Richard X. Bove, Vice President Equity Research at Rafferty Capital Markets, discusses the government intrusion into the financial sector by changing payday loans. Followed by CFPB’s rules regarding payday loans and Appleseed Network and Grassroots Group respond to CFPB’s rules.
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Payday Loans
More Government Intrusion into Financial Sector – New Rules Keep Coming
No Plan to Help Borrowers
After years of arguing about the subject I have finally realized that the United States does not want a capitalist system. It prefers a heavily regulated financial system that is controlled by a small number of technocrats in government agencies that are immune to Congressional influence. As a result:
A government agency sets the price of short-term funds and influences the price of long-term funds
The same government agency determines the quantity of money that should be available to the economy
A series of agencies control every aspect of the banking system or the allocation of funds to the economy
Government agencies have taken control over dividend payments to bank shareholders
Virtually none of these agencies are responsible to Congress
The politicians, the media, and the American people strongly support these actions. Therefore, the government is now reaching out to the non-bank financial sector to bring it under greater control. There are old and new rules in place or being put in place to gain this control. It would take hundreds of pages to define what is being done so a small number of sectors, which are increasingly regulated, are being indicated here:
Old/New Rules
Credit cards
Mortgages
Bank overdraft fees
New Rules to be, or have just been, announced
Payday loans
Auto warranty lending
More overdraft rules
Investment advice (this from the Labor Department)
Online advertising of financial products deemed immoral, but not illegal, by the government
More capital requirements for banking
Being contemplated according to the Federal Reserve is much greater control over the asset management industry. The Fed has invented the term “macro-prudential” to explain its coming attack. It is using the old/new term “systemic financial risk” to justify its right to regulate the sector more aggressively.
At this point, people like myself can only watch and be mystified as to what is happening. One can only wonder whether and when there will be a reaction. It is definitely not positive for bank stocks and now not for other financial issues. GE clearly knew what it was doing when it shed its financial subsidiary.
One wonders also where low income households now go to obtain mortgages and short-term funding. The underground economy comes to mind.
Historic Opportunity To End Predatory Payday Lending
The Consumer Financial Protection Bureau (CFPB) has come out with a proposal for the first federal regulation of small-dollar consumer loans. This rulemaking could help millions of people and be a breakthrough in the struggle to end the abuses of triple-digit-interest, debt-trap lenders. To realize that potential, however, the CFPB will have to address what appear to be a number of weaknesses in this iteration.
The proposal is built around the crucial principle of requiring lenders to establish every borrower’s ability to repay. Predatory payday and car-title lenders typically do the opposite: they target people who, precisely because they lack the ability to repay the loan itself, are likely to get trapped in debt for months or years at a stretch, paying fees and interest that often end up dwarfing the amount they originally borrowed.
The Consumer Bureau has also wisely recognized the need to craft a rule covering a broad range of small-dollar loans, and not just payday and car-title loans in their most common forms. A narrower proposal would invite abusive lenders to do what they have done in many states that have taken that approach: find ways to tweak their products without giving up the fundamentally predatory business model of extracting wealth from economically vulnerable people through products designed to make their financial troubles worse, not better.
Payday lenders have been working hard to make the rule weaker than the preliminary outline released last year, however, and the proposal we see today appears to include several provisions that, unless corrected, will allow lenders to evade borrower protections and continue their abusive practices.
We will be working with our allies in communities around the country to call on the CFPB to continue its work, close the gaps, and write a final rule to achieve the vitally important goal that it has brought within reach: stopping the debt trap.
Appleseed Network Reacts to Today’s CFPB Payday Lending Rules
A nationwide network of nonprofits today praised a historic proposal by the Consumer Finance Protection Bureau (CFPB) to provide safeguards for users of payday loans, calling for careful review to ensure that the new draft rule properly protects millions of Americans from predatory lending.
“The CFPB must ensure that payday loans are not a debt trap dressed up as a lifeline,” said Bert Brandenburg, president of Appleseed, a national network of public interest justice centers working to help low-income people build better lives. “Without protections that are strong and clear, too many payday loans fuel poverty instead of relieving it.”
The CFPB defines payday loans as short-term loans, usually for $500 or less, that are typically due on a borrower’s next payday. The finance charge may range from $10 to $30 for every $100 borrowed. A typical two-week payday loan with a $15 per $100 fee equates to an APR (APR) of almost 400%. By comparison, APRs on credit cards usually range from about 12 percent to 30 percent. Payday lending is banned in 15 states.
Appleseed is a network of 17 centers across the U.S. and Mexico, deeply rooted in their communities, that advances justice and opportunity to help low-income people build better lives. Appleseed centers in Alabama, Hawaii, Nebraska, South Carolina and Texas have worked to shine a light on payday lending debt traps in their states, enact reforms to protect consumers, and ensure that the court system treats everyone fairly instead of becoming an assembly line in service of the debt collectors.
In Alabama, in 2003 the payday lending industry persuaded the legislature to legalize annual percentage rates (APR) of up to 456% rates for a 14-day loan, and up to 621% on a 10-day loan, and a study by the Center for Responsible Lending estimates that state residents pay $125,216,000 annually in payday lending fees—6th in the nation. Alabama Appleseed has led lobbying efforts to protect vulnerable consumers, helped pass 20 bans and zoning ordinances to curtail payday lending in 20 municipalities, and served as the State Banking Department’s expert witness in a lawsuit over regulations establishing a statewide database. Alabama Appleseed also coordinates the Alliance for Responsible Lending, a statewide coalition of advocates and stakeholders, and organized a community stakeholders’ roundtable during the CFPB’s first field hearing in Birmingham. Last March the White House asked Alabama Appleseed to convene payday lending advocates to meet with President Obama during his visit to Alabama.
In Hawai’i, where payday lenders charge some of the nation’s highest rates (about 460% APR), Hawai’i Appleseed is fighting to cap the rate at 36%. The Center for Responsible Lending estimates that state residents pay $3,281,179 annually in payday lending fees.
In Nebraska, the situation
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