The Obama administration has announced it wants to take payday loan company regulation from the states and make it a federal matter. My question is, why?
The payday rule, proposed by the Consumer Financial Protection Bureau (CFPB), imposes a complex set of requirements on the payday industry, mandating that lenders assess a borrower’s ability to repay and making it harder for lenders to roll over loans—a practice that often leads to escalating borrowing fees—or to take fees out of a borrower’s bank account.
What gives this alphabet soup agency the power to violate the Tenth Amendment? Even if the rules themselves make sense, their implementation is outside the powers of the federal government given by the Constitution.
Just the other day I was discussing payday loan companies with a friend. I live in a military town, and anyone who has lived in a military town knows that one feature of such places is the abundance of payday loan stores. There’s no more captive audience than greenhorn 18-year-olds in the military who just got their first real paycheck.
They go out and spend on who-knows-what (new cars, clothes, women, drinking) and end up short. The payday loan companies provide a “service” by charging insane interest rates. With the military, not repaying those loans will get a young servicemember in deep trouble, so it’s great business for the companies, who generally get paid by military members (eventually). But the rest of the population has a very high default rate, which is why states tend to closely regulate payday loan companies.
By the time the typical customer has signed up for their “loan” they’ve paid somewhere in excess of 16 percent, just to get the paperwork done and walk out with money. Then it increases to 24 percent or 30 percent if the minimum isn’t paid on time, and then the loan rolls over. But that makes sense because the paperwork costs money, and when 50 percent or more customers never repay their loans, the lender has to make up the difference somewhere.
In my discussion, I thought the best way to regulate these companies (I’ve got some experience dealing with banks, risk and payment processing) was to force the banks to do a better job underwriting their risk–filtering out the bad customers who won’t repay from the good. I realize that’s hard to do because payday lenders are as a rule the lender of last resort. They are for people who have maxed out their cards, or can’t qualify for a credit card.
Forcing the banks to do a little better will allow them to bring down their rates. Too much regulation drives the loan business underground, where Luigi and Rocko show up to collect, and that’s got problems of its own. I believe Obama is using this federal regulation as another power grab, and eventually he (or another Democrat) would close down the businesses that don’t play by whatever race, socioeconomic or other rules they concoct to give free money to some people and not others.
In short, it’s a shakedown just like Obamacare and all the other federal strings-attached power grabs. The states have the exclusive right to regulate payday loan companies, and do a pretty good job at it (for the most part). Next it will be sugary drinks and Slurpees at the 7-Eleven under federal control.
Congress and the states should fight this federal power grab with all the tools at their disposal.