banks because their checking account terms are "one-sided" that over-effect the poor with accounts at their institutions?

    I have used these places in the past and they are, generally, not like what you portray. Could there be some tightening of laws? Sure. Leveling the playing field between the payday loan industry and the average consumer would be a proper use of government regulation.

    But what the CFPB is proposing is akin to forcing McDonalds to read a 10-minute-long script to each and every customer about the ingredients it uses in all of the products it carries because eating McDonalds 4 times a day is ridiculously unhealthy. Having to sit in a drive-through for 10 extra minutes per vehicle would destroy McDonalds, and it is over-bearing regulation that will do more harm than good as people who are short on time for lunches or dinners will simply not eat instead of getting a big mac, which will cause hunger in children and potentially even deaths (e.g. truck drivers running on empty).

    The criticism of the proposed rules being set forth is appropriate for the rules that are proposed.

  • Foo_dd||

    there is a difference between defending payday loans, and defending bad payday loans. the regulations they are attempting are not designed to eliminate the excesses you mention... they are attempting to make payday loans go away... with profit margins either very low, or in the red, even the more honest payday lenders will go away.

    but maybe that is the problem with political things... so many people see things as absolute. just because there are lenders with questionable practices, does not mean that payday loans are bad, by default.

  • Sir Chips Alot||

    If you do not like the lenders terms, simply do not agree to them.

  • F. Mattress Boy, Jr.||

    preying on poorer and desperate Americans with 500%+ interest rates

    Good point. Whenever poor people need greater buying power, they can get turned down at responsible, less predatory lenders. Their situation will surely improve once they cannot buy what they need.

  • See Double You||

    500%+ interest rates

    There's a valid business reason for such "steep" interest rates. RTFA.

    deceptive marketing practices

    Subjective phrase which usually makes for bad law.

    absolutely outrageous one-sided contracts.

    You don't believe contracts of adhesion should be valid and enforceable?

  • Akira||

    Offering a bad deal is not a crime.

    What do you think a poor person should do if they need money to fix the car but they have no other source of money? You know, not every person is lucky enough to have friends and family who can just loan them a few hundred dollars whenever they want.

  • Michael Price||

    "preying on poorer and desperate Americans "
    New rule, if you're not going to offer a better terms to poor and desperate people than he people you're criticising, shut up.

    deceptive marketing practices, "
    Actually their contracts are well-understood, perhaps better understood than most mortgages and insurance policies. Payday lenders don't get customers because people don't understand the terms.

  • Bob K||

    Really easy to fix some of this without regulating pay day lenders. Allow employers to loan money to their employees without any IRS regulations on how much interest to charge and how to deal with the tax implications. I know businesses that would give interest free loans but are afraid of doing it wrong because they are small businesses and don't want to run afoul of the IRS and lose everything to help an employee.

  • Mindyourbusiness||

    Just about every government agency suffers from a horrible case of mission creep. Which as far as I'm concerned is a great reason to limit severely the scope of their actions. The Law of Unintended Consequences never malfunctions, and bureaucrats seem to willfully ignore that fact.

  • retiredfire||

    This was no "unintended consequence" - the sights of those, who crafted this bureaucracy, were always on the payday lenders, among other social justice financial wrongs.
    SJW's on the march.

  • Sir Chips Alot||

    The road to hell is paved with good intentions.

  • Unicorn Abattoir||

    And who paved that road?...

  • Michael Price||

    You didn't make that!

  • SimonD||

    I always thought the road to hell was paved with frozen door-to-door salesmen.

    Seriously, I think you're overestimating the good intentions of Sen. Warren and the rest of the ProgDems.

  • Free Society||

    The Consumer Financial Protection Bureau Should Stop Hurting the Poor

    But I feel so...protected.

  • SimonD||

    Typical government; they're going to protect you...good and hard, whether you like it or not.

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  • ||

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  • Sir Chips Alot||

    let me guess the next steps here...since interest rates will be capped, pay day lenders are going to stop lending as there is no way to accurately value risk. So then we will have government, i mean tax payer backed payday lending to cover all the losses?

  • retiredfire||

    Yes, the proposed agency being the Post Office.

  • Sir Chips Alot||

    let me guess the next steps here...since interest rates will be capped, pay day lenders are going to stop lending as there is no way to accurately value risk. So then we will have government, i mean tax payer backed payday lending to cover all the losses?

  • Brochettaward||

    Those god damn Jews and their usury. It's not fair that they won't lend me their money for free, I tell ya...

  • JJM||

    No.

    Regulation of usury lending practices is actually one of the oldest, if not THE oldest forms of financial regulations on the planet and for good reason - it's immoral and evil. Not only that, but history is ripe with examples of money lending going wrong. Just look at the ancient Romans - in the 3rd century they completely destroyed their tenant farmer class and reduced them to serfdom because of usury lending by

    It's the one thing that both Christians and Muslims have agreed on since Islam even became a religion. The states have always had the right to regulate usury lending and while on some surface level I agree with the argument that this regulation is designed at a federal level to kill the practice, I'm more than happy to cry crocodile tears for modern debt-slavery.

    It's almost ironic that someone who works for the "Cato Institute" would not heed the words of Cato the Elder:

    "And what do you think of usury?"—"What do you think of murder?"

  • Migrant Log Chipper||

    Yawn....Bible stories make me sleepy.

  • Bob K||

    But instead of going after pay day lenders why not allow businesses to give out interest free loans to their employees. The company I work for used to but ran of afoul of the IRS and had to stop. Not because they were giving company execs lavish loans that were never paid back but because they were giving out $500.00 loans and just taking $50.00 out of the employees check for 10 weeks. They did this when say an employees car broke down and they didn't have the capital off hand to pay for the repairs. No the IRS had to stop that practice and guess what pay day lending increased. Got to love the IRS and their bullshit.

  • Frankjasper1||

    Why is it your business to regulate?

  • Michael Price||

    " it's immoral and evil."
    If you can't show your reasoning behind that statement we can assume you have none. Ancient unverifiable books are not scholarly sources.

    "Just look at the ancient Romans - in the 3rd century they completely destroyed their tenant farmer class and reduced them to serfdom because of usury lending by"
    NO moron that's because the State taxed them too much.

  • jrom||

    Elizabeth Warren, is a danger to society, just like most other government crooks!

  • Buzzbug222||

    I completely agree that the CFPB is out of control. The fact that the CFPB outright claim that they are actually "protecting" the consumers in this country is a blatant lie. There are numerous cases in which the CFPB and a deceitful Cordray have used their seemingly relentless and unaccountable power in an attempt to extort millions upon millions of dollars for their own benefit. And it works. Big-time corporations run scared from them and hand over whatever dollar amount the CFPB decides they feel like taking - all without actual solid proof of customer harm. I speak from first-hand experience as to the amount of corruption going on within this agency. They are a threat to so many hard-working Americans and their families, hidden by the falsity of "helping and protecting" consumers. This couldn't be further from the truth as to their real agenda. I pray that this unjust government agency, backed by Obama and Hillary, will soon be unmasked to show the real truth behind their corruption and will be shut down.

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