First of four parts
Brian Lynn, a retired Marine Corps officer who took over his family business to become chief executive officer of Speedy Cash and Lending Bear in 2003, is worried that the federal government is going to force him to shutter his 26 stores and lay off all 120 employees.
Right now, his business is on lockdown.
“If we had some regulatory clarity and knew we were able to operate well into the future, we’d be opening new stores, hiring people. There’s demand for this product,” said Mr. Lynn, 42. “We’d be promoting from within and giving opportunities for greater pay and authority to people who have worked with us, promoting them into branch management. But we can’t do any of that because we are crippled from this uncertainty — waiting for the other shoe to drop when the final rule is released.”
Mr. Lynn is referring to the rule-making process at the Consumer Financial Protection Bureau, which is looking to federally regulate his industry, the payday loan business.
In March, the bureau proposed rules to end what it calls “payday debt traps” by limiting the interest rates payday lenders can charge, prohibiting borrowers from taking out more than one loan at a time and requiring lenders to assess borrowers’ ability to pay.
“Extending credit to people in a way that sets them up to fail and ensnares considerable numbers of them in extended debt traps is simply not responsible lending,” Richard Cordray, CFPB director, said in remarks announcing the proposed rules. “It harms rather than helps consumers. It has deserved our close attention, and it now leads to a call for action.”
The industry says the bureau’s approach is too heavy-handed and that it could force up to 70 percent of payday operators out of business and deny credit to millions of low-income people.
A Charles River Associates analysis of the proposed rule predicts that it would result in an 82 percent drop in revenue for small businesses like Mr. Lynn’s — something most payday lenders could not withstand.
A study conducted by Deloitte consulting, commissioned by the Financial Service Centers of America, drew similar conclusions after obtaining the financial information of a sample set of payday lenders and juxtaposing it against the CFPB’s proposed rules.
“Our analysis of the potential rulemakings by the CFPB indicates that none of the FiSCA Panel members would remain economically viable, potentially leading to the closing of most, if not all stores, resulting in the loss of jobs for most, if not all employees,” Deloitte reported.
Missing the message
To protect small businesses, which create 64 percent of private-sector jobs in the U.S., Congress wrote into the Dodd-Frank Act a requirement that the CFPB must convene small-business panels to seek direct input when engaging in rule-making.
Mr. Lynn — who sat on one of those panels — said the bureau merely went through the process required by Congress to prevent courts from overturning its regulations and had no real desire to hear feedback from small business that would be affected.
“We had two conference calls prior to the daylong meeting. It certainly didn’t feel like CFPB listened to us and really heard our message,” Mr. Lynn said.
“The entire process was an eye-opener because the CFPB didn’t even seem to understand the differences in our product offerings like what are installment loans versus payday loans versus car title loans. They really needed to do a product-by-product analysis before they put out a proposed rule, and it didn’t seem like they had done that yet,” he said.
The payday industry sentiments aren’t isolated. Community bankers, auto lenders and other financial outlets have raised similar concerns to Congress about the regulations that the CFPB and the Obama administration have been trying to impose on them since the 2007-2009 financial crisis.
“Washington’s response to the crisis has exacerbated overregulation with new rules on mortgage lending and capital standards that have restricted community bank lending and consumer access to credit,” Camden R. Fine, president and CEO of the Independent Community Bankers of America, wrote in a Washington Times op-ed last month.
“Federal regulations are injuring the customers they are intended to protect,” he wrote.
Small businesses such as gun shop owners, payday lenders and a tobacco store told a House committee this year how another Obama administration financial crackdown, Operation Chokepoint, harmed their livelihoods.
“My retirement is gone. I have nothing to sell of the business. My retirement and my child’s education fund,” Allison Deguisne, a California payday lending store owner, told lawmakers.
State laws neglected
The rules that the CFPB is considering covers payday, vehicle title and certain high-cost installment loans.
There are no federal laws governing the payday industry, but the states and territories have a variety of regulations.
Payday lending is legal in most of the country, with some states setting requirements such as fixed interest rates and capping the amounts that can be borrowed. Some of those state regulations, according to lenders groups, are so stringent and prohibitive that they operate as de-facto bans.
According to the National Conference of State Legislatures, four states — Arkansas, Arizona, Georgia and North Carolina — plus the District of Columbia have banned the operations outright.
Mr. Lynn operates his shops in three states: Florida, Georgia and Alabama. His stores offer a variety of credit options, including payday lending, pawn and car title loans, although only pawn and car title loans are offered in his Georgia stores because of state regulations. Many other small businesses also offer a variety of credit products.
“It also didn’t appear like the CFPB did their homework on all of the state laws out there. We asked them simple questions like, ’How would this rule interact with this state law?’ and their response was, ’We know we need to look at the state laws, but we haven’t done that yet, but we intend to.’ It’s amazing they’d get so far into the process as to publish a rule and admit they hadn’t done their homework,” Mr. Lynn said.
In response to his meeting with the CFPB, Mr. Lynn and six other small-business owners wrote to Sen. David Vitter, Louisiana Republican, and Rep. Steve Chabot, Ohio Republican, who head the respective small-business committees in Congress, to enlist their leadership to “prevent the CFPB from ignoring our views, perspectives, and input as the Bureau moves towards a rule-making.”
The Aug. 11 letter depicted several frustrations, including bureau officials’ inability to “identify failings in the state regulatory framework that would prompt a federal overlay of new regulatory obligations,” and “the lack of appreciation the CFPB seemed to have for our customers and the relationship we have with them.”
The bureau declined to comment to The Times, but Mr. Cordray did lay out in his March speech how the rule-making process was initiated.
“The proposed framework under discussion reflects rigorous thinking by our colleagues at the consumer bureau,” Mr. Cordray said. “In addition to our own extensive research, we have had many discussions with consumers, industry, other federal agencies, state and local regulators, academics, and other interested parties. Our outreach efforts have covered both depository and nondepository lenders that offer payday loans, deposit advance loans, vehicle title loans, installment loans or other similar loans.”
Questions from Vitter
In June, Mr. Vitter sent a letter to the Government Accountability Office that questioned “the adequacy and thoroughness of the CFPB’s analysis of small entity impacts” in connection with its payday lending rule-making process and asked the GAO to conduct an investigation and issue a report.
Among the issues Mr. Vitter, who is chairman of the Committee on Small Business and Entrepreneurship, wanted the GAO to investigate was whether small businesses had adequate input and representation during the rule-making process, whether the panel process allowed for the CFPB to adequately consider small businesses’ views and whether an adequate analysis was conducted to determine how the proposed rules would affect these small businesses.
“The CFPB is legally required to assess the impact of its rules on small businesses, and yet there have been disturbing recent charges that the agency is failing to do so,” Mr. Vitter said in a statement to The Washington Times. “That’s why I’ve asked the GAO to review the adequacy and thoroughness of the CFPB’s Small Business Regulatory Enforcement Fairness Act (SBREFA) process, and will continue to work to make sure all impacted parties have their voices heard.”
Many political leaders say the payday lending industry has had some unethical operators and examples of consumer gouging and that some federal oversight may be needed.
However, Rep. Debbie Wasserman-Schultz, Florida Democrat and chairwoman of the Democratic National Committee, recently implored the CFPB not to apply a one-size-fits-all approach to regulating payday lenders and to examine the bipartisan regulatory framework that has succeeded in her state for a decade.
Even Mr. Lynn sees a role for some sort of regulator to look over the industry.
“But what we need is regulation, not extinction,” he said. “The CFPB needs to take this rule proposal, throw it out, then create a product-line-by-product-line analysis to understand payday lending and the reality of it.
“When they’re done with that, then a state-by-state analysis should be done, seeing where compromise has been made and what state laws are working. It just seems like the CFPB is using as a starting point the notion that payday lending is bad for everyone and then are working to create a framework around that preconceived conclusion,” he said.
Tuesday: Customers who use these franchises and the impact in certain states where such businesses have been banned.
• Kelly Riddell can be reached at kriddell@washingtontimes.com.
Please read our comment policy before commenting.