Two recent announcements by the Consumer Financial Protection Bureau have proponents of increased financial regulation up in arms.
The first is the Bureau’s expansion of its no-action letter policy to include a regulatory sandbox. A sandbox is a program which allows firms to offer new products under a modified regulatory regime and with oversight from financial regulators. No-action letters, for their part, are assurances from a regulator that it will not take adverse actions in response to a specific new practice by a regulated firm. Neither policy heralds the advent of a regulatory Wild West.
The second announcement involved changes to the CFPB’s payday lending rule, which in its original form (published in 2017) would have made most high-cost short-term lending of this kind unprofitable, reducing loan volumes by more than 65 percent. The Bureau’s modified rule removes an underwriting provision that would have made it very difficult for borrowers to access short-term credit, as they currently do in the 33 states where payday lending is legal. The Bureau has re-considered the costs and benefits of this provision, finding that the loss of access to credit would not be sufficiently offset by an increase in borrower well-being. This finding is bolstered by the fact that Professor Ronald Mann, author of an academic study on which the CFPB heavily relied in its original rule, strongly disavowed the Bureau’s use of his work.
In its original form, the payday rule would have banned much existing high-cost short-term credit, which typically flows to borrowers with few alternatives. Opponents of the industry, as well as some state officials, have – perhaps unsurprisingly – criticized both of the CFPB’s announcements. They ostensibly favor “responsible innovation,” without necessarily specifying what behavior warrants the “responsible” tag. They seem to view a strong stance against payday lending as fully compatible with dynamic and innovative credit markets. But this view is questionable, for three reasons.