Time is running out for Congress to remove payday loan red tape

Many Americans have had to deal with an unexpected car repair while up against a due date for a utility bill. Regardless of income, this is a tough position to face but even tougher for those who don’t have easy access to capital.

Unfortunately, this is the case for many. The Federal Deposit Insurance Corp. estimates that 30 million Americans are underbanked or unbanked. Given these circumstances, many turn to small-dollar loans to get out of the jam.

{mosads}The short-term loans act as a cash advance that are paid back in full at the borrower’s next pay period. Their convenience is essential for consumers as many banks are unwilling to engage in these types of transactions as the little return on fees is not enough to offset compliance costs. While not for everyone, they’re crucial for many who live paycheck to paycheck, and especially for those who have difficulty qualifying for other types of credit.

The Pew Research Center found that 12 million households turn to them each year.

However, the Obama-era small-dollar lending rule finalized last October strips this crucial financial instrument from those who need it the most.

Thankfully, a resolution introduced by Sen. Lindsey Graham (R-S.C.) late last month would remove the Bureau of Consumer Financial Protection (BCFP) regulation on small-dollar loans, ensuring underserviced consumers can still get speedy access to capital when they need it. The rule is aimed at preventing consumers from falling into “debt-traps” in which they take out new loans to cover past loans.

Graham’s legislation falls in line with Acting Director Mick Mulvaney’s plan of following the letter of the law as mandated by Dodd-Frank and ending activist enforcement that was commonplace under the Bureau’s previous director. This includes referring to the Bureau as its formal title under Dodd-Frank instead of its progressive name, the Consumer Financial Protection Bureau’s (CFPB), and former director and Obama-appointee, Richard Cordray.

To this end, it limits the number of loans that can be taken out by a borrower at any given time. It also increases the amount of personal and private financial information consumers must provide lenders before they can issue a loan, including the borrower’s income, borrowing history, and financial obligations.

Many turn to these loans as a means of covering surprise expenses like a furnace repair or leaky roof.  Without access to these short-term loans, hardworking Americans can be faced with a Hobson’s choice of repairing the car or keeping the lights on and paying the electric bill.

Cash-strapped Americans of limited financial means are left with few options as the rule prohibits nearly two-thirds of loans made by small-dollar lenders. By limiting the choices, many are forced towards extreme alternatives like loan shark street toughs or shadowy figures who show up at your door offering too good to be true deals.   

Graham’s legislation, S.J.Res.56, was introduced under the Congressional Review Act (CRA), a filibuster-proof and expedited legislative process that allows Congress to rollback regulations from executive agencies finalized and submitted to Congress or published in the Federal Register, whichever comes first, within 60 legislative days with a simple majority vote and the president’s signature.

Additionally, Sen. Pat Toomey (R-Pa.) and Sen. Ted Cruz (R-Texas) have signed on to cosponsor Graham’s legislation. An accompanying bipartisan measure, H.J.Res.122, was introduced in the House by Rep. Dennis Ross (R-Fla.) this past December.

To date, Congress has removed 16(!) Obama-era regulations by using the CRA, with another resolution recently passed in the Senate and pending the House’s approval that would eliminate the CFPB’s auto lending rule.

Additionally, Mulvaney also put a hold on the rule’s implementation to allow for further reconsideration. While a good start, it’s not a long term solution given that another administration could easily revive the rule in the future. By using the CRA, the small-dollar rule could never see the light of day again as it also prohibits a “substantially similar” regulation from being written at a later point.

The window in which Congress can use the CRA to overturn this rule is expected to expire at the end of this week. With time ticking, it is paramount that Congress moves to relieve American consumers from this unnecessary and heavy-handed regulation.

Matthew Adams is a federal affairs associate at Americans for Tax Reform, a nonprofit group dedicated to lower taxes and limited government.