Despite professing a desire for “financial inclusion,” usually understood as better access to financial products for lower income people, the Consumer Financial Protection Bureau (CFPB) has taken aim at a product used extensively by low- and moderate income Americans: the short-term, low value loans known as “payday” loans. What is even more striking about the proposed rule, however, is the fact that it works as an end-run around an express limit on the CFPB’s power. The CFPB has spent its short life pushing the bounds of its authority in numerous directions, going so far as to incur a slap from a federal court when it trod on the toes of another agency. The CFPB could be excused for thinking that at least some members of Congress desired such expansion, given the broad and amorphous authority the Dodd-Frank Act grants the new agency. But it is hard to justify evading an express prohibition.
Although the CFPB is given the authority to proscribe unfair, deceptive, and abusive practices, the Dodd-Frank Act explicitly withholds from the CFPB the authority to “establish a usury limit.” The proposed rule does not set a rate cap, but it does make lending at any rate above 36 percent so onerous as to be infeasible. In fact, it is not clear that it would be even be possible to comply with the rule.
On Friday, I submitted a letter to the CFPB, expressing concern over the agency’s authority to enact the rule as proposed. In particular, the letter notes that the underwriting process required for loans with an effective annual interest rate higher than 36 percent are not only onerous but require the lender to make determinations that may be impossible to make. For example, under the proposed rule a lender would be required to “forecast a reasonable amount of basic living expenses for the consumer – expenditures (other than debt obligations and housing costs) necessary for a consumer to maintain the consumer’s health, welfare, and ability to produce income[.]” This amount can be difficult for individuals to determine for their own households. My husband and I have an estimate we use to help us save for an emergency, but I couldn’t swear to its accuracy given the vagaries of life with small children. I couldn’t guess what the right number might be for any other household in my acquaintance. If I am uncertain what my own family might need, it is difficult to see how a storefront lender could make this determination for a prospective borrower who walks in off the street. Certainly this level of underwriting, which surpasses even what is required for most mortgages, is not cost-effective for a loan of only a few hundred dollars.
If the “power to tax involves the power to destroy,” the power to regulate must carry the same destructive force. Since these heavy underwriting rules would apply only to loans made at a certain interest rate, It is difficult to view the proposed rule as anything less than an attempt to cap interest rates on short term, small dollar lending at 36 percent. And this the CFPB may not do.
Nor is the CFPB authorized to ban payday lending altogether and yet the rule is likely to do just that. There have been previous attempts to cap such lending at 36 percent. And the result was a significant decrease in the availability of short term, small value loans.
Congressional intent can be ambiguous. But in this case, Congress spoke clearly through Dodd-Frank: the CFPB cannot set interest rate caps. No, not even through clever rule-making. I have argued elsewhere that concern about the dangers of payday lending are misplaced, but even those who find payday lending to be distasteful should reject such naked overreach. This regulation should be scrapped.