We at CFIF have consistently highlighted the peril of federal, state and local government efforts targeting…
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New Study Shows How Overregulating Short-Term Lenders Harms Consumers

We at CFIF have consistently highlighted the peril of federal, state and local government efforts targeting the short-term consumer lending sector.

Less than two years ago, we specifically sounded the alarm on a New Mexico law artificially restricting interest rates on short-term consumer loans.

Well, a new study entitled "A New Mexico Consumer Survey:  Understanding the Impact of the 2023 Rate Cap on Consumers" that surveyed actual borrowers confirms our earlier warnings:

Key findings include:

•Short-term,small-dollar loans help borrowers manage their financial situations, irrespective of the borrower’s income.

•The rate cap has failed to improve the financial wellbeing of New Mexicans, specifically those who had previously relied on short-term, small-dollar loans.

•…[more]

November 27, 2023 • 03:57 PM

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Supreme Court Reviews Rogue CFPB Bureaucracy Print
By Timothy H. Lee
Thursday, October 05 2023
The CFPB’s crusade targeting the short-term lending sector isn’t merely unconstitutional, however. It’s also objectionable in terms of public policy.

The United States Supreme Court began its new term this week, featuring pivotal cases involving the Second Amendment, environmental regulation, social media content regulation and Congressional districting.  

None of those issues, however, exceed in importance a case heard this week regarding the rogue Consumer Financial Protection Bureau (CFPB) brought by the short-term lending industry.  

Understandably, financial overregulation and the CFPB may not trigger instant recognition among everyday Americans in the way that free speech, religious freedom, gun control or affirmative action cases do.  

Amid increasing consumer strain and economic uncertainty, however, the matter merits our attention and affirmation of a Court of Appeals ruling last year that led to the instant Supreme Court review.  

The lower court already reached the correct result, so now the Supreme Court need only affirm it.  

Here’s the backdrop and why the case carries such importance.  In an era of federal government overreach, the CFPB stands out as perhaps the most egregious violator.  Just two years ago, for instance, the Supreme Court ruled its leadership structure unconstitutional.  

Then, in a separate legal challenge last year, the U.S. Fifth Circuit Court of Appeals ruled the CFPB’s funding mechanism similarly unconstitutional, vacating a regulation it had imposed on the consumer short-term lending industry.  

In fact, the Court of Appeals found the CFPB funding structure so contrary to the Constitution’s separation of powers and principles of democratic governance that the court used the term “despotism” to describe it.  

The case originates from a destructive 2016 “Payday Lending Rule” proposed by Obama Administration CFPB Director Richard Cordray, which targeted the nation’s short-term lending industry on which millions of Americans rely.  

The lower Court of Appeals rightly noted that under its current structure the CFPB “wields vast rulemaking, enforcement, and adjudicatory authority over a significant portion of the U.S. economy.”  With regard to its funding mechanism in question, the Court rightly highlighted how, “Unlike nearly every other administrative agency, Congress placed this ‘staggering amalgam of legislative, judicial, and executive power in the hands of a single Director’ rather than a multimember board or commission.”  

That structure, the lower court states, amounts to a constitutional “abomination”:  

“It acts as a mini legislature, prosecutor, and court, responsible for creating substantive rules for a wide swath of industries, prosecuting violations, and levying knee-buckling penalties against private citizens.”  …  An expansive executive agency insulated (no, double-insulated) from Congress’s purse strings, expressly exempt from budgetary review, and headed by a single Director removable at the President’s pleasure is the epitome of the unification of the purse and the sword in the executive – an abomination the Framers warned “would destroy that division of powers on which political liberty is founded.”  

Consequently, the Court of Appeals held that mechanism unconstitutional and vacated the CFPB’s “Payday Lending Rule.”  

The CFPB’s crusade targeting the short-term lending sector isn’t merely unconstitutional, however.  It’s also objectionable in terms of public policy.  

Payday lenders offer struggling Americans a reliable, legal source of short-term loans to get them through temporary emergencies.  With economic uncertainty on the rise, access to emergency funds in that safe, legal manner is invaluable to consumers.  

Illustrating the point, even before the Covid pandemic the Federal Reserve found that nearly 40% of U.S. households possess insufficient savings to handle even a $400 unexpected expense.  As further illustration, an alarming 51% of U.S. military personnel live paycheck-to-paycheck, rendering them vulnerable to financial emergencies.  For those people, credit cards aren’t always a viable option, and traditional bank loans can’t provide help because the dollar amounts are too small.  

Whereas higher-income Americans with strong credit history can typically access savings accounts, borrow from banks or use existing assets as collateral for liquidity, people with lower credit scores or insufficient savings face much stronger headwinds.  Over 40% of consumers possess credit scores under 700, which renders traditional bank loans less accessible or impossible.  

Accordingly, for lower-income Americans facing temporary difficulty, short-term lending provides a lifeline.  If overzealous bureaucracies like the CFPB make consumer lending less accessible, however, those lower-income consumers will instead be forced to turn to dangerous loansharks, bounce checks or simply skip payments of critical bills.  

Even the World Bank maintains that government restrictions on consumer lending lead to “increases in non-interest fees and commissions;  reduced transparency;  lower number of institutions and reduced bank density;  and adverse impacts on bank profitability, in addition to the lack of access for smaller and riskier borrowers.”  

With inflation, interest rates and economic uncertainty rising, we mustn’t tempt that result.  

The Supreme Court should affirm the Fifth Circuit’s ruling and further rebuke federal bureaucratic overreach, but elected officials and regulatory personnel at the federal, state and local levels must also play a role in not undermining the short-term consumer lending sector on which so many struggling Americans rely. 

Notable Quote   
 
"The Biden administration has outpaced other recent presidents in issuing significant regulations that place a financial burden on taxpayers, according to a report from the Competitive Enterprise Institute.Under President Joe Biden, the federal government completed 89 economically significant rules in 2022, defined as those with at least a $100 million economic impact, which is higher than any point…[more]
 
 
— Will Kessler, Daily Caller News Foundation
 
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