Bailout

Payday lenders go to Washington

By Felix Salmon

Ylan Mui reports on the “Hill Blitz” orchestrated last week by payday lenders, aggrieved that they might at last face federal regulation:

According to a study by the Federal Deposit Insurance Corp. released in December, about a quarter of American households have little or no access to banks or other traditional financial services; many rely instead on payday lenders and check cashers.

But in back-to-back meetings with dozens of members of Congress last week, industry executives argued that their sector is already regulated by a complex web of legislation in the states, including some that ban payday lending. A federal regulator would create another layer of work that would increase their costs and potentially put some providers out of business, they said. In addition, they are often the only alternative for consumers who cannot qualify for — and sometimes do not want — a bank account or credit card.

It’s completely insane that a system which protects the relatively well-off customers of banks might include a carve-out specifically excluding the unbanked from any federal consumer protection. They are, after all, the people who need such protection most. And I’m particularly tickled that the payday lenders seem to think that the fact that they’re banned in some states is a good reason for a federal consumer protection agency not to regulate them at all.

The worrying thing about all this, however, is that the less-government-is-better-government crowd is likely to lap it up. And it seems that the consumer-protection rules were drafted far too sensibly, which means that as the payday lenders achieve success in their lobbying efforts, they’ll weaken the final agency far too much.

The right thing to do, it seems, would have been to take a leaf out of Blanche Lincoln’s book. After she proposed that investment banks be forced to spin off their swaps desks entirely, she put the banking lobby on the back foot: all of the lobby’s efforts are now being put towards weakening or repealing that one rule, and the rest of her derivatives legislation seems much more likely to sail through the Senate. Maybe Chris Dodd should have proposed banning payday lenders. Then they would be lobbying for mere regulation, rather than agitating against it.

Full post as published by Macroprudential on May 10, 2010 (boomark / email).