Payday lenders go to Washington

By Felix Salmon
May 10, 2010
Ylan Mui reports on the "Hill Blitz" orchestrated last week by payday lenders, aggrieved that they might at last face federal regulation:

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Ylan Mui reports on the “Hill Blitz” orchestrated last week by payday lenders, aggrieved that they might at last face federal regulation:

According to a study by the Federal Deposit Insurance Corp. released in December, about a quarter of American households have little or no access to banks or other traditional financial services; many rely instead on payday lenders and check cashers.

But in back-to-back meetings with dozens of members of Congress last week, industry executives argued that their sector is already regulated by a complex web of legislation in the states, including some that ban payday lending. A federal regulator would create another layer of work that would increase their costs and potentially put some providers out of business, they said. In addition, they are often the only alternative for consumers who cannot qualify for — and sometimes do not want — a bank account or credit card.

It’s completely insane that a system which protects the relatively well-off customers of banks might include a carve-out specifically excluding the unbanked from any federal consumer protection. They are, after all, the people who need such protection most. And I’m particularly tickled that the payday lenders seem to think that the fact that they’re banned in some states is a good reason for a federal consumer protection agency not to regulate them at all.

The worrying thing about all this, however, is that the less-government-is-better-government crowd is likely to lap it up. And it seems that the consumer-protection rules were drafted far too sensibly, which means that as the payday lenders achieve success in their lobbying efforts, they’ll weaken the final agency far too much.

The right thing to do, it seems, would have been to take a leaf out of Blanche Lincoln’s book. After she proposed that investment banks be forced to spin off their swaps desks entirely, she put the banking lobby on the back foot: all of the lobby’s efforts are now being put towards weakening or repealing that one rule, and the rest of her derivatives legislation seems much more likely to sail through the Senate. Maybe Chris Dodd should have proposed banning payday lenders. Then they would be lobbying for mere regulation, rather than agitating against it.

Comments
3 comments so far

How precisely is a federal consumer protection agency going to help the people who patronize payday lenders?

All the talk about what a potential CFPA will look like or how it will actually function in the real world is incredibly vague. The plan seems to be 1. “Establish agency with benevolent and positive sounding name”. 2. ?????? 3. Consumers don’t get ripped off by banks as much!

Specifically on the issue of payday lending, how will a protection agency help? Because the most likely suggestion, limiting APRs or rates charged, is extremely unlikely to be to the benefit of those who use these shops- in fact it will probably hurt them by reducing their access to credit, since lenders are likely to stop lending.

As for “making the terms of the loan clearer” or something along those lines, that doesn’t seem that helpful. While I’m sure people do sign agreements with clauses they don’t fully understand, and it would be an improvement if this didn’t happen, this is not the root of the problem- the root of the problem is that serving the “unbanked” requires high interest rates for it to be profitable, and a CFPA doesn’t address that.

So how exactly will a CFPA help these people? You have to establish that it can successfully accomplish this, and that weakening the agency will actually make a difference. I haven’t seen that anywhere, like I said the arguments behind a “strong” CFPA are incredibly vague and no one (particularly the authors of the legislation) seem to have a good answer, or at least I haven’t seen it.

Posted by Claremont1 | Report as abusive

From the example of payday lenders’ response to potential regulation one can extrapolate backward what’s wrong with Dodd and his dithering, WWE-style sham battle “against” multiplex megabanks: the rules need to be kept no-nonsense, firm and plain-as-daylight simple.

If they are, it might all mean something to everyone. If they aren’t, they’ll be utterly worthless, with everyone but the banks still getting screwed.

Posted by HBC | Report as abusive

felix, just because a behavior is made illegal does not mean it disappears. See, Prohibition, Alcohol, United States of America, 1930s.

Posted by TinyOne | Report as abusive
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