President Obama signed Dodd-Frank on July 21, and it is now Public Law 11-203. Despite nearly contemporaneous public statements from adversaries that the enactment would be the death knell for payday lending, the Act doesn’t contain any substantive regulation of payday lending in any of its 848 single-spaced pages. If there is a deadly weapon in the Act, it is apparently has a silencer.

Maybe it’s here: Title X of the Act creates the Bureau of Consumer Financial Protection (which we all need to start abbreviating properly as “BCFP”). The BCFP has amazingly broad powers to adopt and enforce regulations with respect to the conduct of “covered persons” – if you’re a payday lender, this means you.

The industry’s antagonists have pronounced that the BCFP’s first act will be to regulate payday lenders out of business (even though payday lending was entirely unrelated to the causes of the recent financial crisis, they assume that the BCFP will have no bigger fish to fry than payday lending). Some of my colleagues believe that payday lending is “low-hanging fruit” that the BCFP can use to put up a quick and easy “W” on the scorecard and, in the process, placate consumer groups. I think they’re all wrong.

A thoughtful analysis of how the BCFP will go about regulating payday lending needs to be multifaceted and nuanced. This process does not lend itself to facile, throw-away lines like “Liz Warren hates payday lending.” Rather, we need to look at the people who will promulgate the regulations, at the deliberative process mandated by the statute and at the guidelines the statute provides. Consideration must also be given to the effect on other BCFP constituencies of a perceived hasty and baseless proscription of payday lending. Finally, we need to think about timing and the likelihood that changes in the political composition of Congress will have occurred by the time the BCFP can get around to turning its guns on payday lenders.

The heavy lifting in the drafting of any regulations affecting payday lending will be done by staff of the BCFP. (The Bureau has no staff today but will acquire staff soon as a result of the combination of staffs of several federal agencies and outside hiring.) Staff are frequently the unsung heroes of Washington. Many of them are doctorally prepared career experts – economists, lawyers and psychologists – who could do better for themselves in the private sector but who choose instead to serve the public. No fooling. They work hard, and their work outlives the politicians to whom they report. And this factor is important for a critical reason: their primary motivation is to get it right, not to serve the ends of consumer groups or even of their more politically minded, but time-limited, bosses. The BCFP’s staff will be aware that consumers will be driven to inferior substitute credit products if payday loans become less available. They understand that eliminating supply does not eliminate demand. They will want to know what will replace the payday loans that are proposed to be outlawed. They don’t care about getting votes.

Staffs understand science. At the FDA, science sounds like this: “The effect of Diasporex was studied in a multicenter, prospective, randomized, double-blind, controlled trial conducted from 2002 through 2008 at 163 institutions, which enrolled 2,539 patients with type 2 diabetes without a history of atherosclerotic disease. A total of 34 patients in the Disasporex group and 38 patients in the control group died from any cause (hazard ratio 0.90, 95% confidence interval).” We grasp from this study that 10% fewer patients died with Diasporex than without it, a determination made using the gold standard of scientific inquiry in a large-scale, controlled experiment.

What is the analog of this for payday lending? For the CRL, it’s this: “Kym Johnson, a single mother working as a temp in Tempe, took out a payday loan when a friend told her about how she could borrow money easily. She quickly fell into the debt trap and had to pay a high fee every payday to renew the loan and avoid default. When she had trouble keeping up this cycle, she took out a second loan to pay fees on the first. It took Kym another eight months to shake free from the debt trap.”

Staff people understand that anecdotes are not science.

There is a significant existing body of real science on the issue of whether payday loans are welfare-enhancing for consumers. Most of the academic research shows that consumer welfare is enhanced by access to payday lending – although, in candor, a few studies are ambiguous or to the contrary. But there is no unambiguous research showing that payday loans are “bad” for a majority of borrowers. Likewise, there is no scientific evidence that the “right” number of rollovers at which to limit consumers is eight or six or zero. Think about all of the states with rollover limitations – there is no state in which a rollover limitation has been adopted based on a scientific study; such limitations have always been the product of a horse trade or something worse. That is not going to happen with the BCFP. Staffs are not going to make this stuff up. They are going to study it and get it right.

And this is precisely the process that Barney Frank intended. Despite numerous proposed amendments from the Left to impose specific interest-rate or rollover limits on payday lending, Frank pushed them all back and urged that these matters should be left to the agency’s expertise. They are going to study it and get it right.

The argument can be made that, even if staff personnel are scientific and apolitical, the regulatory process can easily corrupted by a political director. Let’s take a close look at a couple of the current directorship candidates and how they approach consumer-credit ambiguities:

Elizabeth Warren’s approach to regulatory issues becomes clear in her law review article, “Bankruptcy Policy,” 54 U. Chi. L. Rev. 775-814 (1987) (you can pay for the full article and download it at http://www.jstor.org/stable/1599826). The article illustrates her struggle with some thorny policy matters. She resolves them by adopting an economic analysis, which she admits is imperfect – “a dirty, complex, elastic, interconnected view of bankruptcy from which I cannot predict outcomes nor even necessarily fully articulate all the factors relevant to a policy decision.” In short, she is resistant to elemental dogma and takes little on faith. She has spent her career as a scholar who will follow the data and who is willing to vary her position when the facts lead that way. If, indeed, Warren hews to this mold, she is precisely the kind of leader whom we might want as the head of the BCFP: a non-dogmatic social scientist who listens. FiSCA interviewed her last year for its members’ magazine, and she presented a balanced and thoughtful approach to the credit requirements of lower-income consumers. At the time, I thought she was merely being polite (and politic); on reflection, while there is much on which I do not agree with her,  I’m not so sure she’s the devil incarnate.

The same can be said of the other leading candidate, Michael S. Barr, although his writings are more often cited as directly antithetical to payday lending. While he was on the faculty of the University of Michigan Law School, he conducted a study of Detroit-area lower-income consumers. The analysis in the paper is thoughtful and not critical of payday lenders in isolation; it shows that users of payday loans often have been turned down for other forms of credit and use overdraft and pawn to equal, often detrimental, effect. The paper is cited by CRL frequently for the proposition that payday users have three times the rate of bankruptcy, double the rate of evictions and phone cut-offs, and almost three times the rate of having utilities shut off. Unsurprisingly for CRL, these statistics are absent from the paper. And, of course, Barr never claims causation; he merely observes coincidence. See, “Financial Services, Savings, & Borrowing Among LMI Households in the Mainstream Banking & Alternative Financial Services Sectors,” http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1121195 (2008). He is a pretty level-headed, data-driven analyst, as far as I can tell. He understands that people often use payday loans because they are in trouble; he has not asserted that they are in trouble because they use payday loans. Barr shows every indication of being, like Warren, an evidence-based scholar.

Are these folks arch-conservative, pro-business zealots? Of course not. But they’re certainly not as awful as the trade press portrays them.

The director’s term is five years. Control of Congress and/or of the White House seems likely change in that time. The director will need to be mindful of the likely changes.

I turn now to the specifics of the Act. The BCFP’s authority includes proscribing by rule any “unfair, deceptive, or abusive act or practice under Federal law in connection with any transaction with a consumer for a consumer financial product or service.” Sec. 1031. To be clear, if the BCFP is going to curtail payday lending, it can only be because the Bureau finds payday lending to be “unfair, deceptive, or abusive” – there is no other basis in the statute for a proscriptive regulation. Unfortunately, the Act doesn’t define any of these three terms.

So what, exactly, is it about payday loans that the BCFP could find to be “unfair, deceptive, or abusive”? The resolution of this question really consists of two parts, because “unfair” and “deceptive” are already well-established legal concepts with time-tested meanings (largely from FTC practice).  Indeed, the language used in the Act to describe an “unfair” practice is lifted nearly verbatim from the FTC Act (at 15 U.S.C. § 45[n]). An example of a “deceptive” consumer financial service is one that economists refer to as a “shrouded attribute” – like a critical deal term concealed in fine print.  Although the statute explains certain conditions that must exist for an act to be found “unfair” or “deceptive” for purposes of brevity, suffice it to say that payday loans do not meet either of the traditional standards of “unfair” or “deceptive” products, because they comply literally with the requirements of applicable state enabling statutes and do not shroud any of their material terms. There is abundant judicial precedent on this point, including the FTC’s own Policy Statement on Deception (http://www.ftc.gov/bcp/policystmt/ad-decept.htm). If this were not the case, the FTC would long ago have shut the entire industry down. To my mind, this argument entirely disposes of two of the three “bad conduct” badges in the Act. Even if it did not dispose of this issue, the BCFP is required to take into account “public policy” considerations – such as the fact that access to payday loans remains the legislative public policy of 36 states – although such considerations are not dispositive (again, this language is lifted from the FTC Act). The FTC Act and Title X of Dodd-Frank are manifestly in pari materia, and chaos would result if they were interpreted differently.

Conversely, the third – “abusive” – is a standard created out of whole cloth for this legislation by Rep. Frank and his staff, without historic or judicial precedent, and without much in the way of legislative history in the Act itself. Here is what the statute says about “abusive”:

(d) ABUSIVE.-The Bureau shall have no authority under this section to declare an act or practice abusive in connection with the provision of a consumer financial product or service, unless the act or practice-

(1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or

(2) takes unreasonable advantage of-

(A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;

(B) the inability of the consumer to protect the interests of the consumer in  selecting or using a consumer financial product or service; or

(C) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

Sec. 1031.

This is a strange way not to define a term. Note that the statute doesn’t explain what “abusive” is; it simply tells the Bureau what minimum conditions must be present for “abuse” to be found. And I would argue – persuasively, I think – that none of those four conditions is present in a traditional payday loan.

An argument could be made that hyperbolic discounting might lead a small subset of consumers to take on debt that, had they known better, they might have realized they would not be able to repay (a [2][B] violation). This argument is readily reduced to an absurdity because the same hyperbolic discounting leads to excessive use of mainline credit products, such as credit cards, which nearly everyone agrees are non-”abusive.” The possibility that some subset of borrowers, however small, might over-consume a credit product when they have not been deceived into doing so does not strike me as an abusive process worthy of a ban applicable to all consumers.

Perhaps ultimately some argument could be made that an egregious combination of high interest rates and rollovers is “abusive.” While this argument, too, might lend itself to a reductio ad absurdum analysis – no one objects when the consumer pays three times the principal over the life of a thirty-year conventional mortgage – the “cycle of debt” claim remains seductive for those who would do right by consumers. The problem with the “cycle of debt” is that there is no scientific support for its existence; it exists only in CRL anecdotes and screeds. The emerging science is actually to the contrary; higher interest rates do not cause consumers to be indebted for longer, even though a superficial and unstudied review tells us this “must” be true. Ultimately, the BCFP isn’t merely going to take CRL’s word for it.

There is another problem with even taking interest rates into account in determining a payday loan to be “abusive.” Very importantly, under the Act, the BCFP has no authority to set or limit interest rates. Sec. 1027(o). By logical extension, I would argue that the BCFP has no authority even to take interest rates into account in determining a consumer loan product to be “abusive,” simply because the power to do so is the power to ban a product because of its high interest rate – a power expressly denied the BCFP under Section 1027(o). Congress did not want the BFCP to be able to supersede otherwise lawful state interest rates. Under the statute, the BCFP might find a 16-week loan term to be abusive from some reason, but it cannot – without spurring litigation – do so merely because the loan bears a 391% (rather than 18%) annualized interest rate.

In summary: payday loans are not “unfair” or “deceptive,” under well established and longstanding FTC standards, and it will be a very long shot to find them “abusive.”

The Act recognizes the importance of access to small-dollar consumer credit and actually creates (at Sec. 1205) a Treasury-funded small-dollar loan program, as an “alternative” to payday loans. The BCFP’s rulemaking authority is to be exercised in a manner so that “all consumers have access to markets” (Sec. 1021[a]); and the BCFP is required to balance “the potential benefits and costs to consumers and covered persons, including the potential reduction of access by consumers to consumer financial products or services resulting from such rule” (Sec. 1022[b]). It seems unlikely that a thoughtful and deliberate BCFP would eliminate consumer “access to markets” for small-dollar, short-term credit before the government’s own program catches on. Of course, it won’t ever catch on, just as the FDIC program flubbed. Banks don’t want these customers. And banks will have their hands full for years to come with the other provisions of the Act and don’t need to bother themselves competing with payday lenders.

Finally, the rulemaking process – collecting disparate views, drafting, giving notice and taking comments – will take time and is inherently deliberate and deliberative. All of this will happen only after the BCFP hires staff, finds office space and buys coffeemakers. It will therefore be many months, possibly 18 to 24 months, before the BCFP is effectively able to address these issues. During that time, control of Congress may change, and economic conditions are unlikely to militate in favor of further reductions in the supply of consumer credit.

There is every reason, too, why the BCFP would want to give the impression of being deliberate. It has other constituencies with far more economic and political clout than payday lenders. A perception by these other groups that payday lenders had been given hasty, incomplete or unfair consideration would lead to predictable howling and adverse consequences for both BCFP leadership and staff. There is simply nothing in it for the BCFP to throw payday lenders under the bus without at least careful research and a thorough, fair hearing.

In summary, I do not believe that the people who will lead the BCFP and who will execute the BCFP’s rulemaking process will regulate the payday loan industry out of business on the basis of prejudice, malice or politics, or that they will promulgate regulations in anything other than a near-plodding, diligent and fair way. I do not believe that a payday loan is “deceptive” or “unfair” within the common legal meanings for those terms, and I do not believe a payday loan can be shown to be “abusive” without the BCFP’s impermissible intrusion into interest-rate matters denied to it under the statute.

At the end of the day, heads-up against the BCFP, I believe the industry either wins outright, pushes or can negotiate an acceptable compromise.

As a consequence, at least a significant part of the “action” through at least mid-2011 is likely to remain at the state level. Continued diligence by trade associations, lobbyists and grass-roots organizations will therefore be required. This is especially the case because payday lending antagonists may flank the industry by pushing state legislatures to act early next year while the trade associations are focused on the BCFP.

At least as far as the BCFP is concerned, with apologies to Mark Twain, the rumors of the death of the payday loan have been greatly exaggerated.