Cordray Resistance Aims to Rewrite CFPB's History
Critics of small-dollar lending are at it again, this time attacking the Consumer Financial Protection Bureau’s (CFPB) forthcoming reconsideration of the 2017 small-dollar lending rule. Politics, the critics claim, is behind the current rulemaking – a hypocritical allegation that has many of us scratching our heads in disbelief. The Bureau’s rulemaking, led by its previous director, was perhaps the most partisan perversion of the regulatory process in modern history. We cannot forget it, and thankfully, the current leadership of the Bureau is working diligently to fix it.
The latest salvos are reminiscent of the years of hyper-partisanship that pervaded the Bureau and its rulemaking under the previous regime, which started at the very top. In 2017, the Bureau reportedly rushed to release its final small-dollar loan rule ahead of then-Director Richard Cordray’s departure to run for Ohio Governor, sacrificing rigorous, data-driven rulemaking for political expediency. During his tenure, the Bureau also released an arbitration rule that was a windfall for trial lawyers. In turn, they donated to his failed gubernatorial campaign in droves. Cordray could not have been unaware that these two rules, timed to coincide with his gubernatorial run, would have a positive impact on his own political career; however, he did nothing to distance himself from the perception that he was using the rules to his benefit.
No amount of posturing at this late juncture can mask the blatant partisanship or the shoddy foundation that underpinned the CFPB’s original rule. The CFPB had a golden opportunity to break new ground and work cooperatively with the industry to truly understand small-dollar loan customers and their credit needs. Instead, the former director and his acolytes worked backwards. They had a goal in mind – decimate the industry – and they bent the entire rulemaking, inappropriately, to achieve their desired aim. They gave unfettered access to the groups who could provide political cover, while shutting out the industry and the very customers who are closest to the product. This wasn’t rulemaking; it was a political campaign, plain and simple, further evidenced by the fact that a staggering 99.6 percent of political contributions from CFPB staff at the time went to Democratic candidates.
Nowhere was this more obvious than in the Bureau’s research, or more accurately, the lack thereof. The CFPB under its previous leadership did not conduct any research on customer outcomes to determine who is helped and who is potentially harmed by small-dollar loans. I have always suspected that this is because the CFPB did not want to admit that many customers do, in fact, benefit from the access to credit that small-dollar loans provide. Instead, the Bureau simply assumed that repeat usage of small-dollar loans equates to harm, an assumption for which there is no evidentiary basis. That’s the same as saying repeat usage of credit cards is harmful to consumers. This may be true for some, but for many consumers, it is not.
As with research, the previous regime at the CFPB committed other sins of omission, avoiding questions for which it did not want the answers, or which would have distracted from its singular mission of taking down a state licensed and regulated industry. For example, the Bureau did not bother to conduct a cost-benefit analysis, nor did it conduct an analysis of existing state regulatory structures or practices, despite the fact that states have vastly more experience regulating small-dollar loans. The Bureau also did nothing to address the ongoing issue of illegal, unregulated lenders operating in the shadows.
Finally, the previous director’s bias is evident in the CFPB’s prejudicial treatment of small-dollar loans relative to other financial services products. The Bureau’s mandate requires that it create the least damage possible to existing entities. An appropriate starting place would have been to examine whether enhanced disclosures may better inform and protect consumers. Disclosure was the guiding principle behind the so-called “Schumer Box” that now appears on credit card statements, clearly detailing rates, fees and terms. Yet, Cordray and his team skipped right over disclosure and went directly to annihilation.
When the 2017 rule was issued, customers who had been shut out of the rulemaking process made their views clearly known in record numbers. They submitted more than one million comments opposed to the original rule, hundreds of thousands of which were personal, handwritten letters. However, the deeply paternalistic bureaucrats at the CFPB were convinced they knew better, and summarily rejected the voices of these customers. Once again, the facts did not support the previous regime’s preconceived notions, so they rejected the facts.
The small-dollar loan industry intended to collaborate with the CFPB in good faith during its original rulemaking. We were never against a rule in principle; the question was what the rule would look like and whether the Bureau would develop commonsense regulations that appropriately balanced consumer protection and access to credit. Unfortunately, it wasn’t possible to collaborate with a Bureau that was hell-bent on wiping out an entire industry, no matter the consequences.
In today’s environment, those consequences would have been even more severe. There’s a credit crisis in America, which the previous CFPB regime would have exacerbated with a rule that restricted access to credit. Critics of the industry have never understood that this is a demand-driven industry. People need credit and, if licensed and regulated lenders are not the ones providing it, consumers will go underground in search of alternatives – and that is the most dangerous proposition of all.
The current leadership of the Bureau marks a refreshing return to professionalism. Under Director Kathy Kraninger, the Bureau has been guided by data and facts, rather than anecdotes and assumptions. The current leadership of the Bureau has also taken a more inclusive approach to rulemaking, considering the views of more stakeholders in its process. No one knows what the CFPB will soon announce with regard to the reconsideration of the small-dollar lending rule, but whatever the CFPB issues, it will be the result of a more thoughtful and data-driven process conducted by professional regulators. That’s what scares the Cordray resistance the most.