Economics

Consumer Financial Protection Vagary

Congress confuses the causes of the financial crisis-on purpose.

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Handing out small loans against future paychecks had absolutely nothing to do with last year's market meltdown, but federal regulators have been itching to get their hands on the the payday lending industry for years, and yesterday's committee vote on the creation of a new omnibus agency to control all financial products was the perfect opportunity.

The House Financial Services Committee voted 39 to 20 on Thursday to create a new Consumer Financial Protection Agency (CFPA). The stated goal of the proposed law, which will now move to a broader vote, is to consolidate regulation of financial products and use the resulting agency to monitor the use of sub-prime mortgages and other high-risk, complicated financial products.

In contrast to the complex instruments that helped bring about the financial crisis, payday loans are astonishingly low tech: Applicants bring in a stack of paper showing that they have a job and a bank account, write a paper check in a physical store for the amount they will owe when the loan comes due, and walk away with a handful of cash. These localized, low-key transactions are hardly the stuff of innovative high finance, but that hasn't stopped Congress and the president from purposefully conflating ordinary, everyday financial practices they deem unsavory with those that caused a global financial meltdown.

During his presidential campaign, Barack Obama promised to "work to empower more Americans in the fight against predatory lending" by capping "outlandish interest rates." Obama also said he wants to extend the 2007 law imposing a 35 percent cap on interest rates for loans charged to members of the armed forces and their families to "all Americans." He's now well on his way, and if the CFPA becomes law, he'll be able to count it as a much-needed legislative victory. Payday lending has become a talking point for financial regulators, something that ordinary voters—who find derivatives confusing—can understand. The historical image of payday lenders as unsavory loan sharks and more recent stories of folks caught in debt spirals make the industry seem unsavory, ripe for regulation.

A press release on the committee's website is a study in the confused rhetoric of these new regulations, jumbling together several distinct types of financial products, crowing about "extend[ing] federal supervision to a host of financial industries, such as payday lenders and mortgage originators, which have long escaped oversight" and asserting that, "As last year's crisis demonstrated, deceptive financial products—such as predatory mortgages and hidden credit card fees—not only damage the livelihoods of American families, but can destabilize the entire economy." The use and abuse of credit cards and payday loans may be indicators of the overall financial health of the country, bu they had nothing to do with the 2008 crash.

The press release also includes a quote from Rep. Brad Miller (D-NC): "The Committee vote today is a rifle shot at abusive financial practices, not a shotgun blast that would hit community banks making an honest living from fair lending practices. It's no surprise that the lenders with the worst practices are still fighting tooth and nail against this bill. The last thing they want is to have to make an honest living."

Small banks have managed to get out from under most of the harsh new regulations—probably because they call themselves "community banks." And who doesn't like community? Rep. Barney Frank (D-Mass.), the chairman of the House Financial Services Committee, told The Wall Street Journal last week that community banks "were not the cause of this" and agreed to an exception for small banks that would allow them to continue dealing with their current regulators rather than the new consolidated federal agency. The same might be said of payday lenders, and yet Frank had harsh words indeed for them, singling out payday lenders and promising to "adopt a system of regulating the non-bank, non-regulating competitors who are frankly worse for both the consumer and the economy."

Naturally, the payday lending industry is freaking out. And when Congress and the president join forces to regulate an industry, there's only one thing for it: lobbyists. When ordinary people go to payday lenders, they get $100 or $200 in cash as an advance on their paychecks. When payday lenders go to Congress, they get considerably more. The industry spent $4.2 million on lobbying during the 110th Congress (which ended in January 2009), and gave $1.5 million in the 2008 election cycle. In the past, payday lenders have mostly concentrated their lobbying efforts at the state level, to mixed success. But the threat at the federal level is real this time around and the lobbying dollars reflect that. Stay tuned for part two of the debate, when would-be regulators cite the massive amount of lobbying dollars as further evidence of the industry's corruption.

Katherine Mangu-Ward is a senior editor at Reason magazine.

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  1. The last thing they want is to have to make an honest living.

    So rent-seeking is an honest living, and better than doing trade? That… actually explains some things.

  2. “And payday loans had nothing to do with the financial crash of 2008. But the president and Congress haven’t let that stop them from lumping in payday lenders with high-risk financial instruments and regulating the heck out of them.”

    That’s nothing. A week or two ago — I think on The News Hour on a segment about the Pay Czar — a woman was advocating for the control of all companiies’ payrolls. She was insidious saying that it could be simply done by passing a law that says the federal government cannot enter into contracts with companies that had a wide gap (30x IIRC) between the lowest and highest paid employees.

    I recall that when the US had sanctions against South Africa, companies that did business with SA couldn’t get government contracts. So essentially this woman and her ilk advocate treating American businesses as if they were the apartied-era South African government.

    I nearly shot out my TV screen.

    1. I would have too

    2. What about the communist, racist, violent Mandela era?

      1. I live for your kisses!

      2. So your point is that we should be treating US businesses like the communist, racist, violent Mandela era?

        As usual, your not really making any sense.

  3. Well, they have to regulate somebody since y’all don’t want any accountability for Wall Street!

    1. What exactly are you accusing Wall Street of doing?

      1. I suspect he’s accusing them of making shit-loads more money than he does. And I suspect he is right about that. 😉

    2. That’s silly, Libertarians want Wall Street to face the ultimate accountability: Bankruptcy and financial failure, instead of bailouts.

  4. STFU, Ray Buttmunch.

  5. Government is trying to shift blame?

    WHAT’S NEW?!

  6. Rep. Brad Miller (D-NC): “The Committee vote today is a rifle shot at abusive financial practices, not a shotgun blast that would hit community banks making an honest living from fair lending practices.”

    I feel better knowing that Congress knows exactly what “honest and fair financial practices” look like.

    1. Congress also working on a plan to provide capital for these community banks because they have none to lend (and damn it, how can banks loan money if they don’t have any?). I believe I heard an amount equivalent to 1/3 of the TARP money.

      Great idea. Especially if the loans can’t be repaid. Someone on another thread asked how long before it will no longer be illegal to print counterfeit money? I’d say we’re mighty close.

      1. It isn’t illegal for the fed to print counterfeit money not backed up by anything.

        1. Yes, but isn’t it backed by the “full faith and credit of the United States Government”.

          Oh wait, never mind.

    2. I’m just surprised the “you don’t need an assault rifle to go duck hunting” crowd actually knows the difference.

    3. Why, yes they do. It’s the exact opposite of the federal government’s accounting practices.

  7. I now truly weep for our country. With bozos like Paulsen, Geithner, Bernanke, Obama, and pretty much anyone else (including GWB) making all sorts of financial pratfalls at the expense of the US taxpayer almost reeks of treason to me. I am angaging in hyperbole a bit, BUT COME ON! These guys can’t be this stupid and incompetent. I am not given to tinfoilery, but this has to be calculated; all these wonks and such would have to at least considered this as a result of their bubble blowing. 1/3 of TARP has been spent and they have 2/3 to go. Hmmm, since they have already robbed Paul, which Peter is going to paid in 2010?

    1. Groovus, you are sounding a little tinhat, but you do raise an important point: how do the supposed Emperors of Economics get it so horribly wrong? Is it coincidence that Goldman-Sachs is a revolving door with DC and that they directly and indirectly received tens of billions from the .gov?

  8. Is it coincidence that Goldman-Sachs is a revolving door with DC and that they directly and indirectly received tens of billions from the .gov?

    Yes.

    1. I wonder if Reason will get any pingback from this?

  9. “The Committee vote today is a rifle shot at abusive financial practices”.

    These clowns couldn’t hit the broad side of a barn even if they were standing inside of it.

  10. Stay tuned for part two of the debate, when would-be regulators cite the massive amount of lobbying dollars as further evidence of the industry’s corruption.

    I’m waiting for the part where congresscritters accepting lobbying dollars is further evidence of congress’s corruption. But I’m not holding my breath.

    OTOH: Payday lenders and borrowers; yet another group of little people pissed off at government. This kind of stuff is starting to stack up.

  11. A woman at work asked to borrow $5 to buy gas. She was on empty and was worried she wouldn’t make it home. I needed the $5 to buy dinner on the way home so was reluctant to hand it over. She said the $5 was more valuable to her than to me and that she would give me $10 the next day if I gave it to her. I was about to loan her the money when the Federal Government swept in to protect her from unfair lending practices. I ended up keeping the $5 for myself. She didn’t make it home that day and hasn’t been seen since.

    1. You nearly gave out a loan with a 7.5*10^111 percent annual interest rate!?! You monster!11!1

      (I forget, does Congress assume compound interest or simple interest when having hysterics about the price of a risky loan? Compound interest is easier to get huge numbers from, but would require them to do math…)

  12. Is it really possible to be a “predatory lender” if the potential borrowers come to you of their own accord, and freely agree to whatever conditions apply? Just another bit of doubetalk coming from the left.

    1. Just to play devil’s advocate, you’re assuming that people who use payday loans are financially savvy enough to understand the contract to which they’re agreeing. IME, most Americans have no clue about things like the time value of money, what interest is and how it works, and so on. Granted, this is primarily a failure of our public education system, but government authorities do have a duty to protect the stupidest of us from making truly horrible decisions.

      1. “government authorities do have a duty to protect the stupidest of us from making truly horrible decisions”.

        Where do you start, and where do you end? And how do you separate “bad” decisions from the decisions that are only “politically incorrect”?

      2. The government has a duty to prevent fraud, so we can make our own informed, horrible decisions.

      3. Captain, you’re quite right, in part: “…most Americans have no clue about things…”. The qualifications in the rest of the sentence were unnecessary. Where do you get the silly idea that “…government authorities do have a duty to protect the stupidest of us from making truly horrible decisions.”?

  13. most Americans have no clue about … what interest is and how it works …. Granted, this is primarily a failure of our public education system

    The ignorance is “compounded” 😉 by pervasive misuse of the adjective “exponential”.

    government authorities do have a duty to protect the stupidest of us from making truly horrible decisions

    Citation needed.

  14. O great and powerful Obama, I beseech Thee, save me from my bad decisions! I never again want to be duped into spending money on a John Grisham book!

  15. What needs to be strictly regulated is the ability of politicians to write laws which infringe on what should be guaranteed rights, i.e. the right of people to enter into clear, honest, mutually acceptable economic transactions where no dangerous goods are involved.

    Nobody can tell someone they are being stupid in agreeing to pay $15 for a two-week, $100 loan. In some cases that can save a family from eviction in the dead of winter, and for many others it can be very useful. For some people it may be a mistake, which will teach them to be more cautious about borrowing money in the future.

    But to say it is a stupid thing to do because that is about a 400% APR is about as stupid as you can get, because the significance of the APR is inversely proportional to the amount and size of the loan. For small, short-term loans – the only type of loan many people can qualify for – all it tells you is that the borrower would be better off getting a loan at credit card or personal loan rates, which of course doesn’t matter because payay loan borrowers don’t qualify for those. And the APR tells you nothing about how much profit payday lenders are making, because with small, short-term loans the cost of issuing them is a huge factor, which the APR ignores.

    The politicians pushing for this legislation are complete hypocrites in saying that they want to save consumers from overly complex financial services when the laws they write are so confusing that consumers have to hire lawyers to understand them and the tax code is so complex we have to hire accountants.

    Let them put their own house in order first!

    1. Consumer protection can facilitate commerce. More poor people would use payday loans if there is less risk of being cheated by the lender. It’s a fact that most people are financially iliterate and this is just a common sense solution to a problem.

      1. I disagree, Andrew, with your first sentence. Consumer protection can facilitate politics, never commerce. All government actions in the markets caused increased costs which are unrelated to anything other than filling politicians’ pockets .. sorry; or the pockets of their buddies in the industry being acted upon. It does not require “financial literacy”, whatever that may mean, to realize that your entire paycheck goes to the loan company every payday and you gotta borrow it all again to pay your bills. It might require a bit of foresight to figure that out in advance, but major league financial knowledge? No. In a society where too many kids have one parent and that parent is on welfare, indifferent, doped up, choose your favorite excuse for utter failure as a parent, it surprises me that the kids can remember how to steer a car and shift the automatic transmission, let alone figure out payday loans. Oh, by the way, get one of those loan forms and read it. The interest rate, the amount of interest and the total to be repaid are printed large enough to be read by me without my glasses. It’s a failure to comprehend, not a failure to regulate or “cheating” by the lender.

      2. I haven’t seen any claims of anyone being “cheated by the lender” here. Existing laws should cover that case though.

  16. This seems like it might be a situation for a bipartisan effort. Republicans love to fuck with poor people and regulate “vice” type industries.

  17. actually, to a certain extent, the payday loans were responsible for the crash. I’m a lawyer and have worked on multiple cases involving fraudulent mortgage loan practices. Here in California the payday loan companies are regulated under the California Finance Lenders Law (Cal Fin. Code 22000, et seq). Many of the most unscrupulous mortgage brokers (who are fiduciary agents of borrowers under Wyatt v. Union Mortgage 24 Cal 3d 773), obtained these licenses in order to broker loans because the requirements to get the licenses were the most lax. Many lenders also obtained these licenses for the same reason. Said lenders and brokers then breached their duties to borrowers by writing bad loans (usually involving poor or nonexistent underwriting procedures).

    1. KG: And who wrote those wonderful laws, rules and regulations in the first place? Oh, yes, of course, it was the evil lenders, not the government regulators who possessed the legal authority.

    2. It is a fallacious notion that lenders should be “responsible” for ensuring borrowers can repay their loans. If lenders should be so responsible, then why shouldn’t other merchants and service providers also be? Before long you won’t be able to buy any product or service without the seller being required to investigate your finances to ensure you are making a wise decision. Is that the kind of world you want to live in?

      The only responsibility lenders should have to borrowers is to present their offerings clearly and honestly, and to obey all debt collection laws. Lenders have underwriting criteria to protect themselves, not the borrower, and that is how it should be.

      I am not against the government offering direct assistance to people who develop serious problems, but it should not do so by infringing on freedom of commerce.

  18. Clearly the government is meddling all over financial services, but I have a problem with the banking and securities industries that it bigger. The banks are given a very significant monopolistic license to lend, so it’s not as though it’s a free market anyway. Yes, this is more intervention, but it’s not as though the market really functions freely for credit anyway. To more on how banks benefit from public largesse, see my article at http://libertariancomment.com/…..rspective/

  19. Off subject. Could someone please explain to me the difference between small l and big L libertarianism? I hear references to the distinction and I googled it but I just don’t get it.

    1. I believe the big L means you are a card carrying member of the Libertarian party. That’s why almost every reference to an l is the small l.

  20. Well the problem is that in most cases, COngress doesnt know their own arse from a whole in the wall. So therefore, it doesnt matter.

    RT
    http://www.anonymous.ua.tc

  21. Personally, I really don’t see how one of these loans can “help” someone. Unless, of course, someone were to get a hot tip on a horse running at Belmont in the 5th.

    Credit card companies have long been able to bypass individual state usury laws. This is just another example. Except in Georgia, where it’s a felony to offer payday loans. They are probably one step above a pawn shop loan, and a half a step below a title loan, and two steps above a refund anticipation loan. It’s all bullshit.

  22. Charlie Freak had but one thing to call his own
    Three weight ounce pure golden ring no precious stone
    Five nights without a bite
    No place to lay his head
    And if nobody takes him in
    He’ll soon be dead
    On the street he spied my face I heard him hail
    In our plot of frozen space he told his tale
    Poor man, he showed his hand
    So righteous was his need
    And me so wise I bought his prize
    For chicken feed

    Newfound cash soon begs to smash a state of mind
    Close inspection fast revealed his favorite kind
    Poor kid, he overdid
    Embraced the spreading haze
    And while he sighed his body died
    In fifteen ways

    When I heard I grabbed a cab to where he lay
    ‘Round his arm the plastic tag read D.O.A.
    Yes Jack, I gave it back
    The ring I could not own
    Now come my friend I’ll take your hand
    And lead you home

    -Donald Fagen

  23. Thanks James. So it’s a technicality there’s no difference between the two politically? Or am I still not getting it. It seems sort of meaningless but people make the distinction for themselves all the time. Just trying to sound discerning?

    1. When someone claims to be a small l libertarian ther are saying they generally agree with the policies of the official Libertarian party. Although even within the party there are wide ranging arguments about stuff. But small l libs won’t join the party because of numerous reasons. Like identifying with a fringe group consisting of less than 2% of the population, or being associated with the likes of Wayne Allen Root.

  24. Mmmm, Root! I love the taste of Root in the morning!

  25. No one forces those people to seek loans at these rates. If these people are charging rates that these people don’t know about (they’re hiding or not disclosing them), there are already laws on the books to allow prosecution. Whether we’re conscious of it or not, unless we’re coerced, every decision we make, we’ve already come to the conclusion that we’re better off with the decison that we would be had we not made it.

  26. Thanks again. That seems to make sense. I think it has been escaping me because I don’t know anything about the “Libertarian Party”. I only know libertarianism philosophically. It’s funny though. The Political/ philosophical divide seems a little silly and confusing when the philosophy itself answers so many of the big political questions.

  27. CFSA is the national trade association representing responsible payday lenders. With membership representing more than half of the payday advance outlets nationally, CFSA promotes laws and regulations that protect consumers while preserving their access to credit options. The association also works on behalf of members to support and encourage responsible industry practices.

    CFSA supports regulations that ensure the product is used responsibly and are doing our part to encourage responsible use. We want customers to use payday advances wisely and we want the service to be a solution for individuals who need low-dollar, short-term credit. To that end, CFSA member companies have taken a significant step forward in our ongoing commitment to responsible lending.

    Payday advances are small, unsecured, short-term loans, usually due on the borrower’s next payday. The average loan is $300 and the typical fee is $15 to $17 per $100 borrowed.

    The payday advance industry exists because we offer our customers a product that is more desirable than the alternatives. Payday advance compares favorably to many consumer alternatives, even when expressed as annual percentage rates for two-week terms: $100 payday advance with $15 fee is 391% APR.; $100 bounced check with $55.59 NSF/merchant fee is 1449% APR; $100 credit card balance with $37 late fee is 965% APR; a $100 utility bill with $46.16 late/reconnect fees is 1203% APR; a $100 off-shore Internet payday advance with $25 fee is 651.79% APR; $29 overdraft protection fee on $100 is 755%.

  28. My only point is that if you take the Bible straight, as I’m sure many of Reasons readers do, you will see a lot of the Old Testament stuff as absolutely insane. Even some cursory knowledge of Hebrew and doing some mathematics and logic will tell you that you really won’t get the full deal by just doing regular skill english reading for those books. In other words, there’s more to the books of the Bible than most will ever grasp. I’m not concerned that Mr. Crumb will go to hell or anything crazy like that! It’s just that he, like many types of religionists, seems to take it literally, take it straight…the Bible’s books were not written by straight laced divinity students in 3 piece suits who white wash religious beliefs as if God made them with clothes on…the Bible’s books were written by people with very different mindsets..

  29. My only point is that if you take the Bible straight, as I’m sure many of Reasons readers do, you will see a lot of the Old Testament stuff as absolutely insane. Even some cursory knowledge of Hebrew and doing some mathematics and logic will tell you that you really won’t get the full deal by just doing regular skill english reading for those books. In other words, there’s more to the books of the Bible than most will ever grasp.

  30. My only point is that if you take the Bible straight, as I’m sure many of Reasons readers do, you will see a lot of the Old Testament stuff as absolutely insane. Even some cursory knowledge of Hebrew and doing some mathematics and logic will tell you that you really won’t get the full deal by just doing regular skill english reading for those books. In other words, there’s more to the books of the Bible than most will ever grasp. I’m not concerned that Mr. Crumb will go to hell or anything crazy like that! It’s just that he, like many types of religionists, seems to take it literally, take it straight…the Bible’s books were not written by straight laced divinity students in 3 piece suits who white wash religious beliefs as if God made them with clothes on…the Bible’s books were written by people with very different mindsets

  31. Providing Personal Finance News like Insurance, Loan, Debt, Business, Pension, Payday Loan and other Debt Settlement Blog.

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