Time for Regulators and Legislators to Regulate and Legislate

Mark Winston Griffith

Time for Regulators and Legislators to Regulate and Legislate

If you go around the country and monitor the activity of state and federal governmental agencies that regulate financial institutions, you might be lulled into thinking that there is a fierce effort to guard low-income consumers from the evils of things like pay day lending, refund anticipation loans (RALS), exotic mortgages and other sleazy products that charge more, for less, to people who can least afford it. For instance, our own New York State Banking Department issued an Request For Proposals for financial literacy programs more than a year ago that pays non-profit organizations to help consumers navigate their way around the banking and financial services system. In North Carolina, arguably the most progressive banking state in the country, the governor issued a public warning to consumers designed to help them guard against usurious and predatory refund anticipation loans.

This is great and certainly laudable, but rather than hoping that consumers are "educated" enough to hop scotch their way around noxious loans, our legislators and regulators - the New York State Banking Department, the Federal Reserve, the Office of the Comptroller of the Currency - need to focus their attention on doing what the public has entrusted them to do: Create and monitor a financial services system that protects the consumer.

Robert H. Frank made the argument in yesterday's New York Times that "[t]hose concerned about the growing culture of consumer debt need to recognize that it stems far less from the greed of lenders than from recent liberalizations of lending laws. Since biblical days, societies have imposed limits on the terms under which people can borrow money. A wave of deregulation in the financial industry has eliminated many of those limits."

While Frank is misguided in suggesting that less time should be spent going after financial institutions for the predatory practices, he does make the point that only by changing the system itself can we hope to stem abusive lending.

Posted at 10:18 AM, Jan 19, 2007 in Permalink | Comments (3) | TrackBack (0)

Comments

Is that the definition of "progressive"? The belief that a legitimate roll for government is to prevent people from entering into transactions that we believe are unwise, or to force people to sacrafice their short term satisfaction for their long term well being?

Just as a parent compells onto their child the highly non-intuitive idea that he should save some money rather than spend it on immediate gratification, should government compell onto the citizens this longer term view that they should not be allowed the immediate gratification of making expenditures that they cannot afford?

Morris

Hi Morris. Thanks for responding.

I don't think this is about preventing people from "entering into transactions". It's not about trying to dictate consumer behavior. It's about government determining the parameters of responsibe corporate culture and behavior. It's about determining what is fair and in the public interest and what kind of market practices violate the public trust.

Isn't that what usury laws are about in the first place? Isn't that why we have limits on whom alcohol and tobacco companies can sell to? Things like pay day and refund anticipation loans exploit the cash flow needs of the working poor.It's part of a larger corporate stucture that helps to reinforce and feed off of poverty rather than alleviate it.

I'm a bit uncomfortable with your parent-child analogy. People who are poor are not children. Sure, poor people make irresponsible and careless decisions as much as anyone else, but when you're living from paycheck to paycheck "immediate gratification" could mean paying your rent...today!

If you want to run with the parent-child metaphor, corporations often act like spoiled children who enjoy all the advantages, play on an uneven playing field and want to be able to do whatever they want while ignoring responsibility for the (quite intended) consequences of their actions. Ultimately, government, whether it is "progressive" or not, helps to determine the social and moral values of the marketplace. Customer behavior will follow accordingly.

Mr. Pearl, I see this one as less about individual freedoms to take out high interest loans than lenders' freedom to charge such high interest.

The balance of power is so disproportionately on the side of the large banks and tax preparers vs. low-income borrowers that I'd suggest it's no longer meaningful to talk about the borrowers' freedom here. In the same way that, as progressives, that we support a minimum wage that effectively prohibits workers from selling their labor for $1 an hour, some degree of government paternalism is necessary to regulate what is otherwise such a severe imbalance in the market that virtual slavery or peonage could emerge.

Both extremes: a complete free market or a completely state-planned command economy would be intolerably oppressive, so we have to face these constant questions about where it's appropriate to draw the line in each case.