The CFPB has been a controversial agency since its inception in 2010 under the Dodd-Frank Act. Financial institutions have not been a fan of its work, as more and more regulation is introduced by the agency with the goal of curbing abusive practices. Consumer protection advocates have rallied around this agency with the objective of improving the financial capacity of those most at risk of predatory practices. As the CEO of a community development financial institution that serves members who are mostly low or moderate income, both sides have valid arguments. Regulation can have unintended consequences, sometimes restricting credit even more for those who need it most. Overregulation can take away from operational efficiency as resources need to be directed toward compliance, vendor management, training, reprinting documentation, and tracking. More regulation isn’t necessarily a good thing. However, there are important reasons consumer protection is necessary.
On our side of the loan desk, we are educated in legal and financial definitions. We understand the terminology we are working with and have resources at our disposal to create attractive products at interest rates that will produce yield. Even though we know people don’t read every loan document carefully, we forget that average Americans are not well versed in wage assignments and security liens. Many borrowers in real need don’t look beyond the monthly payment, or even the next payment. At our CDFI credit union, I have personally seen people bring in loan documents from other lenders that have 300+% interest rates written on the document. In one case, a $500 payday loan document showed the total interest on the loan as $1100.
Americans are making hard financial choices, and there are many contributing factors. Among these include inability to make a living wage, lack of affordable housing, lack of generational wealth and unexpected life events. Average Americans don’t always choose to borrow because they want a new furniture set or a nice vacation. There are times that those stereotypes are true. But other times a borrower taking out a loan still may have to choose between a car repair and school fees for kids. Some of these choices also involve things like moving out of unsafe living conditions, avoiding evictions, paying unexpected medical expenses or for a parent’s funeral. Our credit union has seen the majority of our small-dollar loan borrowers make these choices. Few are borrowing to extend their lifestyle beyond their means.
Lenders that make predatory loans often state they are meeting a market need. They reference the need for smaller dollar loan products when defending their high interest rates. These lenders are correct that people do need access to small amounts of short term credit – and perhaps this is an indication that not enough credit unions are providing an alternative in this space. If we are truly for our communities, recognize that people of all walks of life are living paycheck to paycheck. If consumer protection is needed, it is because not enough financial institutions are protecting their customers, borrowers or members instead of their bottom line. Predatory loans in all forms do nothing to strengthen the financial health of consumers. These loans only create a vicious cycle of expensive borrowing. Because of our mission and not-for-profit status, credit unions should be strongly pro-consumer protection.
While we may justifiably may want to be anti “more-regulation” we should devote equal resources to being a presence for our borrowers at the highest levels. They don’t have teams of lawyers and lobbyists working on their behalf. At the end of the day, most Americans are just one paycheck or two away from eviction. As an industry, that should concern us.