The Trump administration has just proposed a rule that declares open season on consumers for subprime lenders. The Office of Comptroller of the Currency and the Federal Deposit Insurance Corporation (on whose board the CFPB Director serves) have released parallel proposed rulemakings that will effectively allowing subprime consumer lending that is not subject to any interest rate regulation, including by unlicensed lenders.
Category: Underbanked/Fringe Banking
-
Libra and Financial Inclusion
Posted by
Facebook’s proposed Libra cryptocurrency project has truly stirred up a hornet’s nest of controversy. Critics have generally focused on Libra as a currency and the power of Facebook in society and its appropriation of users’ privacy.
I think that discussion misses a key point. Libra will be, first and foremost, a payment system. It will be a payment system that happens to operate using a currency index, rather than a single country’s currency, and clear using blockchain rather than other clearing software, but it’s still a payment system, that is a system for moving value between parties. The payment system aspect is what both makes me incredibly skeptical about Libra’s financial inclusion claims and about Libra’s prospects for success.
-
New Paper: Consumer Protection After the Global Financial Crisis
Posted by
Historian Ed Balleisen and I have just posted a paper of interest to Credit Slips readers who are interested in consumer protection, financial crises, and inputs into post-crisis policymaking more generally. I will let the abstract speak for itself:
Consumer Protection After the Global Financial Crisis
Edward J. Balleisen & Melissa B. Jacoby
Abstract
Like other major events, the Global Financial Crisis generated a large and diffuse body of academic analysis. As part of a broader call for operationalizing the study of crises as policy shocks and resulting responses, which inevitably derail from elegant theories, we examine how regulatory protagonists approached consumer protection after the GFC, guided by six elements that should be considered in any policy shock context. After reviewing the introduction and philosophy of the Bureau of Consumer Financial Protection, created as part of the Dodd-Frank Act of 2010, we consider four examples of how consumer protection unfolded in the crises’ aftermath that have received less attention. Our case studies investigate a common set of queries. We sought to identify the parties who cared sufficiently about a given issue to engage with it and try to shape policy, as well as the evolving nature of the relevant policy agenda. We also looked for key changes in policy, which could be reflected in various forms—whether establishing an entirely new regulatory agency, formulating novel enforcement strategies, or deflecting policy reforms.
The first of our case studies focuses on operations of the Federal Trade Commission in the GFC’s aftermath. Although the Dodd-Frank Act shifted some obligations toward the CFPB, we find that the FTC continued to worry about and seek to address fraud against consumers. But it tended to focus on shady practices that arose in response to the GFC rather than those that facilitated it. Our second case study examines the Congressional adoption of a carveout from CFPB authority for auto dealers, which resulted from strong lobbying by car companies worried about a cratering sales environment, and the aftermath of the policy. Here, we observe that this carveout allowed a significant amount of troubling auto lending activity to continue and expand, with potentially systemic consequences. Loan servicer misbehavior, particularly in the form of robosigning, is the focus of our third case study. Although Dodd-Frank did not explicitly address robosigning, the new agency it created, the CFPB, was able to draw on its broad authority to address this newly arising problem. And, because the CFPB had authority over student loan servicers, the agency could pivot relatively quickly from the mortgage context to the student loan context. Our fourth and final case study is the rise and fall of Operation Choke Point, an understandably controversial interagency program, convened by the U.S. Department of Justice, which, with the GFC fresh in mind, attempted to curtail fraudulent activities by cutting off access to online payment mechanisms. Here, we see an anti-fraud effort that was particularly vulnerable to a change in presidential administration and political climate because its designers had invested little effort in building public awareness and support for the program.
The Article concludes with an overall assessment and suggestions for other focal points for which our approach would be useful. The examples span a range of other domestic and global policy contexts.
-
Usury 2.0: Toward a Universal Ability-to-Repay Requirement
Posted by
There's bi-partisan legislation pending that would prohibit the practice of installment lenders sending out unsolicited live convenience check loan: you get an unsolicited check in the mail. If you cash it, you've entered into a loan agreement.
The debate about check loans has turned on whether consumers understand what they're getting into. The legislation's sponsors say consumers don't understand all the terms and conditions, while the installment lender trade association, the American Financial Services Association, argues that there's no problem with live check loans because all the terms are clearly disclosed in large type font.
This debate about consumer understanding and clarity of disclosure totally misses the point. The key problem with check loans is that they are being offered without regard for the consumer's ability to repay. For some consumers, check loans might be beneficial. But for other they're poison. The problem is that check loans are not underwritten for ability-to-repay, which is a problem for a product that is potentially quite harmful. Ability to repay is the issue that should be discussed regarding check loans, not questions about borrower understanding. Indeed, this is not an issue limited to check loans. Instead, it is an issue that cuts across all of consumer credit. Rather than focus narrowly on check loans, Congress should consider adopting a national ability-to-repay requirement for all consumer credit (excluding federal student loans).
-
Unsolicited, Live Check-Credit
Posted by
The Washington Post has an interesting story about consumer installment lender Mariner Finance. Three brief observations.
First, Mariner has found an interesting regulatory loophole. The Truth in Lending Act prohibits the issuance of "live," unsolicited credit cards. That provision, however, only applies to devices that can be used for multiple extensions of credit, not single use items like a check. So Mariner can mail out live checks to consumers (it presumably prescreens a population to target), without running afoul of the federal prohibition on mailing live, unsolicited credit cards. That's a creative way of reaching customers without having an extensive and expensive brick-and-mortar presence. It also avoids some of the adverse selection problems of internet-based lending.
Second, there is no federal preemption obstacle to states prohibiting the issuance of live, unsolicited checks used to create a credit balance. Mariner seems to be the only major firm doing this, and it doesn't have any preemption argument I can see.
Third, no one should be shocked that large financial institutions provide the money behind Mariner. Large banks don't do small dollar lending themselves; there are too many regulatory and repetitional issues, but they will provide the financing for small dollar lenders, whether by providing lines of credit or by making equity investments in them. And this has political consequences: the lobby opposing the regulation of small dollar lenders isn't just finance companies, but also the large financial institutions that are funding them. Consider how that might affect efforts to close the unsolicited live check loophole on either the federal or state level.
-
The Bootstrap Trap
Posted by
I just had the pleasure of reading Duke Law Professor Sara Sternberg Greene's paper The Bootstrap Trap. I highly recommend it for anyone who is interested in the intersection of consumer credit and poverty law. The paper is chok full of good insights about the problems that arise when low-income households strive for the goal of self-sufficiency, which results in the replacement of a public welfare safety net with what Professor Sternberg Green describes as a private one of credit reporting and scoring systems. The paper shows off Professor Sternberg Greene's training in sociology with some amazing interviews, particularly about the perceived importance of credit scores in low-income consumers' lives.
Other respondents referred to their credit reports or scores as “the most important thing in my life, right now, well besides my babies,” as “that darned thing that is destroying my life,” and as “my ticket to good neighborhoods and good schools for my kids.” Many respondents believed that a “good” credit score was the key to financial stability.
One respondent, Maria, told a story about a friend who was able to improve his score. She said, “He figured out some way to get it up. Way up. I wish I knew what he did there, because I would do it. Because after that, everything was easy as pie for him. Got himself a better job, a better place to live, everything better.” Maria went to great lengths to try to improve her score so that she, too, could live a life where everything was “easy as pie.”
Credit scores have become a metric of self worth and the perceived key to success.
-
New Study Tells Inside Story of how Local Communities use Ordinances to say ‘Enough’ to Payday Lenders
Posted by
Robert Mayer of the University of Utah and I just finished an 18-month study of community approaches to controlling payday lending . The study concludes with ten lessons communities can use to pass similar ordinances on any subject matter. In The Power of Community Action: Anti-Payday Loan Ordinances in Three Metropolitan Areas, we document how local communities positively organize to control payday lending in their jurisdictions and thereby create important legal change. Our whole report as well as an executive summery can be found here.
We hope this study will galvanize local communities and show them how they can make a difference in changing the law and society as a whole, Payday loans, which are borrowed against future paychecks and can carry interest rates of 400 percent or more, often strip wealth from society’s most economically vulnerable individuals and communities. These loan outlets now outnumber all McDonald’s, Burger King, Starbucks and Walgreens stores combined. In states where legislative controls are weak — and in the absence of federal regulations — some local governments have stepped forward to address the problems caused by high-cost, predatory payday loans.The researchers traveled to three regions — Silicon Valley in Northern California; Greater Metropolitan Dallas in Texas; and Greater Salt Lake City in Utah — to see how local entities have produced numerous ordinances aimed at halting the spread of payday lending. The locations were chosen for their diverse demographic, cultural, political and legal characteristics.
-
Auto Title Lending: Exploding Toasters
Posted by
The CFPB has a new report out on auto title lending, and the findings are jaw-dropping. If ever there was a consumer financial product that looks like an exploding toaster, it is an auto title loan. Default rates on auto title loans are one in three, with one in five resulting in a repossession. Is there any consumer product that is tolerated when one out of three products blows up? Even one in five?
There's a lot of good data in the report (which assiduously avoids any interpretation, but just presents the facts), but beyond the default rates, here's what really jumps out at me: over 80% of the loans roll over and around half result in sequences of 10 or more loans. That means that rather than viewing auto title loans as short term products with an extension option, they are really used more like longer-term products with a prepayment option. But more importantly, it tells us something about how to interpret default rates.
-
The Promise and Limits of Postal Banking
Posted by
It’s easy for Progressives to get excited about the idea of postal banking: a public option for banking! What’s not to love?
I’m glad to see the idea of public options in financial services getting some play of late; it’s something I’ve championed for a while in payments and housing finance. But I think it’s necessary to recognize some of the limits to postal banking. In particular, it's not at all clear to me why we would want to involve the Post Office in the public provision of financial services. What the Post Office offers is a way to recreate a brick-and-mortar branch bank network. This really doesn't make a lot of sense for 21st century banking. Additionally, postal banking is often pitched as an alternative to payday and title lenders. Before we go running down that path, we should think about what it means to have the government in the payday lending business.
-
It Is Very Expensive To Be Poor
Posted by
Cash checking fees, prepaid card fees, money transfer fees, cashier's check fees — all together, the unbanked pay up to 10% of their income simply to use their own money. And when lower-income people face an emergency, they must turn to expensive payday loans, title loans, and tax refund loans. As Mehrsa Baradaran (University of Georgia) writes in her new book, How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy, "indeed, it is very expensive to be poor."
How did this happen? And how might we begin to solve the problem? In her book, Baradaran details how banks and government are and always have been inextricably tied, with the government helping banks and the banks supposedly helping the public in return. But this "social contract" has eroded. The banking sector has turned away from less profitable markets, leaving people with small sums of money to deposit without a trustworthy place to stash their cash, and people in need of small sums of money to borrow nowhere to turn but fringe lenders. Moreover, these people understandably often are uncomfortable dealing with large banks. And the result is that an astonishing large chunk of the American population is unbanked or underbanked.
If the unbanked and underbanked had a trustworthy place to deposit their cash, some of the fees they pay simply to use their money would go away. This alone might allow families to stay financially afloat. Likewise, if they had the option to borrow small sums of money at reasonable rates, temporary financial emergencies may not set so many families up for a lifetime of financial failure. Which leads Baradaran to a proposal that I’m fond of (indeed, I’ve blogged about Baradaran’s thoughts on it before): postal banking.