Mr. Hilary B. Miller, an attorney with considerable payday loan and consumer finance experience, has been kind enough to share his wisdom with our 4000 plus readers regarding his expectations for our future and the impact of the Consumer Financial Protection Bureau (CFPB) which contains Title X, the Bureau of Consumer Financial Protection (”we all need to start abbreviating properly as BCFP”).
A majority of our readers will recognize Mr. Hilary B. Miller as a presenter at The Community Financial Services Association of America; a national organization dedicated solely to promoting responsible regulation of the payday advance industry and consumer protections through CFSA’s Best Practices. CFSA, in addition to FISCA and OLA are the three organizations we recommend all our readers become acquainted with and support with donations and membership. An additional resource you must investigate is: Consumer Rights Coalition
As previously discussed, our thoughts on the future of the payday loan industry are EXTREMELY OPTIMISTIC! So continuing in that vein, today we have additional expert opinion specific to the payday loan industry from an industry veteran!
By Hilary B. Miller
What, exactly, are the implications of the Dodd-Frank Wall Street Reform and Consumer Protection Act for payday lending? For those in the industry, how the Act will shape the future of short-term consumer loan products is this week’s “$64 question.” Some law firms, Wall Street analysts and others have summarized the Act and its possible effect on various other financial businesses, but commentary on payday has been lacking in the media - including, surprisingly, the blogosphere. For better or worse, I’m going to launch myself into this lacuna.
My views will surprise many readers and will appear at odds with the public statements of some industry professionals. (I’m going to be making a presentation on this subject at the ABA Annual Meeting on August 8; so if you think I’m all wet, please let me know right away before I embarrass myself.)
These thoughts come with some caveats: First, if you are not my client, this is not legal advice to you. Second, efforts at punditry of this nature are notoriously unreliable and subject to the vagaries of political winds that will blow and crack your cheeks - or possibly worse. Third, I propound this primarily as a thought experiment to elicit alternative or better theories, to which I am receptive; if you have a different view, I want to hear it.
President Obama signed Dodd-Frank on July 21, and it is now Public Law 11-203. Despite nearly contemporaneous public statements from adversaries that the enactment would be the death knell for payday lending, the Act doesn’t contain any substantive regulation of payday lending in any of its 848 single-spaced pages. If there is a deadly weapon in the Act, it is apparently has a silencer.
Maybe it’s here: Title X of the Act creates the Bureau of Consumer Financial Protection (which we all need to start abbreviating properly as “BCFP”). The BCFP has amazingly broad powers to adopt and enforce regulations with respect to the conduct of “covered persons” - if you’re a payday lender, this means you.
The industry’s antagonists have pronounced that the BCFP’s first act will be to regulate payday lenders out of business (even though payday lending was entirely unrelated to the causes of the recent financial crisis, they assume that the BCFP will have no bigger fish to fry than payday lending). Some of my colleagues believe that payday lending is “low-hanging fruit” that the BCFP can use to put up a quick and easy “W” on the scorecard and, in the process, placate consumer groups. I think they’re all wrong.
A thoughtful analysis of how the BCFP will go about regulating payday lending needs to be multifaceted and nuanced. This process does not lend itself to facile, throw-away lines like “Liz Warren hates payday lending.” Rather, we need to look at the people who will promulgate the regulations, at the deliberative process mandated by the statute and at the guidelines the statute provides. Consideration must also be given to the effect on other BCFP constituencies of a perceived hasty and baseless proscription of payday lending. Finally, we need to think about timing and the likelihood that changes in the political composition of Congress will have occurred by the time the BCFP can get around to turning its guns on payday lenders.
The heavy lifting in the drafting of any regulations affecting payday lending will be done by staff of the BCFP. (The Bureau has no staff today but will acquire staff soon as a result of the combination of staffs of several federal agencies and outside hiring.) Staff are frequently the unsung heroes of Washington. Many of them are doctorally prepared career experts - economists, lawyers and psychologists - who could do better for themselves in the private sector but who choose instead to serve the public. No fooling. They work hard, and their work outlives the politicians to whom they report. And this factor is important for a critical reason: their primary motivation is to get it right, not to serve the ends of consumer groups or even of their more politically minded, but time-limited, bosses. The BCFP’s staff will be aware that consumers will be driven to inferior substitute credit products if payday loans become less available. They understand that eliminating supply does not eliminate demand. They will want to know what will replace the payday loans that are proposed to be outlawed. They don’t care about getting votes.
Staffs understand science. At the FDA, science sounds like this: “The effect of Diasporex was studied in a multicenter, prospective, randomized, double-blind, controlled trial conducted from 2002 through 2008 at 163 institutions, which enrolled 2,539 patients with type 2 diabetes without a history of atherosclerotic disease. A total of 34 patients in the Disasporex group and 38 patients in the control group died from any cause (hazard ratio 0.90, 95% confidence interval).” We grasp from this study that 10% fewer patients died with Diasporex than without it, a determination made using the gold standard of scientific inquiry in a large-scale, controlled experiment.
What is the analog of this for payday lending? For the CRL, it’s this: “Kym Johnson, a single mother working as a temp in Tempe, took out a payday loan when a friend told her about how she could borrow money easily. She quickly fell into the debt trap and had to pay a high fee every payday to renew the loan and avoid default. When she had trouble keeping up this cycle, she took out a second loan to pay fees on the first. It took Kym another eight months to shake free from the debt trap.”
Staff people understand that anecdotes are not science.
There is a significant existing body of real science on the issue of whether payday loans are welfare-enhancing for consumers. Most of the academic research shows that consumer welfare is enhanced by access to payday lending - although, in candor, a few studies are ambiguous or to the contrary. But there is no unambiguous research showing that payday loans are “bad” for a majority of borrowers. Likewise, there is no scientific evidence that the “right” number of rollovers at which to limit consumers is eight or six or zero. Think about all of the states with rollover limitations - there is no state in which a rollover limitation has been adopted based on a scientific study; such limitations have always been the product of a horse trade or something worse. That is not going to happen with the BCFP. Staffs are not going to make this stuff up. They are going to study it and get it right.
And this is precisely the process that Barney Frank intended. Despite numerous proposed amendments from the Left to impose specific interest-rate or rollover limits on payday lending, Frank pushed them all back and urged that these matters should be left to the agency’s expertise. They are going to study it and get it right.
The argument can be made that, even if staff personnel are scientific and apolitical, the regulatory process can easily corrupted by a political director. Let’s take a close look at a couple of the current directorship candidates and how they approach consumer-credit ambiguities:
Elizabeth Warren’s approach to regulatory issues becomes clear in her law review article, “Bankruptcy Policy,” 54 U. Chi. L. Rev. 775-814 (1987) (you can pay for the full article and download it at http://www.jstor.org/stable/1599826). The article illustrates her struggle with some thorny policy matters. She resolves them by adopting an economic analysis, which she admits is imperfect - “a dirty, complex, elastic, interconnected view of bankruptcy from which I cannot predict outcomes nor even necessarily fully articulate all the factors relevant to a policy decision.” In short, she is resistant to elemental dogma and takes little on faith. She has spent her career as a scholar who will follow the data and who is willing to vary her position when the facts lead that way. If, indeed, Warren hews to this mold, she is precisely the kind of leader whom we might want as the head of the BCFP: a non-dogmatic social scientist who listens. FiSCA interviewed her last year for its members’ magazine, and she presented a balanced and thoughtful approach to the credit requirements of lower-income consumers. At the time, I thought she was merely being polite (and politic); on reflection, while there is much on which I do not agree with her, I’m not so sure she’s the devil incarnate.
The same can be said of the other leading candidate, Michael S. Barr, although his writings are more often cited as directly antithetical to payday lending. While he was on the faculty of the University of Michigan Law School, he conducted a study of Detroit-area lower-income consumers. The analysis in the paper is thoughtful and not critical of payday lenders in isolation; it shows that users of payday loans often have been turned down for other forms of credit and use overdraft and pawn to equal, often detrimental, effect. The paper is cited by CRL frequently for the proposition that payday users have three times the rate of bankruptcy, double the rate of evictions and phone cut-offs, and almost three times the rate of having utilities shut off. Unsurprisingly for CRL, these statistics are absent from the paper. And, of course, Barr never claims causation; he merely observes coincidence. See, “Financial Services, Savings, & Borrowing Among LMI Households in the Mainstream Banking & Alternative Financial Services Sectors,” http://papers.ssrn.com/sol3/papers.cfm?abstract_id
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