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Monday, October 24, 2016

Regulators Are Going After Short-Term Loans

We need to look at the cold-hard facts: the numbers that the CFPB uses to defend their arguments are manipulative and outright false.

In June, the Consumer Financial Protection Bureau (CFPB) put forward a proposal to heavily regulate the short-term loan industry. The Small Dollar Lending Rule seeks to “alleviate and solve” for the “apparent weaknesses” of the current rates and short-term lenders by requiring “lenders to assess and verify a borrower’s income, housing costs, and credit and legal obligations.”

The intention of the proposal is to protect low-income families from being caught in an endless cycle where many are “forced to take out another loan to make ends meet.” At first glance, it seems that the rule would solve problems in an industry known for its “dirtiness.” But policy makers are thinking with their hearts while sitting in their air-conditioned offices, away from the facts and any form of interaction with the real state of affairs of short-term loans. Just the fact that they see the short-term loan industry as “dirty,” supplies sufficient reason to believe that either these policymakers are ignorantly prejudiced or plainly manipulative.

Instead of finger-pointing and name-calling at the short-term lending industry, they should be applying simple economics to their proposals to see if they hold water.

Profit Margin Is Profit Margin

In “Understanding the CFPB Proposal for Payday and Other Small Loans,” a Pew brief about the 2015 CFPB regulatory outline, several arguments are made in favor of new legislation.

Why should short-term lenders be held accountable any differently than Apple?The first of its arguments is that, “with payday and vehicle title loan markets, lenders’ and borrowers’ interests are not aligned because profitability for lenders depends on loans being unaffordable for customers.” But doesn’t this argument stand for any industry that sells a product?

How much do you think an iPhone costs versus the cost consumers pay for it? An iPhone 6 costs $200.10 to produce and is sold for $699 dollars. That is triple its cost to make – to borrow a phrase from the left, it’s 300 percent “price-gouging.” Yet there is no noise from policy makers claiming to call Apple a company that cheats its customers.

So why should short-term lenders be held accountable any differently than Apple? Shouldn’t short-term lenders be able to charge at interest rates that make up for the huge risk they incur in lending money out to low-income borrowers?

Studies show that, on average, these lenders charge an average of 15 percent, or $15 for every $100 loaned – a profit margin that is significantly less than the price percentage difference of products in other markets.

Smaller Payments?

The second of the CFPB’s arguments, according to this Pew brief, is that to solve for “balloon payments,” or the cycle of continued borrowing to pay off loans, the CFPB would “require that most products become installment loans with smaller, manageable payments.”

The problem with this statement is that the Bureau completely ignores the reason why short-term loans are so available to borrowers – it’s because short-term loan companies can offset risk by requiring borrowers to weigh their own risk against their need to borrow.

Simply put, the short payment periods are put in place to deter those who definitely should not borrow. Additionally, making the periods longer and the payments smaller defeats the business model, making short-term lenders irrelevant because their models are defined by their expediency.

Change the Game, Raise the Price

The third of CFPB’s argument is that their proposal would solve the “problems” related to “price gouge lending” by requiring “lenders to evaluate borrowers’ financial condition” and by forcing borrowers to submit written statements on income, housing expenses, all outstanding debt and child support. Meanwhile, the lender is required to obtain a national credit report, and then deliver that data to all proposed credit tracking agencies.

Remember: all of these government-imposed requirements cost the short-term lenders money. The cost of finding out this data would eliminate any ability that firms have to loan small amounts of cash at current interest rates. The result would either lead short-term loan companies to shut down, or further hurt borrowers by requiring that they borrow larger sums of money to qualify for loans.

Keep What Helps

Lastly, the CFPB’s redesign appears to have been prompted by a study by The Pew Charitable Trusts, which found that the “vast majority of borrowers want … most products [to] become installment loans with smaller, manageable payments.”

More than 98 percent of the 12,308 submissions to the Bureau’s “Tell Your Story” program were positive and excessively thankful for these loans.At first glance, it seems that borrowers in need are hurting and want to find a way out of a difficult situation. Although there are those who are caught in the inability to pay back loans because they got caught in bad finance (due to the risk of short-term loans), many of those “surveyed” actually sent in raving reviews in support of short-term loans.

In fact, more than 98 percent of the 12,308 submissions to the Bureau’s “Tell Your Story” program – where people sent in their experience regarding short-term loans – were positive and excessively thankful for these loans.

These responses ranged from, “There are no other avenues out there that can lend money like [this],” to a simple “Thank you.” This study was personally conducted by the CFPB. Unsatisfied with the results, they hid it from the public’s view until a Freedom of Information Act request forced them to release it.

This holding back of information demonstrates that the Bureau is not truly searching to help the people it says it wants to help; rather, they have a keen eye for policy symbolism, and the flash of “fighting for the underdog” when in fact that are irreversibly harming them while sticking a knife in their back.

Policymakers’ continued belief that short-term loans are as bad as they seem comes either because they did not attend their economics classes in college, or they simply want to be perceived as “someone who cares.” But we cannot let policymakers make decisions because their hearts lead them to make uneducated proposals. We cannot let legislators sway our hearts because we hear about the extreme situations where people are hurt. Instead, we need to look at the cold-hard facts: the numbers that the CFPB uses to defend their arguments are manipulative and outright false.

The Small Dollar Lending Rule must not be allowed to pass and the proposal must be removed and taken back – it will only hurt the people it claims it will help. Let Americans make decisions for themselves – they’re smarter and more risk-averse than Washington insiders give them credit for. As the old economic rule reads, “Laissez-faire,” or “Do, let live.”

  • Jonathan Lee is a filmmaker and freelance political journalist.​