By Ryan C. Wood
I was shocked to read that on February 6, 2019, the Consumer Financial Protection Bureau (CFPB) is proposing to rescind provisions of the 2017 final rule providing consumer protections for payday loans, vehicle title loans and other high cost installment loans. For the rest of this article these types of loans will just be called “Loan Sharking Loans.” Given the definition of loan sharking is the lending of money at unreasonable high interest rates it seems appropriate. Oh yeah, loan sharking is not illegal anymore if you did not know. The CFPB is proposing to allow lenders to not have to do any underwriting determinations (ability to pay back the loan) when entering into the Loan Sharking Loans in an effort to allow consumers more access to credit. The CFPB is also alleging there is not enough data to show the consumer protections are necessary. The following are various reasons why less regulation would be bad. Of course there are always exceptions to the rule and no doubt there are many stories of how a payday loan or title loan saved the day for someone in a cash crunch.
Access To Credit Is At An All Time High
Something that may not be known is that people that file for bankruptcy protection receive applications for credit cards and offers for credit even before their bankruptcy case is discharged and closed (Chapter 7). As the filers bankruptcy attorney I get email after email and calls from clients about offers for credit they receive a short time after their case is filed. Right now the most aggressive lenders are companies offering vehicle loans to consumers. As I have pointed out before it prior articles bankruptcy filers are actually the perfect customer. If receiving a discharge in Chapter 7 the bankruptcy filer has no debt and cannot file for bankruptcy again for many years. So why not lend or extend credit to them? They are certainly a lower risk then someone with $40,000 in debt and struggling to pay their bills.
How many credit cards does the average person have these days? Not only are credit cards with multiple banks available but store credit cards for our favorite stores are also available. This can lead to ten to twenty credit accounts to use at any given time. What about online credit lending today? Someone can obtain cash by using their phone if a very short period of time. Reducing regulation on high interest and high fee payday loans and title loans is not going to all consumers more access to credit. It is going to negatively affect their financial circumstances further by paying an extremely high amount of money for the money they are being lent. Payday loans especially are horrible when it comes to upfront fees and then interest even if paid according to the terms of the payday loan.
Payday Loans Create a Vicious Cycle of Fees and Payments
What happens when you lend money to someone that is on the brink and needs cash now? Generally payday loans as part of the deal include automatic payments from bank accounts on future dates. After paying high fees for the advance cash with an extremely high percentage rate if the borrower does not have the funds in their bank account at the time of the schedule withdrawal the account could be put into the negative triggering bank fees and costs. This will create a cycle of negative consequences for the borrower and significantly increasing the already high cost of the money borrowed. Loan Sharking Loans potentially cost the borrower well over 100% or more when taking the totality of the circumstances. Not good. As a bankruptcy attorney I hear all kinds of horrible stories about payday loan companies not accounting for payments properly and charging fees that are not warranted. Some people can fight to not have to pay fraudulent fees. Most are just trying to survive and ultimately how does someone have money to properly enforce their legal rights when they need money for food? That is why more regulation is necessary for payday and title loans. Consumers need protection rather than less.
How About We Get Rid of Price Gouging Laws Too
How is this any different than price gouging? When there is a flood, earthquake, fire or other natural disaster and someone is in their greatest time of need to purchase food or other necessities of life there are laws against price gouging or increasing price based upon the disastrous circumstances. Why not charge as much as humanly possible for these necessities of life regardless of the person’s ability to pay, need or circumstance? The market determines price right? That is our system right? No, under certain circumstances allowing the market to determine price is wrong and inhumane. This is why there are laws against price gouging. Can we all agree that price gouging laws make sense and are good regulation?
How is obtaining one of these Loan Sharking Loans any different? No one is obtaining one of these Loan Sharking Loans because things are great and some sort of financial disaster is taking place. Someone needs money for rent, food or a car payment so they can get to work and earn an income so that it all does not fall apart. So why would we allow price gouging when it comes to Loan Sharking Loans? If anything the fees and interest should be limited to make sure the borrower can obtain the funds and not continue to spiral down financially.
How About We Get Rid of Seatbelt Laws
It is strange how people see things differently when it comes to money and other consumer protections. Regulations regarding how to build safe vehicles are consumer protections. Seatbelt laws are consumer protections. So why not do away with seatbelt laws just like the CFPB is proposing to do away with regulation regarding these Loan Sharking Loans? They can just say there is not enough data to come to the conclusion that seatbelts save lives. Then after 5 years of more deaths in vehicle accidents we can then reinstate the consumer protections, seatbelt laws, and again save lives. There is a reason why the CFPB initiated the rules to begin with. There was and is a problem with payday loans and title loans. Most laws and regulations exist for a reason and the reason is usually in reality a very good reason to protect us consumers from entities that have more power than us.
How About We Get Rid Of Income Requirements For Home Loans
Oh wait, that already happened and the taxpayers had to bail out some of the largest corporate entities on planet Earth as a result. We let some banks and business fail while deciding which corporate entities got bailed out. The CFBP is proposing these rule rescissions alleging that, “The Bureau’s proposal suggests there was insufficient evidence and legal support for the mandatory underwriting provisions in the 2017 final rule.” What part of the last ten years do we have to ignore to reach this desired conclusion? Lack of underwriting requirements and oversight was exactly what led to the mortgage meltdown and housing bubble that burst. The financial carnage the mortgage meltdown is not even over. It certainly is not like it was in 2008, but not a month goes by without hearing a story about how that period of time is why I am speaking to someone about filing for bankruptcy protection today.
Regulation is Like a Pendulum Swinging Back and Forth
Whether you are for more government regulation or less government regulation history provides a very clear picture of the pendulum of regulation. The pendulum swings back and forth over time towards more regulation or less regulation and the results are known. You can do your own research and not take my word for it. Google the following:
1. LatAm Debt Crisis 1982
2. Savings and Loan Crisis 1980
3. Stock Market Crash 1987
4. Junk Bond Crash 1989
5. Tequila Crisis 1994
6. Asia Crisis 1997-1998
7. Dot Com Bubble 1999-2000
8. Global Financial Crisis 2007-2008 or Mortgage Meltdown.
How about Google Enron and why deregulation was a disaster or California Electricity Crisis and you will find price manipulation due to deregulation. How could California have an electricity shortage when California could generate 45 GW of electricity and demand was only 28 GW for the entire state?
Arguably some of these financial meltdowns were not due to less regulation, but if you dig deep you will find when there is less regulation parties, people and businesses, move into that space to take advantage of the lessened regulation it to make obscene amounts of money until no one can ignore the problem anymore and regulation is passed to right the ship.
The point is how can loosening the requirements to obtain these Loan Sharking Loans help when we already know Loan Sharking Loans are not good? How can less regulation help the borrower lead a healthier financial life? History seems to be overwhelming on the side of regulating Loan Sharking Loans more and not less to prevent severe financial outcomes. So many people believe bankruptcy is wrong, so how about supporting regulations that allow people to pay back debts under reasonable terms and prevent more bankruptcy filings?
