Alternative Lenders Offer Opportunity For Consumers and Businesses Alike

The Consumer Financial Protection Bureau's (CFPB) proposed rule on short term credit unveiled last month has spurred much debate. While the Bureau says it wants to protect consumers, I'm concerned that the rule will have the exact opposite impact, eliminating credit for millions of Americans and making many worse off. What's more, minority communities who are unbanked or underbanked will be disproportionally impacted.

Nearly half of Americans do not live with the financial security that has become a major part of our definition of the American dream. Last year, the Federal Reserve found that 47 percent of American households could not cover a $400 emergency expense, or they would have to sell something or borrow the money to pay for it. That is a significant level of financial insecurity and portrays the need for Americans to have the ability to access credit in an emergency.
Beyond providing a safety net for individuals and households, accessing capital also plays a fundamental role for the millions of American Dreams invested in small businesses that lead our economic recovery by creating jobs. Without access to capital, American entrepreneurialism is stifled and the country cannot continue to recover from the depths of the Great Recession. The CFPB's arbitrary rule ignores the needs of consumers, reduces access to credit for millions and harms small businesses and the millions they employ.

In drafting this rule, the CFPB has overlooked the disproportionate impact that the economic downturn has had on Hispanic households. A key driver helping these households to recover fully and improve their financial well-being are the millions of Hispanic-owned businesses who are also contributing to our national recovery by creating jobs right here in the United States. My organization, the United States Hispanic Chamber of Commerce (USHCC), represents the interests of an estimated 4.1 million Hispanic-owned businesses across the country, which create jobs and contribute in excess of $661 billion to the American economy. The issue of accessing capital is especially important to our members. Unfortunately, this proposed rule makes that more difficult and will negatively impact Hispanic households and businesses. Frankly, this rule, in limiting an important credit option, seems downright disrespectful to them and their efforts to improve the American economy.

While the CFPB may believe it is protecting consumers, in fact, it is acting without a full understanding of what payday loan customers value. Survey research has shown significant differences in opinions of those who have used payday loans compared to voters who have never used the product. Despite what the CFPB claims, the people who have used payday loans in the past are much more favorable toward these products than those who do not have the same personal experience. According to the research, most payday borrowers believe that payday loans can be a sensible choice, appreciate the option it provides, think that they are fairly priced and fully understand the loan terms.

Acting without the full understanding of consumers' financial situations has led the CFPB to propose a rule that will harm the millions of consumers who use payday and other short-term loans responsibly to manage unexpected and periodic financial difficulties. By limiting access to credit, many would be unable to stave off financial emergencies or shortfalls and be forced into costly, less regulated options such as overdraft fees or late payments.

The proposed rule sets requirements that no small businessperson in the business of short-term lending can meet. According to the bureau's own estimates when it announced its rule concepts last year, 84 percent of payday loan volume was going to be eliminated, resulting in a 66 percent reduction in the number of storefronts. These small businesses would be driven from business by overbearing government regulations. In many cases, these are among the only financial services businesses in their communities and they serve a critical role for their employees and customers. Should they close, they would leave tens of thousands of employees without paychecks or health insurance, and leave communities with no source of short-term credit.

In fact, a large portion of small-dollar loans are used to pay bills at small businesses, and money spent at these businesses stays within the communities, boosting local economies. Access to credit drives consumer spending, and is absolutely essential to USHCC members and their businesses. Hispanic consumers and businesses have been significantly impacted by the tightening of credit in recent years.

In my view, the CFPB has not sufficiently balanced access to credit with consumer protection in these proposed rules. Eliminating access to credit for millions of Americans - for many their only option when an unexpected expense arises - will do significant harm to the financial lives of consumers who already have too few options. I can understand government policymakers may not have a sufficient understanding of daily realities for the financially insecure; I cannot understand their failure to research and thoroughly understand those realities before proposing rules, as they appear to have done for short-term lending.