“Unconstitutionally structured.” A “gross departure from settled historical practice.”
That’s how the U.S. Court of Appeals for the District of Columbia Circuit recently described the Consumer Financial Protection Bureau (CFPB), the federal watchdog led by Director Richard Cordray. This week, the appellate court ruled that Director Cordray, an Obama appointee who can only be fired by the president and for just cause, wields too much influence. To address the CFPB’s startling lack of accountability, the court voided the for-cause provision, meaning that Director Cordray can now be removed by the president at any time and for any reason.
{mosads}It shines new light on an increasingly powerful federal agency with plenty of baggage. Rep. Sean Duffy (R-Wis.) is on-record stating that “the CFPB has been riddled with allegations of discrimination based on an employee’s race, their age gender, and now sexual orientation.”
The CFPB is a mess—from allegations of discrimination against its employees to the long list of crippling financial regulations it relentlessly churns out.
No industry is more targeted than payday lenders, who provide millions of low-income Americans in need of liquidity with short-term loans. In the words of Director Cordray: “We do not want lenders to be abusing their preferential access to people’s accounts.” As Sen. Elizabeth Warren (D-Mass.), the CFPB’s fiercest backer in Congress, put it: “[P]ayday lenders that build business models around trapping people in a never-ending cycle of debt are throwing bricks to a drowning man.” And the agency has vowed to “prepare new regulations to address issues with small-dollar lending,” which the CFPB refers to as “payday debt traps.”
Yet the assumption that payday borrowers are trapped in vicious debt cycles has little empirical backing. A 2009 study from Clemson University found that neither the legality of payday lending nor an increase in the number of loan stores led to higher rates of bankruptcies—backing up earlier research from Dartmouth College and the Federal Reserve Bank of New York. Professor Michael Maloney, who co-authored the study, argued the following: “[P]ayday loans appear to increase the welfare of consumers by enabling them to survive unexpected expenses or interruptions in income.” He also claimed that payday loans “are not harmful to their users.”
An American Payroll Association survey released the following year confirms that more than 90 percent of payday advances are repaid when due, refuting the CFPB’s “debt trap” narrative.
Unfortunately, the growing body of research has not precluded the agency from regulatory overreach. The CFPB now requires payday lenders to verify a borrower’s income, major financial obligations, and borrowing history before issuing a loan. The agency has even issued a long list of “affordability criteria” to lengthen the payday lending process. All of it is designed to erect a barrier between payday lenders and borrowers in need of quick cash.
The current regulations governing short-term loans already insure that customers know the terms and fees of borrowing, while the transaction remains quick and transparent. Payday borrowing is not the most inexpensive option, but its popularity speaks to the easy-to-understand costs.
A 2015 study from George Washington University analyzed over one million short-term installment loans, concluding that the CFPB’s porposals reduce the availability of credit to low-income borrowers. The researchers found that “simple affordability criteria risks substantial reductions in credit availability to a population that often has few available alternatives.” For the more than 70 percent of Americans living paycheck to paycheck, even less access to credit is the last thing they need.
This is not to say that the CFPB serves no purpose. The Wells Fargo debacle shows that consumer protection is a real concern—and the agency can help address it. Federal regulators recently revealed that Wells Fargo employees secretly created millions of unauthorized bank and credit card accounts—without their customers knowing about it—earning the bank millions of dollars in unwarranted fees. The creation of phony accounts allowed bank employees to boost their sales figures and earn more take-home pay. According to the CFPB, employees went so far as to create fake PIN numbers and email addresses to enroll customers in online banking services, which ultimately led Wells Fargo to fire 5,300 employees in recent years for mistreating customers.
These kinds of predatory practices warrant the CFPB’s scrutiny. However, they must not be confused with payday lenders supplying individuals and families in need with short-term liquidity. One is a brazen (and illegal) attempt to increase profits on the backs of unknowing customers, while the other rewards customers like them with vital resources on short notice.
The CFPB should heed the District Court’s warning and stay in its lane.
Gregory T. Angelo is the President of Log Cabin Republicans, the country’s premier organization representing LGBT conservatives and straight allies.
The views expressed by authors are their own and not the views of The Hill.