Congressmen routinely disguise their purposes with public-spirited rhetoric. So it is with so-called financial “consumer protection” legislation pending on Capitol Hill. One of the worst provisions under consideration is the Hagan amendment, which would enrich the financial industry rather than protect consumers.
The 2008 financial crash cost many Americans their investments and some saw their retirement nest egg wiped out. There was more than enough blame to go around, but much of it belongs to the federal government. Washington created Fannie Mae and Freddie Mac, which helped create the housing bubble; cartelized the rating agencies, which misled investors about the value of mortgage-backed securities; and politicized the Community Reinvestment Act, which debased lending standards.
Indeed, the federal government led the charge to lend to lower-income and minority communities, regardless of what they could afford. Undoubtedly, this was done with the best of intentions. Yet in the name of expanding home ownership, Washington encouraged people of modest means to take out bigger mortgages than they could afford, leading many to default and feel cheated.
Now, the legislators who helped create this mess are posing as consumer guardians and again, it is low income and minority communities that will be harmed by the unintended consequences of Washington’s “good” intentions.
Congress is working on legislation that is supposed to prevent another financial crisis. The measure is larded with special interest payoffs. No wonder Lloyd Blankfein, CEO of Goldman Sachs said he is “generally supportive” of the effort.
Consider the provision sponsored by Sen. Kay Hagan (D-NC) to limit low dollar loans to banks options. Explains the Wall Street Journal’s Kimberley Strassel: The burden of Sen. Hagan’s proposal “will fall on their smaller credit competitors, who didn’t cause the crisis and don’t have the financial cushion to absorb these costs.”
Jesus said the poor will always be with us. And working class Americans will always have fewer options than the rich. Nowhere is that more obvious than in the financial realm.
Without strong balance sheets or family members with resources, many people of marginal means have to rely on small but expensive loans: payday, tax refund anticipation, car title, and installment loans. None are great options. In fact, they are all terrible options. But the alternatives often are worse. People who run short of cash sometimes run up big overdraft fees. Customers can be hit with expensive charges for bounced checks. Consumers get stuck with costly late fees. Sometimes they simply do without necessities like food, power or water.
Ultimately, the best way to help the poor is to educate and train people so they can take advantage of better jobs. But that is not what Sen. Hagan has proposed. Instead, she wants to regulate institutions which provide small loans while exempting the banks which offer similar high-interest loans through other means.
Her measure would limit the number of short-term loans available to people, regardless of their salary, job history, credit rating, and payment record. The measure would bar people from getting a short-term loan if they also had another loan with a term of at least three months during the same year—even if they paid it off.
Loan issuers would be hit with the cost of complying with all the new rules. This expense, of course, would be passed on to consumers.
Left unregulated by this provision, however, are overdrafts, the bank equivalent of short-term credit, and bounced checks. Last year banks collected nearly $40 billion in fees for these “services.”
Sen. Hagan’s former employer, Bank of America, allows each customer up to four overdrafts a day. That is a potential of nearly 1,500 de facto short-term loans a year—a boon to the banks, but bad news for borrowers, who face an effective interest rate that’s far worse than any other option in the marketplace. And unsurprisingly, the Federal Reserve has warned that payday loan bans result in additional people utilizing other services and paying more in fees.
Sen. Hagan is no friend of the working class. Her proposal would reduce choices and raise prices for those with the fewest options. That’s a bad idea at any time. It’s an especially bad idea as America recovers from an economic slowdown and financial crisis.
Ironically, for all of Democrats’ sound and fury about protecting consumers from greedy
financial firms, those companies have given Senate Democrats more than $5 million in campaign contributions for this election cycle so far. That’s three times the amount collected by Republicans. Who are the Democrats working for, the public or Wall Street?
The crash of 2008 illustrated the need for financial reform. But the legislation now pending before Congress isn’t real reform. Instead, provisions like the Hagan amendment amount to industry, rather than consumer, protection.