Last June the Consumer Financial Protection Bureau [CFPB] proposed a rule to severely restrict access to short-term loans. Although I have no doubt that the CFPB meant well in crafting its rule, the unintended consequences this rule creates for communities of color and the poor make it an unworkable solution that only stands to do more harm than good. It just doesn’t work!
I am the President and CEO of the Southern Christian Leadership Conference, a nationwide advocacy organization committed to the principles of economic, social and political justice. We have a network of local chapters and affiliates that work hard to represent those on the margins of society and bring the ideals of Dr. Martin Luther King, Jr. to our nation in the 21st century. In my work, I’ve seen firsthand how well-intended legislation can have a dramatic and unintended negative effect on the very people it was intended to help. The CFPB’s latest proposal is a prime example.
Whether the CFPB likes it or not, the fact is that short-term, small-dollar lenders are often the only financial institutions willing to serve communities of color and poor people. They are critical lifelines when a child gets sick or a car breaks down. If this proposed rule goes into effect, entire swaths of our community will be left without access to credit.
According to the CFPB’s own estimates, residents in under-served and minority communities will be disproportionately impacted by the proposed rule. Non-bank lenders in these communities stand to lose up to 84 percent of their revenue, which would likely put two out of every three out of business. Financial difficulties and the need for a source of credit, however, will not disappear.
Here’s the reality. The CFPB’s actions will create for millions of people of color, without a readily-available source of short term credit, hard choices will have to be made. Where on earth are people supposed to turn when their one source of credit is taken away? What replaces payday lending in these communities? Banks and credit unions will not lend to those with poor credit, those who depend on payday loans in their time of need. In fact, it makes it more likely that people will seek out dangerous and unregulated lenders, putting consumers even more at risk. That seems like the very outcome that the CFPB would want to prevent, and yet it has not been able to answer how it will mitigate these concerns.
The best thing that the CFPB can do for our community, frankly, is to listen. It needs to listen to people who value having a place in their communities where they can access credit. It needs to listen to the concerns of the mother who needs a source of credit to make an emergency furnace repair in January to keep her family warm. It needs to hear the voice of the father who desperately needed a loan to repair his car in order to get to work and keep his job.
I understand the CFPB’s desire to ensure that no person or industry is taking advantage of the poor and disenfranchised. However, if the CFPB truly listens to consumers, it will learn that its proposed rule will only take away a valuable source of credit and leave entire communities without options. It will become immediately clear that its rule, as written, should not be implemented.
Without drastic changes, the CFPB stands to put communities of color and the poor people at risk. It must take a step back and truly consider that its actions have very real consequences for people across the country. Until the CFPB goes back to the drawing board and reflects on how its proposal will impact under-served communities, the Bureau is not living up to its mission of protecting consumers.
The author is President and CEO of the Atlanta-based Southern Christian Leadership Conference.