The Consumer Financial Protection Bureau (CFPB) just introduced new regulations governing payday loans—small, short-term loans also referred to as “cash advances.”
Since its inception in 2011, the CFPB has vilified the payday loan industry. The federal agency often claims that payday loans lead consumers into “debt traps,” as they often carry annual interest rates of more than 300 percent. (This assumes that the customer takes a year to pay off a loan designed for two weeks.) The agency’s ominous message: Stay away from payday loans because they’ll bust your budget down the road.
Alarmism aside, a recent Inspector General report reveals that CFPB employees don’t practice what they preach when it comes to high interest rates. Analyzing employees’ usage of the agency’s credit card for personal expenses, the Office of the Inspector General found that the most common transaction was a cash advance, whereby employees withdrew cash using their government-issued credit card. The OIG tracked 14 such instances totaling more than $2,700. (And the report just looked at 65 employees.) Obviously, the Inspector General was critical of employees using their CFPB credit card for personal expenses, but it also brings up another issue.
Paying back a credit card cash advance doesn’t come cheap. In fact, it’s exactly the type of thing the CFPB is trying to regulate out of business. The average interest rate on cash advances hovers around 25 percent—almost 10 percent higher than the interest rate on typical credit card purchases. Those interest rates are on top of another three to five percent fee (with a $10 minimum) just for making the ATM transaction. If you take out $300, for example, it could end up costing you about $25 for that one transaction. On smaller amounts, the interest and fees could be even more expensive than a typical payday loan.
But this doesn’t stop the CFPB from attacking payday loans, while its employees practice the same habits it criticizes. Can you spell hypocrisy?