Article published in the American Institute for Economic Research on 8/22/24
On August 12, we submitted a public regulatory comment to the Consumer Financial Protection Bureau (CFPB) in opposition to a proposed rule that would ban medical bills from credit reports. While this rule aims to increase access to credit, it is likely to do the opposite. When potential lenders know that certain information is not being disclosed, they will be hesitant to lend to potential borrowers, cutting off access to credit. In short: while this rule will reduce the supply of credit, it will not decrease the demand for credit. Low-income Americans, the income group with the most medical debt, will turn toward black-market lenders to make up for the lack of credit available.
Analogous results can be seen with the CFPB’s regulations on payday lenders. In 2016, the CFPB proposed a rule under the Dodd-Frank Act that would regulate payday lenders in the name of consumer protection (although these lenders were already regulated by state law). Research from economists as well as the CFPB showed that existing state regulations on payday lenders limited low-income Americans’ access to credit, leading the CFPB to delay the rule’s implementation in 2019 and withdraw the rule in 2020. It did, however, issue a rule regulating “junk fees” that will likely result in low-income Americans losing access to credit. (Other reasons for opposing regulatory action against “junk fees” can be found here.)
Similar outcomes followed CFPB rulemaking on mortgage servicing. This rule took effect in January 2014 with the aim of protecting homeowners by requiring stricter reporting standards form “initial rate adjustment notices for adjustable-rate mortgages, periodic statements for residential mortgage loans, prompt crediting of mortgage payments, and responses to requests for payoff amounts.” It had a significant impact on community banks, which focus on providing traditional banking services to local communities. These banks are the primary source of banking for most rural areas, small towns, and urban neighborhoods. While a study from the Government Accountability Office (GAO) characterized the effect of the regulations as modest, the GAO admitted that data quality for assessing how banks offer loans to businesses needs improvement. The GAO did find that the population among community banks declined by 24 percent (due to mergers among community banks and decline in new bank formation rate) and, among the consolidated community banks that remained, lending increased – albeit at a slower rate due to regulatory compliance. Other research determined that merger-induced bank closures significantly decreased access to credit, especially in rural areas. In the end, compliance costs are always and everywhere a stealth barrier to competition, reducing options for consumers while garbed in moral rectitude and properness.
When these regulations inevitably yield unintended consequences, the CFPB cannot say they were not warned.