When the Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB) in 2010, it gave the agency authority to regulate high-cost, small-dollar loans—including payday loans. This legislation is important because unaffordable payments and excessive costs have caused difficulties for the millions of borrowers across the U.S. who use these types of loans. The CFPB recently proposed a framework to safeguard the small-dollar loan market for consumers.
“The CFPB has not finalized their rules for the payday and small-dollar loan market yet,” says The Pew Charitable Trusts’ Nick Bourke. “But so far, based on initial proposals, there are signs of hope.”
Q: What does your project consider most significant about Dodd-Frank?
A: When Dodd-Frank created the CFPB (Consumer Financial Protection Bureau), they gave it authority over payday and other types of high-cost, small-dollar loans. Not many products are mentioned by name in the Dodd-Frank Act, but payday loans is one of them. This is important because there are serious problems in this market. And it’s good news for millions of consumers. Twelve million people are struggling with payday loans every year in the 36 states that have payday loan stores. And millions of other people are struggling with things like auto title loans and high-cost installment loans that are making people’s financial lives more difficult, not better.
The CFPB sets a floor—rules that all lenders will have to follow. But it’s not a ceiling. States will continue to play a role, and they should, because there will continue to be important needs to help protect people from things like unreasonable interest rates, and states can help do that going forward.
Q: What’s your view of the Consumer Financial Protection Bureau’s progress?
A: The CFPB has not finalized their rules for the payday and small-dollar loan market yet. So we can’t grade their performance for some time still. But so far, based on initial proposals, there are signs of hope. The CFPB is rightly focusing on things like ability-to-repay standards so that lenders are responsible for structuring their loans with more manageable payments that people can pay off over time, so that people who are financially struggling have a chance to get back on their feet.
However, there is significant room for improvement. For one thing, the CFPB’s proposal is very complex. This could make it difficult for some lenders to comply with. It could also make it difficult for regulators to enforce properly. Overall, the CFPB’s proposal makes it a little bit too easy to make dangerous loans, and perhaps a little bit too hard to make safer loans. But they’re on the right track.
Q: What would you like to see five years from now?
A: Five years from now, here’s what success looks like: The CFPB will have implemented new rules that make the entire small-dollar loan market safer and more transparent, with products that look like what people actually get—installment loans that people pay off over time—with more manageable payments, reasonable pricing structures, and no hidden fees or traps. The CFPB can do this by setting reasonable rules now. And states can come in afterwards and fill in the gaps to help residents and their communities, and to continue to maintain reasonable pricing policies. If the CFPB does its job, five years from now responsible lenders will have a real chance of making loans that help people who are financially struggling to get back on their feet and live on with their financial lives in a successful way.