At the Washington Monthly, and here at Political Animal, we’ve written from time to time about the Trump administration’s efforts to defang the Consumer Financial Protection Bureau, but none of us has done as comprehensive a job of it as Nicholas Confessore. His new piece in the New York Times Magazine focuses on Mick Mulvaney’s time at the CFPB as acting director.
I often hear liberals wonder aloud how so many low-to-moderate income Americans can support the Republican Party when it is clearly not in their financial interests to do so, and nowhere is that more clear than on the issues surrounding the CFPB. Confessore demonstrates this very ably by doing a deep-dive into the pay-day lending/short-terms loans industry.
In the following excerpt, he explains how the payday loan industry rose in influence and power during the Bush administration by making loans to people who (they hoped) would not be able to pay back the money. The CFPB was the brainchild of Elizabeth Warren, who was convinced of its necessity by her research into consumer debt.
[Elizabeth] Warren and other consumer advocates argued that payday lenders built their industry on a similar sleight of hand. They marketed themselves as lenders of last resort, offering emergency loans for a broken-down car or an unexpected medical bill. But according to Nick Bourke, a former financial-services consultant who now directs consumer-finance research at the Pew Charitable Trusts, what fed the industry’s growth were not emergency expenses but the increasingly unstable incomes of the working poor. As their hourly wages fluctuated at the whims of workplace-optimization software, payday-loan customers — typically white women earning around $30,000, according to Pew’s research — borrowed to pay their rent or electric bills. The average customer paid $55 in fees to borrow $375, due on their next payday. But most found that they couldn’t afford to repay the loan after two weeks. They took out another loan to cover the first, and usually another.
Consumer advocates called this cycle a “debt trap” and argued that payday lenders, much like credit-card companies, disguised the true costs of their products. Store clerks emphasized the small-seeming fees and pushed customers to roll their old loans into new ones, so that the fees snowballed, eventually exceeding the cost of the original loan. While most banks made money by finding customers who could repay their debts on time, payday lenders made money by finding customers who couldn’t. “If borrowers repaid loans in just two weeks and walked away as advertised, lenders would go out of business,” Bourke says.
What really distinguishes the short-term loan industry from regular banks is precisely the focus on finding customers who will default. They’ve also historically been unregulated by the federal government and free to charge grossly usurious rates. Several states decided to regulate the industry at the end of the last decade, and some like North Carolina banned payday loans outright.
Naturally, there are some consumers who have good experiences taking out emergency loans, and it can work for someone with poor credit who genuinely needs to borrow money for a very short period of time. These feel-good stories are what the industry relies on to rationalize their predatory business model. The overall effect of the industry is ruinous, however, as it sucks up billions of dollars from the people least able to part with their money.
The CFPD didn’t initially think that the payday loan industry would be a high priority for them. But that quickly changed once they opened their doors under their first director, Richard Cordray:
As the human and financial costs of the subprime-mortgage crash mounted, the new bureau was inundated with whistle-blower tips and consumer complaints. Cordray and his leadership team initially planned to focus on the biggest consumer-finance players, like mortgage lenders and credit-card companies; payday lenders were a relatively small industry compared with Wall Street. But it was growing quickly: The crisis had been good for business, pulling more middle-class families into the payday-loan market. And unlike banks, payday lenders were unregulated by the federal government. “It was affecting a lot of people at the margins who could least afford to run into trouble,” Cordray told me recently.
In 2012, the C.F.P.B. began conducting supervisory exams of payday lenders, a process that required them to open up their offices and books, and sometimes yielded evidence of predatory lending for the bureau’s enforcement team to take up. A company called Ace Cash Express, investigators found, harassed overdue borrowers by using phony legal threats. The investigation yielded a potent illustration of the debt trap: Ace Cash’s training manual, which instructed employees to pressure borrowers into paying off overdue loans by taking out new ones, illustrated its customer-service doctrine with a graphic resembling a recycling symbol, with one “short-term” loan fueling the next in an endless loop of debt.
At first, the CFPB went after the most egregious examples of exploitative behavior they could find, and they also put an emphasis on online lenders. In 2015, they began developing a new rule to apply to the industry that they hoped would end the practice of making deliberately bad loans. Lenders would be scrutinized, and they would be expected to examine a borrower’s ability to repay a loan before granting them one. Systemic abuse of the system could lead to hefty fine and even criminal charges. Before the new rule could be implemented, however, Donald Trump surprisingly won the 2016 election.
He then jammed Mick Mulvaney in as the interim replacement for Richard Cordray, and Mulvaney set about not only saving the payday lenders from oversight and regulation but cutting the teeth out of the entire bureau. He was so effective at this job that Trump was convinced to make him the White House chief of staff.
All is not lost, and if a Democrat wins the presidency in 2020 the bureau may be salvageable as an advocate for working people. I imagine a President Elizabeth Warren would be especially invested in that outcome. It seems to me that if people grasped that the Republican Party is on the side of predatory lenders and against protecting people from fine-print scams and debt traps, that a lot of them would be less inclined to take their side because of cultural issues.
The problem is getting them to understand this when there is no much effort going on to keep them focused on NFL players and scary immigrants and the War on Christmas.
“It seems to me that if people grasped that the Republican Party is on the side of predatory lenders and against protecting people from fine-print scams and debt traps, that a lot of them would be less inclined to take their side because of cultural issues.”
Yeah, I think the evidence points to that statement being incorrect.
The problem for Republican voters isn’t that they’re being predatory, it’s that they’re being predatory against the wrong people.
yeah, selfish motives or self-interested behavior is what I’d be relying on here.
Like everything else, the CFPB can only be restored if their unified government under Democrats. A GOP Senate will never agree to any reforms or to even confirming any Democratic administration candidates. As for the voters being victimized by the payday industry, I suspect that a good portion are not even regular voters while many others would be Democrats. It’s not the GOP suburban voters taking these loans.
So, as thoroughly legitimate that this issue may be, I suspect it is not likely to be a very important one to swing an election.
Democrats should be screaming about this from rooftops along with a whole bunch of other stuff. But they never do. They’re fearful of seeming belligerent, partisan, unprofessional. They suck at messaging. Need to get a whole lot more aggressive about speaking truth to power.
In fairness, this is Warren’s main theme and it’s pretty consistent with Sanders’s main themes. Or did you mean Congressional leadership?
With legit credit cards getting 27%, and payroll lender debt traps, would think the mafia could provide better terms?
Nobody votes for republicans for consumer protection. Nobody.
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The CFPB was getting some valuable consumer protection work done with Cordray as Director. I was talking up this portion of the Dodd/Frank Law in 2015 and 2016. The most common response I got from this community was a bunch of shit-talking about Dodd/Frank and the CFPB by so-called progressives here. That shit-talking was remarkably ill-informed and terrifically infuriating.
Fortunately, most of those shit-talkers have dropped away from this community. One is still here, posting away. I think you can guess who.
Elections have consequences. People are best served by voting for the viable candidate who comes closest to reflecting their views. The Parties are not the same. The Congressional Party Caucuses are more cleanly ideologically split than at any time in our lifetimes. The differences between the policy pursuits of the last two Presidents are vast.
The Republican brand is pretty clear to their two bases:
It’s never been any different in my lifetime. The events, circumstances, opportunities may change over time, but those themes explain every domestic policy preference and position taken by Republicans, almost without exception.