An Independent CFPB is Vital to Protecting Consumers in the Deep South
October 31st, 2023
By Courtney Thomas, Senior Policy Analyst
Earlier this month, the Supreme Court heard an important case about the future of consumer protections. The case, Consumer Financial Protection Bureau (CFPB) vs. Consumer Financial Service Association of America, discussed the constitutionality of the funding structure of the CFPB and was initially brought to the forefront by the payday lending lobby. The rule in question required payday lenders to limit the number of times they could initiate withdrawals from a customer’s bank account. Left unchecked, the loans could result in hundreds of dollars in fees and penalties from banks. These aggressive practices spiral consumers into debt and potentially lead them to lose their accounts. The CFPB exists to monitor and regulate all financial actors, prevent consumers from predatory practices, and engender fairness in the market. For those of us deeply engaged in consumer protection advocacy, especially in the Deep South, the outcome of the case is of particular significance. Our states have notoriously weak consumer protection laws and a history of discrimination in the financial marketplace. The CFPB is often the only stopgap between a pathway toward economic mobility and financial ruin.
In four out of the five Deep South States of Alabama, Arkansas, Louisiana, Mississippi, and Tennessee, lenders can legally charge 410% or more on a typical $400 single payday loan. Through these exorbitant fees and interest rates, payday and car title lenders extract over $400 million from consumers.[1] High-cost lenders also strategically position themselves along racial and class lines in our region. A Hope Policy Institute analysis of payday lenders in Memphis found that storefronts are disproportionately located in African American and Hispanic neighborhoods, where they prey on cash-strapped families.[2]
Beyond the data, we’ve seen the harmful effects of these practices on our members as well. In Jackson, Mississippi, one credit union member needed money for an emergency car repair and turned to a payday lender for help. Once the borrower had taken out the first loan, the borrower got behind and then took out another loan and then another. By the time the borrower had made it to the credit union, the borrower had eight payday loans outstanding from seven different lenders – all scheduled to be withdrawn from their checking account on the next payday. While they are marketed as quick-fix solutions, predatory loans often trap customers into insurmountable debt. Even in states that set rate caps, like Arkansas, predation persists. High-cost lenders utilize tricks and legal workarounds like rent-a-bank schemes, partnering with state-charted banks to evade the Arkansas 17% usury law and make loans that would otherwise be illegal in the state.
In the face of these conditions, the CFPB’s enforcement, regulatory, and research efforts remain a critical tool for closing the racial wealth gap in the Deep South. From an enforcement perspective, the CFPB recently sued Heights Financial in Tennessee for illegally and aggressively encouraging borrowers to refinance high-interest loans. As a regulator, the CFPB administers the Home Mortgage Disclosure Act (HMDA) data from lenders, which sheds light on unequal access to homeownership. Because the data exists, we know that in the Deep South, Black borrowers in Mississippi have the highest mortgage denial rates in the state, which is twice the rate of White Borrowers.[3] Similar data does not exist for small business lending. There is currently no systemic tracking of demographic outcomes for the nearly $1.7 trillion small business financing market, despite evidence of racial differences in access to small business capital.[4] Racial and geographic disparities exist in federal and state-level capital programs, and although data can be inconsistently collected, research shows mainstream financial institutions have greater opportunity to better serve businesses of color.[5] The CFPB proposed a small business data collection and transparency rule that would have mandated most small business lenders to report demographic information for loan applications and loans closed, but the rule, Section 1071, was halted by the Senate.
Despite the current challenges to the CFPB, its research elucidates the unique experiences of banking services and consumer finances in the rural South, calling attention to lower wages, higher debt burdens, and unequal access to capital that rural southern borrowers face. These various tactics encourage a fair financial market and protect consumers from discriminatory and wealth-stripping practices. In only 12 years of existence, the CFPB has returned over 17.5 billion dollars directly back into the pockets of consumers, underscoring its importance to our broader economy.[6] It is for these reasons that we must remain vigilant. While several justices expressed skepticism on the CFSA’s position during Supreme Court oral arguments, the future of the CFPB still lies in a precarious state. Since its inception, the CFPB has been under attack by banks and non-bank lenders who want to reduce or severely weaken the ability of the institution to hold them accountable to consumers. Constant litigation and legislation also seek to weaken the agency. Such an outcome would be a huge mistake. An independent CFPB gives the people a direct line to report problems and fraud, without having to navigate state and federal officials who may be co-opted by lenders and banks.
Without an independent CFPB, democracy is threatened, as once again the bad actors will limit the ability of historically marginalized groups to have financial retribution, maintain assets, and build generational wealth. On matters of health care, education, civil, and voting rights, federal involvement has long been an essential ingredient to progress. In this case, once again, the federal government has the opportunity to weigh in and protect the economic and social resources of Deep South communities. The people need an advocate, and they have one with the CFPB. Its independence is our protection.
[1] Glottman, Sunny, Charla Rios, Lucina Constantine (2023). “The Debt Trap Drives the Fee Drain: Payday and Car-Title Lenders Drain Nearly $3 Billion in Fees Every Year.”https://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/crl-debt-trap-fee-drain-jun2023.pdf
[2] Hope Policy Institute and Black Clergy Collaborative of Memphis (2022) High-Cost Debt Trap Widen Racial Wealth Gap in Memphis.http://hopepolicy.org/manage/wp-content/uploads/High-Cost-Debt-Traps-Widen-Racial-Wealth-Gap-in-Memphis-Policy-Brief-Final.pdf
[3] Miller, Sara, (2023) Black Households Face Higher Mortgage Denials than White Applicants, Research Finds”http://hopepolicy.org/blog/black-households-face-higher-mortgage-denials-than-white-applicants-research-finds/
[4] Federal Reserve Bank. (2023).” 2023 Report on Employer Firms: Findings from the 2022 Small Business Credit Survey”.https://www.fedsmallbusiness.org/-/media/project/smallbizcredittenant/fedsmallbusinesssite/fedsmallbusiness/files/2023/2023_sbcs-employer-firms.pdf
[5] Burt, Kiyadh and Diane Standaert. (2021). “Racial gulf created by economic recovery efforts will echo for generations” MLK 50. https://mlk50.com/2021/08/11/racial-gulf-created-by-economic-recovery-efforts-will-echo-for-generations/
[6] The Consumer Financial Protection Bureau. (2023). “Twelve years of protecting consumers and honest businesses”https://www.consumerfinance.gov/about-us/blog/twelve-years-of-protecting-consumers-and-honest-businesses
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