Living with credit

Who is — and isn’t — looking out for consumers

Fred Williams

Crush the little guy — that’s the mission of the U.S. Consumer Financial Protection Bureau.

At least according to Rep. Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee. He called the bureau’s director, Richard Cordray, to a hearing last week to scold him for supposedly throwing his regulatory weight around.

“Soon Mr. Cordray will decide whether he will permit (people) to take out small-dollar loans,” Hensarling said, “to keep their utilities from being cut off or keep their cars on the road so they can make it to work.”

“Small-dollar loan” is a polite term for “payday loan.” It’s true the CFPB is about to issue a long-awaited restrictions on payday loans. Less true is the idea that people depend on the loans to keep the lights on and their car running.

Most payday loans go to pay off other, previous payday loans, the consumer bureau’s research found, trapping people in a cycle of debt. At the hearings I’ve attended, there is no shortage of people telling how their paychecks are gobbled up by recurring fees that never seem to wipe out their original loan.

Also not exactly true is the idea that Cordray can eliminate the costly loans with the stroke of his pen. The actual rule is expected to require a cooling-off period between loans, perhaps 60 days. That should stop the debt cycle and let payday loans be what the lenders claim they are: an occasional stopgap for emergencies.

Hensarling said the time has come to “strip the CFPB of its rulemaking authority,” claiming it is too powerful. When it comes to watching out for consumers, however, other agencies throw up their hands.

When the Justice Department modified the merger plans of two big subprime lenders to keep some communities from being deprived of a payday loan office, the Center for Responsible Lending objected. Before requiring payday loan outlets to stay open, the consumer group said, the Justice Department should first make sure the outlets are a benefit for the public, rather than a curse. Sorry, the department said. It enforces antitrust law, and lacks jurisdiction “to address other issues of consumer protection that fall within the purview of agencies such as the Consumer Financial Protection Bureau.”

Bank lobby groups often grumble about having to answer to the CFPB as well as to other federal regulators. But a report by the Federal Deposit Insurance Corp.’s inspector general illuminates the agency’s priorities — which do not include consumers. The inspector general’s report slapped bank examiners for pushing banks to drop their problematic refund anticipation loans, or RALs.

“RALs were, and remain, legal activities, but ultimately were seen by the FDIC as risky to the banks and potentially harmful to consumers,” the inspector’s office wrote.

The loans, sold by tax preparers, were described to taxpayers as being a speedy refund. In fact, they were costly short-term loans that had little value, the Government Accountability Office found. But this didn’t justify examiners pushing banks away from them, the inspector concluded. The inspector’s report criticized examiners’ use of “moral suasion” against refund loans — in plain language, examiners prodded banks to do the right thing.

The opening of the CFPB in 2011 created an agency that doesn’t have to apologize for looking out for consumers. As the mortgage crisis showed, predatory lending isn’t just dangerous for the unlucky victims. The agency’s creation was a response to the financial crisis and since then, the markets for credit cards and auto loans, as well as mortgages, are better off.

“The growing sense of consumers that these markets can actually work for them without fear of tricks and traps and other predatory conduct,” Cordray told Hensarling, “is stoking their confidence and restoring their trust.”

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