As part of our efforts to comment on CFPB’s proposed rule on small dollar lending, we estimated the impact of the proposal on current loan volume in payday storefronts — checking our data against CFPB’s own analysis. We found business reduction ten percent higher than the high levels predicted by CFPB, where CFPB made a prediction, and even higher where CFPB did not attempt a simulation.
Our friends in the industry and the regulatory community responded to our Report. While comments were widely varied, one question was consistent: when we modelled the revenue reduction resulting from the principal reduction requirement within the “credit rationing” option (CFPB’s “alternative” approach allows three loans in a row, but only if they reduce by one third each time), we used simple math that assumed a one-third revenue reduction from the forced amortization requirement. Of course, that simple math only works if all loans in the current environment would be caught by CFPB’s 30-day sequence definition and forced to amortize. Some loans might not be forced to amortize if they were outside of any “sequence” as defined by CFPB.
We think that’s a good comment. We have gone back and drilled down again, computing the exact revenue reduction from the amortization component of the credit rationing “alternative” to underwriting. Previously, we estimated that the limited revenue left over after other rationing requirements would be reduced by 33%. A precise computation of that reduction is 24.9%
The upshot: CFPB estimated overall revenue reduction from their credit rationing alternative of 71%. Our final, updated estimate is 79.6% revenue reduction. It’s good to be precise, although a cynic might say that “fatal harm is fatal harm, even if it’s 2.1% less severe.”