Outside of health and safety, financial services have become a favorite target of the left. Progressives have pushed to de-couple risk assessment from all manner of lending. Take Senator Bernie Sanders: as he was running for president, Sanders wondered openly why college loans have more expensive annual percentage rates than, say, home loans. He forgot, of course, that home loans are backed by real collateral (in the physical sense of the word), while student loans are backed by nothing but a promise.
Moreover, when it came to home loans, the left wanted to decouple risk—with stunningly bad results. For years, one of the left’s goals was to put as many people as possible into home ownership. They did this by pressuring banks to offer greater loans to more people, even if their credit scores could only be described as “marginal.” Since lending institutions were no longer offering credit at terms that bore some relationship to people’s actual ability to repay, the inevitable ensued: a progressive-created bubble popped, and the economy crashed with it.
It was apparent almost from the start that the left hadn’t learned its lesson, since Dodd-Frank and the CFPB (Dodd-Frank’s monster, much of whose powers were recently ruled unconstitutional by a federal court) were created to pursue this goal of decoupling risk from financial services at warp-speed.
Squashing the Short-Term Loan Industry
Short-term, high-risk loans are a favorite target of the left. A financial instrument of last resort for most Americans, these loans are given to individuals generally without the drawn out process of assessing credit-worthiness. Because of this (and their short time-frame), they have higher interest rates than longer-term loans, in which one’s credit record is assessed and collateral is often offered as security.
To be clear, this is an essential sector in the economy. As distasteful as one might find it, there are circumstances in which people must choose between having, say, their phone or electricity turned off (and then paying an exorbitant fee to have someone push the right key on their computer to turn it back on), or paying a lower fee to take out a short-term loan and keep this necessity “on.” And consumers want these choices: in a review of five years of submissions to the CFPB’s “Tell Your Story” program, a full 98 percent spoke positively of these short-term loans, the lenders who make them, and their necessity in the lives of the consumers contacting the CFPB.
But new rules being proposed by the CFPB have the potential to eliminate this choice from the marketplace—and do serious harm to consumers in the long term. This “Small Dollar Lending Rule” imposes massive new burdens on those making short-term loans, burdens that will only serve to reduce the number of loans made, and the number of lenders making those loans.
This Rule Would Hurt Millions of Americans
It is this last part which appears to be the ultimate goal—for a variety of reasons, the least of which is the desire to help consumers. Attempting to equate the short-term loan industry with more nefarious criminal lending activities (which neither facts nor data bear out), the goal is to force onerous regulatory burdens on these businesses, increasing both the time it takes to give out a loan and the expense in giving those loans.
Absent this industry, millions of “unbanked” Americans would find themselves in the same position as those who unable to cash their paychecks when the CFPB went after the check cashing business (something a number of Democrats from urban districts understood when it was all but too late).
Earlier this month, officials from seven states and the District of Columbia wrote to the CFPB and urged it to tighten these rules. But should the CFPB be successful, consumers would be forced into a variety of horrendous choices—from actually pursuing such loans in the gray or black economy, to not being able to pay their weekly or monthly bills in the event of an emergency, to simply defaulting on their obligations.
The CFPB was created with the intention of protecting consumers and their finances. Thus far, reality has not matched that intent.