What Chris Brown, Anger Management, T-B-T-F Banks and Payday Loans Have In Common

March 28, 2014 at 7:42 am 5 comments

One charge that makes the Lords of Finance angrier than Chris Brown in an anger management class is the suggestion that Too-Big-to-Fail (TBTF) banks enjoy an unfair advantage over their smaller financial counterparts because they can make more aggressive loans and investments secure in the knowledge that in a worse case scenario, they will be bailed out by the American taxpayer.

The latest evidence for this hypothesis was released recently by that bastion of left-wing extremism – the Federal Reserve Bank of New York. Specifically, a paper by two of its researchers concludes that “Too-Big-to-Fail banks engage in riskier activities by taking advantage of the likelihood that they’ll receive government aid.”

In previous work, the same researchers demonstrated that T-B-T-F Banks have lower borrowing costs because people know that, the protestations of the political class notwithstanding, if these mega-behemoths can’t pay their bills the federal government will.

It’s one thing to have advantages because of your economy of scale – Capitalism is supposed to work that way – it’s quite another to be so big that the free market can’t discipline a bank’s conduct and the political class is too dependent on campaign contributions and too nervous about tanking the economy to step into the breach by building real firewalls.

Credit unions should be calling for the breakup of the banks too, not because there is any chance of this happening anytime soon, but because it underscores how hypocritical it is for the banking industry to call for the end of the credit union tax exemption while getting as much if not more government protection as any industry in America.

A less dramatic but also informative piece of research comes from the CFPB, which released a report on Wednesday analyzing a year’s worth of data on payday loans. The findings are hardly surprising but they provide a good indication of where the Bureau is headed as it gets ready to propose national payday lending regulations.

Most importantly, the Bureau confirmed that payday loans are typically not used as an isolated financial tool to help consumers through unexpected rough spots, but rather can best be seen as high-priced, medium-term loans that are great at getting people further in debt. According to the Bureau’s research, 82% of all payday loans are renewed within 14 days.

As Director Richard Cordray concluded in a speech accompanying the report’s release:

“Our research confirms that too many borrowers get caught up in the debt traps these products can become. The stress of having to re-borrow the same dollars after already paying substantial fees is a heavy yoke that impairs a consumer’s financial freedom.”

The question is what can be done about it? Even if the Bureau has the authority to establish national payday lending standards that apply not only to states but to Indian reservations, the reality is that loan sharking is the world’s second oldest profession. If payday loans are made too restrictive they simply won’t be cost-effective enough for many credit unions or other lending institutions to offer; if the restrictions are too lenient then we could end up with a classic race to the bottom with institutions having to choose between foregoing needed revenue and taking a stand against loans that are in no consumer’s long-term interest.  

Let’s continue to outlaw these predatory loans but recognize that for better or worse people need short-term loan options. A good place to start would be with NCUA’s own “short-term, small-amount lending program.” I would love to see the program fine-tuned to attract more credit unions.

 

 

Entry filed under: Advocacy, Economy, General, Regulatory. Tags: , , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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