The CFPB’s War on Installment Loans Hurts the Very People it Claims to Protect
The Consumer Financial Protection Bureau’s war on installment loans disenfranchises the people that it’s charged with protecting according to a report posted at Investors.com1. The agency not only exceeds its legislative mandate but also uses questionable tactics that generate de facto legislative actions by enforcing laws that have not been passed by any legislative body. The report calls for incoming President Trump to replace agency director Richard Cordray as soon as possible.
The Constitution prohibits passing laws that criminalize past behavior, but that’s exactly what the CFPB is doing in its opposition to installment loans according to the report. Cordray has defended his actions aggressively in the war on short-term, small-value loans that are commonly grouped under the heading “payday loans.” Online installment loans, though similar, have different structures in that they’re financed over longer periods and don’t require full repayment from a borrower’s next payday.
Supporters of the CFPB point out that the agency has returned billions of dollars to consumers and uncovered malfeasance such as the Wells Fargo scandal. Democrats and the outgoing Obama administration continue to express support for the agency, so it’s unclear whether the Republican mandate will be enough to reform or abolish the agency. Many consumers have become trapped in debt, and some unethical lenders have targeted minorities and others for usurious loans.
Consumer Financial Protection Bureau Hurts the People Who Depend on Short-Term Loans
The CFPB charges that short-term, bad credit loans take advantage of poor people and others who aren’t sophisticated in how they manage credit. Fee.org2 reports that the agency initiated several proposals to regulate payday lending, installment loan products and other short-term loans that usually carry higher rates of interest than traditional loan products. The agency has unilaterally determined that these loans aren’t in consumers’ best interests because profitability depends on interest rates so high that they’re not affordable for consumers.
However, Journalistsresource.org3 quotes a May of 2016 survey conducted by the Federal Reserve Board, which states that about half of all Americans have no savings for managing financial emergencies. These people face real problems if they have bad credit and need a car repair, cash-only doctor or dental appointment or money to manage some other emergency. People who can’t afford to pay their utility bills face high late fees and penalties, increases in interest rates, service disruptions and cancellation of service if they don’t have access to cash or credit to pay bills in a timely manner.
The 2016 Federal Reserve study found that short-term loans and emergency installment loan products tend to support families in troubled times. The CFPB’s efforts to put these lenders out of business threaten to harm the people that the agency is supposed to protect. The study found that these short-term loans help to keep food on the table, pay bills and deal with misfortune and natural disasters.
Republicans and Incoming President Trump Move to Protect the Installment Loan Industry
The CFPB’s war on installment loans has possibly met its Waterloo since the 2016 election because President-elect Trump and Republican legislators have vowed to scale back the CFPB and its regulation of the installment loan industry. Fortune.com4 quotes Alan Kaplinsky, who leads the Consumer Financial Services Group at the Ballard Spahr law firm: “The election spells very bad news for the CFPB.”
The Dodd-Frank Act of 2010, which created the CFPB, was conceived by Democratic Senator Elizabeth Warren of Massachusetts, and the agency’s creation is considered to be one of the top accomplishments of the Obama administration. Created to deal with the excesses that led to the financial crisis of 2007 through 2009, the CFPB was designed to be independent of congressional funding and oversight to insulate it from politics. Republicans generally opposed the agency’s stifling regulations and high-handed attempts to legislate through fiat. Some of the charges against the agency include:
- The bureau relies on a dated regulation of the Department of Housing and Urban Development to pursue actions against companies that believed they were complying with existing laws.
- The CFPB tends to ignore due process and basic fairness for people who are disenfranchised and don’t have access to traditional financial products.
- Agency officials ignore overwhelming support for short-term loan products as evidenced by letters to the agency, the bureau’s complaint hotline and independent surveys.
- The CFPB publishes complaints before investigating their validity, which can unfairly damage business reputations.
- The director of the agency has a term that runs for five years–longer than the president’s–which insulates the director from accountability.
- Citing debt traps and cycles of debt as justifications for regulating short-term lenders, the CFPB ignores conflicting evidence that most borrowers use short-term loans as intended and repay them promptly.
- The agency has pursued independent automobile financiers in its aggressive efforts to regulate all financial services.
- The CFPB has pursued cases beyond the statute of limitations, but a judge disagreed according to Troutmansanders.com.5
- A three-panel federal appeals court has ruled the agency’s structure to be unconstitutional.
The Future of Online Installment Loans May Depend on Dodd-Frank Reform
Online installment loans, payday loans and even traditional financial products like mortgages and credit union loans face uncertainty as long as the CFPB continues to operate in the same way as it has for the past few years. Critics have suggested that President Trump should fire director Richard Cordray, abolish the agency altogether or reform it into a multiseat commission drawing from both political parties instead of its current status as an independent agency without direct oversight.
Installment Loans Online
Protecting installment loans online is a very narrow benefit that reform of the CFPB would generate according to agency opponents. The agency doesn’t depend on congressional appropriations for financing its initiatives, and the director is in charge of both policy and enforcement, which critics contend concentrates too much power in one person. The director can choose to pursue services outside the agency’s mandate including banks, credit unions, auto finance companies and other financial services like retirement planning. Many Republicans are calling for President-elect Trump to fire Cordray on his first day in office, but there are potential legal problems. Cordray’s term doesn’t coincide with presidential terms.
The only reasons that were defined for removing the CFPB director were malfeasance or “for cause,” which wasn’t adequately defined. However, after the federal appeals court ruled the agency’s structure unconstitutional, many legal experts believe that Trump could remove Cordray immediately because of the court ruling according to an article posted at LATimes.com6.
Bad Credit Scores Can Disenfranchise People and Damage Families
The CFPB ignores the plight of families with bad credit and limited resources, those whom it was designed to protect. Unfortunately, low credit scores make it almost impossible to obtain credit from traditional lenders like banks. These disenfranchised families often depend on online installment loans, auto loans, payday loans and other alternative lending products in emergency situations. Unfortunately, the CFPB consistently ignores the opinions of adults who have the right to choose their own financial products. Most short-term borrowers repay their loans and use them responsibly according to many studies including the one conducted by the Federal Reserve.
Representative Hensarling, chairman of the House Financial Services Committee, proposes a major overhaul for Dodd-Frank to make it more responsive to its constituency and the needs of people with bad credit. The proposal calls for a bipartisan, five-member commission to replace the independent director and restore checks and balances to the regulatory process. Hensarling has called the CFPB “arguably the most powerful and least accountable Washington bureaucracy in American history.” Get the latest updates on the CFPB’s war on installment loans and the beleaguered agency’s fate at the Personal Money Store