Consumer Financial Protection Vagary
Congress confuses the causes of the financial crisis-on purpose.
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.