One expects public policy to be based on the best of intentions—and nobody ever wants to doubt the motives of those claiming to help some mistreated segment of the public. But the road to hell is paved with good intentions, in no small measure because reality eventually intercedes, especially in those cases where the goals of such policy changes were in no way grounded in reality.
Case in point: the left’s attempts to eliminate “risk” throughout the financial services industry.
Today, helping to minimize risk of harm is a necessary and proper function of government, well-recognized and part and parcel of government’s “police” powers to deal with threats to public safety, health, or the environment (within reason).
But the left has been trying to do something entirely different. They want to eliminate risk entirely.
The problem with this well-intentioned policy, however, is that unintended consequences not only result, but they usually cause far more harm in the long term.
In the case of the financial services industry, the government’s attempts at eliminating risk have always ended up lighting matches that set the entire industry to flames.
As he was running for president, Sen. Bernie Sanders (I-Vt.) wondered openly, for instance, why loans for college were given with more expensive annual percentage rates than, say, home loans—forgetting, of course, that home loans are backed by real collateral (in the physical sense of the word), while student loans are backed by nothing all except a promise to repay. If banks and others lenders failed to take risk into account with regards to student loans, they would be put out of business immediately!
Moreover, when it came to home loans, the left also wanted to decouple risk there—with stunningly bad results! For years, one of the left’s goal was to put as many people as possible into home ownership, and they did this by pressuring banks to offer greater loans to more people with credit scores that could only be described as “marginal”. Since lending institutions were no longer offering credit at terms that bore some relationship to someone’s actual ability to repay, the inevitable ensued… a progressive-created bubble popped, and, in 2008, the economy crashed with it.
It was apparent from almost the start that the left hadn’t learned this 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.
Today in 2016, the left’s new favorite target is short-term, high-risk loans. A financial instrument of last resort for most Americans, these are loans that are given to individuals generally without the drawn out process of assessing credit-worthiness, and because of this (and the short time-frame for these loans) have interest rates that are higher than those loans that are for far longer durations, where one’s credit record is assessed, and where (in many cases), some collateral is offered as security for the loan.
To be clear, this is an essential sector in the economy. As distasteful as one might find it, there are circumstances when one finds one’s self having to make a choice 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 of submissions spoke positively of these short-term loans, the lenders who make them, and their necessity in the lives of the consumers who were 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 these short-term loans, burdens which will only serve to reduce the number of loans that are made and the number of lenders making those loans.
It is this last part which is the apparent ultimate goal—for a variety of reasons, the least of which is the desire to help consumers. Attempting to equate this industry with more nefarious criminal lending activities (which neither the facts nor the 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 found themselves without the ability 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. The problem, of course, is that should the CFPB be successful, thee 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, the reality has not matched that intent.
Andrew Langer is President of the Institute for Liberty. He has testified before CFPB Field Hearings several times on these issues.
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