Note from the Editor: The Federalist Society takes no positions on particular legal and public policy matters. Any expressions of opinion are those of the author. We welcome responses to the views presented here. To join the debate, please email us at info@fedsoc.org.
These days the financial regulators are engaging in a careful but high priority regulatory reform process, looking at regulations of recent years to see how they may be revised and refined to promote economic growth. Except for the Bureau of Consumer Financial Protection. The Bureau is still in the business of adding new regulations.
Not long ago the Bureau finalized its rule, effectively banning arbitration clauses in consumer financial contracts. The House of Representatives swiftly passed a resolution under the Congressional Review Act to nullify the rule. The rescission resolution is now pending before the Senate, expected to be voted on in the next few weeks.
In the first week of October, the Bureau finalized another rule it has been working on for years. Its goal is effectively to make payday loans and similar short term small dollar credits illegal or at least harder to provide. The original draft proposal would also have reached to small dollar credits offered by banks.
The final rule scales back the hit to bank credits, targeting its prohibitions on deposit advance products. By those products some banks had allowed deposit customers to write themselves a loan via their deposit accounts, with repayment made by subsequent automatic withdrawals from the account by the bank. Other small dollar bank products are either wholly exempted from the final rule or are allowed if they meet certain requirements as to duration and method of repayment.
Bert Ely, well known bank analyst and public commenter on all things banking, provides an excellent brief summary of the final rule in a piece published in The Hill. Besides his good description, Ely poses the key operational question. The rule clearly will reduce the current supply of small dollar credit, used by tens of millions of borrowers each year, particularly to meet emergency needs and expenses. While reducing supply, the rule does nothing to reduce demand. The Bureau seems to hope that banks will help fill the gap by increasing their offerings of small dollar credits. Maybe they will. Will that be enough to replace the sources of credit outlawed by the rule? Who knows? As Ely suggests, though, the loan sharks are circling for any potential borrowers in need who are left out.
