October 5 2012

CFPB: Teaching Citizens to Be Irresponsible

Charlotte Hays

Call me hard-hearted, but this example of an ordinary citizen—“Ms. Jay,” a single mother, no less—being exploited by a rapacious bank just doesn’t do it for me:  

Ms. Jay “hit some unforeseen financial troubles,” we learned [at a hearing], and resorted to a payday lender. Such outfits pockmark the poorer neighborhoods of American cities, lending money at triple-digit annual interest rates, usually under the condition that the borrower show a recent pay stub as proof of income and hand over a postdated personal check. When the date on the check arrives, the payday lender cashes the check, closing out the transaction—unless the borrower comes calling for a new payday loan, complete with its own hefty fee. Ms. Jay took the second route, as is common, and “one payday loan quickly turned into several.”

Eventually, though, the payday lender presented its check or checks to Ms. Jay’s bank—and there wasn’t sufficient money in the account to cash them. Yet Ms. Jay’s bank allowed the lender to overdraw the account repeatedly and applied overdraft charges as well.

Ms. Jay tried futilely to close her bank account and stop the charges, which totaled $1,390 in overdrawn funds and fees. Only after NEDAP involved itself did the bank close the account and write off the loss. But now, Ludwig said, Ms. Jay “will have trouble obtaining an account at another bank,” meaning that she’s been “systemically blocked” from mainstream banking. “It’s yet another way that banks fail to serve low-income communities,” Ludwig concluded.

Now, you may regard payday lenders as evil incarnate, but doesn’t it strike you that it was Ms. Jay trying to stiff somebody? Who's exploiting whom?

The anecdote comes from a City Journal piece by Nicole Gelinas, one of my favorite economic writers, on the Bureau of Consumer Financial Protection (CFPB), a creation of the Obama administration and brainchild of Massachusetts senatorial candidate, supposedly designed to protect citizens from exploitative financial institutions.

Like me, Gelinas isn't all that sympathetic to Ms. Jay:

Ms. Jay’s main error was that, after writing checks that she couldn’t pay, she expected her bank to bounce them and leave her payday lender, rather than herself, high and dry.

Ms. Jay's saga  emerged from a “field hearing” designed to show why the CFPB, which costs taxpayers about half billion dollars a year, is necessary to protect citizens from merciless institutions.

I am not unsympathetic to Ms. Jay’s original predicament. Life is hard for a single-mother, and perhaps Ms. Jay, a city government employee, had no family to whom she could turn. She may have turned to the payday loan company out of desperation. But that is no justification for trying steal from the lender by closing her bank account.

The best way to protect people like Ms. Jay from financial ruin is to allow them the painful opportunity of cleaning up their own messes. Having been a free lance writer in my early professional years, I know what it is like to live on the edge. But the best thing for me, and the reason I am now a reasonably responsible citizen, is that I had to clean up my own messes.

The CFPB will deal with such matters as “unfair” overdraft fees from banks. Here is a way to avoid those fees: don’t write checks you can’t cover. As a free-lance writer, I sometimes wrote checks that I just knew--just knew--I would be able to cover. An expected fee would in the mail before the check got to the bank and I'd be fine. Alas, such fees didn't always arrive in time for me to beat the check to the bank. Let me tell you something about those “unfair” overdraft fees: they hurt like hell. Especially if you are just getting by. They are, in fact, so painful that it’s been decades since I’ve had one. The mere thought of an overdraft puts my stomach in a knot. So, in a way, they do the job.

But, as Gelinas points out, Ms. Jay may have begun her journey into financial impropriety by doing something far more irresponsible, even possibly illegal, than merely resorting to a payday loan in a pinch:

Ms. Jay’s story raises more questions than it answers—and one is why we need a new federal agency to do what existing rules do. As Ludwig herself admitted, payday lending is already illegal in the Empire State. New York prohibits “criminal usury” by capping interest levies, effectively outlawing a business whose model depends on stratospheric rates. To skirt the law, Ms. Jay probably used an out-of-state payday lender or even one based overseas (one popular Internet payday lender is headquartered in Costa Rica). The remedy here would be better enforcement of the existing law, not the creation of still more rules—though it’s true that no regulator, not even the CFPB, can keep people from giving their bank-account details to murky out-of-state merchants, whether they’re hawking fast money or OxyContin.

It was also alleged at the CFPB hearing that Ms. Jay entered the bargain with the lender without understanding the agreement. I can sympathize with people who may not be sophisticated and maybe sign up for scams. But, as Gelinas asks, how much savvy does it take to know that writing a check for money you don’t have in the bank is a no-no? An overdraft fee, by the way, is the ideal way to instill this very notion in somebody's head.

Gelinas writes:

There is one easy way that the CFPB could protect consumers: make simple, hard-and-fast rules. For example, the CFPB could follow New York State’s lead and ban payday lending nationwide. Some consumer products are too harmful to be legal, and triple-digit loans arguably fall into that category. Similarly, the CFPB could ban bank overdrafts and their attendant fees. After all, charging someone $35 to buy a $4 cup of coffee is payday lending by another name.

Yet the CFPB is unlikely to do anything so simple. Instead, it will busy itself with the nitty-gritty of hidden fees, wordy contracts, and other bugaboos. The reason is prosaic: Congress. Uniform definitions and rules governing the financial industry would render lobbying from both the financial industry and consumer advocates irrelevant, a development that would upset current lobbyists and future lobbyists—that is, today’s congressmen. And another important constituency would balk: middle-class Americans, who increasingly see loose lending as a government entitlement. That’s why, at the Hunter College hearing, Cordray didn’t say that overdraft fees were outrageous and unacceptable but instead that “overdrafts can provide consumers with needed access to funds.”

Oh, and they also keep people like Mr. Cordray employed.

 

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