Richard Cordray, the first official director of the Consumer Financial Protection Bureau (CFPB), will step down at the end of November. That’s great news because now the Trump administration can insert its own director and implement its own policy agenda.
But reversing course at the Bureau will be a difficult task. For starters, it takes a long time to undo any formal federal rules. Perhaps more importantly, the CFPB is run by “entrenched left-wing managers” and “staffed with Democrats, top to bottom.”
Cordray helped create this built-in “resistance” at the CFPB, and he also made sure the Bureau finalized two controversial rules before his departure: the Arbitration Rule and the Payday Lending Rule.
Congress nullified the Arbitration Rule a few weeks ago, using the Congressional Review Act (CRA) to protect consumers from the CFPB. Now, Congress can help the Trump administration reset the agency by using the CRA to kill the payday rule.
Nullifying the arbitration rule was a relatively easy lift, because the CFPB had failed to meet statutory requirements. The Bureau based its final rule on a flawed study that simply did not support banning pre-dispute arbitration agreements, even though the Dodd–Frank Act specifically directed the CFPB to limit or prohibit arbitration clauses only after a study provided evidence to support such actions.
In striking down the arbitration rule, Congress preserved consumers’ freedom to enter into contracts and ensured that well-connected trial lawyers couldn’t force customers to bear the high cost of class-action lawsuits.
Nullifying this rule was a victory for consumers. Now, Congress has the chance to deliver another important victory for Americans by nullifying the payday rule.
Some people don’t like payday loans, but there’s a huge difference between viewing something unfavorably and using the power of the federal government – through an independent agency whose structure has been ruled unconstitutional – to effectively ban consumers from using it.
Millions of people use these short-term loans. Many of them unabashedly profess that the loans are helpful.
It strains all reason to argue that banning these short-term loans enhances consumer welfare. Giving consumers more choices, not fewer options, is the best way to serve them, because it is impossible to objectively judge the circumstances of others and how they value goods and services. This idea used to be a widely recognized benefit of protecting economic freedom, but I suppose times have changed.
Now, it is viewed as perfectly fine to pay $10 for soy-free-cage-free eggs, $225 for an artsy-shaving kit, $24 for soap, $4 for artisanal toast, $590 for a bottle of whiskey, $1,000 for an Italian suit, $90 for “distressed” skinny jeans, $195 for an evening (silk) skinny tie, $695 for leather shoes, $1,000 for an ice cream sundae, or $85 for a men’s haircut.
But charging someone $30 to borrow $100 so they can fix their washing machine or their car? No, that kind of pricing is dangerous and requires extensive government regulation.
Regardless, there is another very good reason that Congress should use the CRA to nullify the payday rule: All 50 states and the District of Columbia already regulate payday loans.
Eighteen states even prohibit the loans. A good case can be made that such prohibitions are harmful, but it doesn’t really matter – citizens in some states have decided they don’t want to allow the loans, and citizens in all remaining corners of the U.S. have decided they want their state to regulate the loans.
There’s simply no need for the federal government to get involved here. State lawmakers have this under control. (At least one state Attorney General came out against the CFPB’s proposed rule for this very reason).
In fact, if the Governors and legislatures let the payday rule slide, it won’t be too long before the federal government takes even more of their authority away.
The final rule covers “loans that require consumers to repay all or most of the debt at once, including payday loans, auto title loans, deposit advance products, and longer-term loans with balloon payments.”
However, the proposed rule covered small-dollar installment lending too, not just the payday (and other) loans covered in the final rule.
The CFPB even went out of the way to release a statement saying that: “The final rule does not apply ability-to-repay protections to all of the longer-term loans that would have been covered under the proposal.” [Emphasis added.]
This move was quite crafty because installment lenders had been lobbying Congress based on the fact that installment loans are very different than payday loans. So the CFPB’s final rule split the opposition.
Pure installment lenders now have little reason to care about the immediate effects of the final rule. Of course, their victory is likely to be short-lived.
The CFPB is a politically charged partisan agency. It is designed on the premise that consumers need the federal government to protect them from making their own (inevitably) bad decisions.
By design, the CFPB limits the availability of credit and curtails Americans’ choices for investment and wealth creation. Its methods represent a departure from the principles that governed consumer protection law for decades.
The Bureau clearly wanted to apply strict rules to the installment lenders too, but it strategically chose to wait. And it will take several successive, deregulatory-minded U.S. presidents, as well as Congressional action, to ensure that the Bureau does not simply bide its time to go back for another shot at installment lenders.
Perhaps the installment lenders are right to wait for a total revamp of the CFPB, but given what recently happened in the Senate, there’s little reason to believe Congress will soon pass comprehensive legislation to restructure the CFPB.
On the other hand, Congress has demonstrated its willingness to use the Congressional Review Act (CRA) to keep the CFPB in check. And nullifying the payday rule with a CRA resolution would ensure that the CFPB could not issue any similar rule.
At the very least, using the CRA to nullify the Payday Lending Rule would preserve the states’ right to regulate these small-dollar financial transactions within their borders. And that would be a win for consumer protection.
This piece originally appeared in Forbes
