New Orleans Candice Choi’s AP interview with Harvard Law Professor Elizabeth Warren who is now organizing the Consumer Financial Protection Bureau for the Obama Administration shed both light and darkness on what is going on now in the 6-month run-up before the July 21st rule making powers of the agency take effect. All of the language about being “market facing” and assuring more transparent disclosures says almost nothing though and will hardly impact on the situation. Where I became more troubled was reading the end of the interview about her intentions for the CFPB on the issues of payday lending and the unbanked, a category largely populated by lower income and immigrant families. Her positions were clear as mud.
Q: Another area the CFPB will be reviewing is services for people who don’t have a bank account. How do you regulate services like payday loans and still ensure people have access to small loans?
A: Well you know, access to small dollar loans is critical to many families. The notion that we somehow try to eliminate that, it’s just not going to happen.
It can force people into unregulated markets, including “Jimmy the Leg Breaker,” which is not where we want people to be.
So it is important from a regulatory standpoint that people are not at the mercy of lenders who build business models around fooling people. They’re drawn in the front door thinking they’re going to pay one price and then beat about the head and ears, financially speaking, so that they’re paying much, much more.
On the other hand, there’s a real problem. And that is how to get good, small dollar lending started in areas where there’s great need.
Sometimes that’s going to be by community banks. Sometimes it’s going to be by non-bank lenders and sometimes it’s going to be innovations and new technology that’s going to open up markets for the currently underserved population.
I anticipate a lot of change in this area.
This was Warren’s longest answer to any question, and she was certainly transparent about the fact that she was weighing pros and cons, but it is equally clear if one really reads her remarks that she is stuck here. If she wants the CFPB to be “market facing,” her answer indicates that the street level, honest, and non-predatory market does NOT yet exist for lower income families needing small loans. There’s no real indication that “community banks” are willing or able to step into this market in a way that competes with payday lenders yet. Efforts to encourage such lending by the FDIC and Sheila Bair at the end of the Bush reign have been little more than a footnote on this market thus far. Warren also seems not to have gotten a grasp on the fact that the big banks she is dealing with on her other issues are also the factors supplying most of the dollars and owning significant shares in many of the payday lenders. It is a stretch to call them non-bank lenders, when they couldn’t lend without being long arm extensions of some of the biggest banks in the country.
As far as new technology, she’s talking about a fantasy here that is thus far even more farfetched. The families under discussion are still on the wrong side of the digital divide in terms of access and even more miles away if we think about being comfortable with technology. I would hate to harp on remittances, though I will at more length in the future, but this is a classic example in which banks have shown no hurry to reduce predatory pricing and utilize technology they already have at hand.
These remarks by Warren were simply scary and disheartening.
On the huge related problems of the “unbanked,” the news from Warren is even worse though more grounded.
Q: Is the idea to bring the unbanked population into the traditional banking world? Or is there a valid place for services like check cashing?
A: I think the traditional banking world concept is going to change over the next 10 years. I think technology changes it and I think the needs of an unmet population change it.
I’m going to take a little bit of a side step from the question. The basic paradigm in which we’ve thought about this is actually starting to break apart.
I all I can say is YIKES! That answer is not exactly a “side step,” but more like a hail Mary pass and nothing more than a hope and a prayer.