One study, two very different visions of the CFPB rules


When Ronald Mann, a law professor at Columbia University, surveyed 1,000 payday loan clients to see if they could estimate how long it would take to pay off a loan, he didn’t know that the resulting study would become a lightning rod in the drafting of the first federal regulation for small lenders.

Previous Consumer Financial Protection Bureau leadership cited Mann’s research more than 30 times into an existing rule to impose strict underwriting requirements for payday loans.

But signs now point to Trump-appointed CFPB director Kathy Kraninger using the same study in a much-anticipated overhaul of the rule, which is expected to to give up the repayment capacity requirement in what would be a huge win for the industry.

“Mann’s study will likely be the centerpiece of any new rule that revokes the old rule,” said Casey Jennings, lawyer at Seward & Kissel and former lawyer in the CFPB Bureau of Regulations, who worked on the original rule. from 2017.

Mann’s study – funded by a payday loan business group – focused on whether borrowers could accurately predict when they might be able to repay a loan. The research, conducted in 2012, sparked controversial debate because it seemed to provide evidence both that underwriting standards were often not necessary and, in some cases, they were.

“The relevant political question is whether borrowers who decide to start borrowing from a payday lender understand what will happen to them,” Mann said in an interview.

Mann, co-director of the Charles Evans Gerber program in transactional studies at Columbia Law School, noted that agency officials contacted him earlier this month to discuss the study. “They are planning to issue a new rule and I guess it will be more favorable to payday lenders than the previous proposal,” he said.

The Columbia professor has refuted how the CFPB led by Obama-appointed former director Richard Cordray interpreted his research, suggesting that the the current rule puts too much emphasis on cases where consumers have borrowed beyond their means.

the to study found that 60% of first-time payday loan borrowers accurately predicted within two weeks when they might be able to pay off a small loan. But it also indicated that in many cases the flip side was true – that 40% of borrowers had no idea when they were going to repay a loan.

Understanding the risks before taking out a payday loan is at the heart of the CFPB rule and how Kraninger’s office plans to unwind it.

“The purpose of the study was to ask a borrower at a time when they made the critical decision to start a debt cycle how long they expected the cycle to last,” Mann said.

As the investigation determined that repayment capacity was predictable in the majority of cases, CFPB executives appointed during the Trump administration pointed out that the study supported the idea that strict rules requiring the repayment capacity standard would not are not needed.

In court documents, the CFPB under former interim manager Mick Mulvaney cited Mann’s study as key evidence in support of the “overhaul” of the underwriting requirements in the payday rule. Last year, Mulvaney sided with two trade groups that sued the CFPB to overturn the rule, which is based on federal law banning “unfair” and “abusive” practices.

The court documents present a possible model for how the agency could remove the repayment capacity standard and claim that payday loans are neither unfair nor abusive. Citing Mann’s study, the CFPB said the payday industry presented “a substantial case” to show that most borrowers know what they’re getting into when they take out a payday loan.

“The Bureau interpreted this study (the ‘Mann Study’) as showing that few or no borrowers who had long stretches predicted this outcome ex ante and that those who had borrowed the most in the past did not. not doing a better job than other borrowers of predicting their future use of the product, ”the CFPB said in a court case in support of the Payday Groups. At the same time, the Bureau recognized not only that the results of the Mann study were open to multiple interpretations, but that the author of the study himself ‘derived different interpretations from his analysis from those of the Desk’.”

Almost immediately after taking over from Cordray, Mulvaney sought to change the payday rule. (Kraninger took over the agency in December after obtaining Senate confirmation.)

A judge recently agreed to delay the compliance deadline for which much of the Cordray rule will come into effect to give the office time to come up with and finalize a redesign.

For any rule of this magnitude, citing research as the basis for policy decisions is essential to avoid legal claims under the Administrative Procedure Act that regulatory decisions are “arbitrary and capricious”.

But Jennings said that if Kraninger’s CFPB cites Mann’s study in a revamped rule, it should also show why economists, staff and the agency’s previous management came to an incorrect conclusion when analyzing the research of Mann. Calling into question the prior analysis could prove difficult since nearly 90% of the existing rule, which totals 1,690 pages, consists of research and the justification for issuing the regulation.

“Basically the only thing that has changed the Bureau’s analysis is the people doing the analysis,” Jennings said.

The CFPB court record argues that if the majority of borrowers understand how long it will take to repay a loan, then they can reasonably avoid being harmed – one of the statutory elements of injustice – by not taking out a loan.

In addition, the CFPB has stated that if borrowers understand the product, it cannot be abusive, as statutory elements of abuse include “a lack of consumer understanding of the material risks, costs or conditions” of the loans. . as well as “the consumer’s inability to protect the interests of the consumer in choosing or using” the loans.

“For the office to find something to be unfair or abusive, it has to show that the consumer doesn’t understand the product,” Jennings said. “If the consumer understands [the product], then the identified practice is not unfair or abusive. That’s why Mann is very important. “

Yet Cordray’s office looked at the same data in Mann’s study and came to very different conclusions.

While Cordray’s CFPB acknowledged that many borrowers predicted they wouldn’t stay in debt for more than one or two loans, it found that Mann’s study did not address the issues faced by the remaining 40%. borrowers, especially those who have ended up borrowing over and over again.

Indeed, the CFPB found that 12% of borrowers Mann interviewed remained in debt after 200 days – much longer than expected – and finished take out 14 two-week payday loans. Ultimately, the CFPB under Cordray relied on Mann’s study to conclude that it was both abusive and unfair to grant a loan without assessing a borrower’s ability to repay it.

The rule imposed verification requirements that lenders had to “reasonably determine” that a borrower could repay a loan while still being able to pay basic living expenses. The rule was also intended to prevent direct rollovers of payday loans and imposed “cooling off” periods between loans.

But Mann continues to suggest that this approach was too cumbersome.

“The premise of the rule was that so few people understand that they are going to carry over loans over a lot that the proceeds are unfair and abusive,” Mann said. “This is the real difficulty. It is difficult to regulate the demise of a consumer credit product because a certain percentage of people do not understand how the product works.”

In addition to receiving funding for the study from a payday loan business group, Mann said the study was conducted in cooperation with “a major national payday lender,” who was not named. Employees of the payday lender handed the surveys to potential borrowers and the results were then sent to Mann.

“The funding came from a trade association in the industry, which hoped the study would produce favorable results, but the arrangement, as always, was that I could publish whatever I wanted, that the results look good to them. or bad, ”Mann said. “There was no real relationship with the payday lender.”

Consumer advocates argue that Mann’s study is flawed because it excluded any borrower who had taken out a payday loan in the previous 30 days, essentially eliminating six out of seven borrowers.

“It’s hard to see what would be the basis for using this research to weaken the rule,” said Alex Horowitz, senior executive at Pew Charitable Trusts. “The office carefully considered Ronald Mann’s research in 2017.”

Mann said that while many borrowers are in desperate need of money, they understand the cost of loans, which typically charge an upfront fee of around $ 15 for every $ 100 borrowed.

“The problem isn’t that payday loans are expensive, it’s that we live in a capitalist society and don’t have a safety net, and a lot of people earn less than others and can’t join them. two ends, “he said.


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