We know the pattern by now. A crisis arises. As my Competitive Enterprise Institute colleague Chris Horner puts it, this administration says, “There’s no time to waste, we must do something now, sign here, details to follow.” And every time, we discover that we have signed up for more than we bargained for. That was the case with the Dodd-Frank Act, passed in 2010 supposedly to solve the problems that caused the financial crisis. Only now are we seeing the details to follow. They amount to a government takeover of the financial industry and increased government control over our behavior, particularly over that of the poorest in society.
The big banks were the easiest. Dodd-Frank was supposed to end the Too Big to Fail (TBTF) phenomenon but instead entrenched it. Big banks became Systemically Important Financial Institutions (SIFIs), with increased regulatory supervision, but also with the expectation that they are thereby too important to be allowed to fail.
Worse, Dodd-Frank effectively requires responsible financial institutions to pay to fix problems created by others. Indeed, presumably in order to increase the pool of funds necessary to bail out “systemically important” banks, the Financial Stability Oversight Council has named several large insurance firms, such as MetLife, as SIFIs, even though those firms in no way contributed to the financial crisis. For this privilege, these responsible firms have to submit to much greater regulatory supervision, suppressing their ability to innovate and making them much more like the TBTF banks.
But it didn’t end at Wall Street. Dodd-Frank also increased regulation for medium-sized firms, which have greater compliance costs relative to their size than do the TBTF banks. This has led to a wave of mergers among small and medium-sized banks as they struggle to contain compliance costs. In the process — and thanks to other aspects of Dodd-Frank such as the Durbin amendment, which caps the amount debit-card issuers can charge retailers every time a card is swiped — bank fees have ballooned. ATM fees have gone up. Monthly maintenance fees have gone up. Minimum-balance requirements have gone up. Free checking is much rarer, and debit-card reward schemes have almost disappeared. The result has been that a million former bank customers are now “unbanked” — they have no checking or savings account with a bank.
Even more perniciously, while the Obama administration blames subprime housing credit as being the cause of all our current woes, it now deems the people who took out loans they couldn’t pay not irresponsible borrowers, but victims. And it has extended this mindset to other forms of credit and banking that cater to the subprime market. The administration is waging subtle war on the small financial businesses that serve this market. If it is successful and destroys these industries, what will replace them? The administration’s answer is simple: Obamaloans.
This is subtly building an infrastructure to allow the federal government to lend money to the poor through a network of intermediaries, financed by taxpayers rather than investors. And it offers another glimpse into how the Obama administration intends to change America.
The first target is short-term lenders, including payday-loan companies. The unbanked population uses these companies to meet immediate, short-term financial needs, like paying a utility bill on time. Surveys of these companies show that their customers generally know what they are doing when they take out a loan — which most of them repay on time — and that they like the service. One investigative journalist who recently took a job with one of these companies found that the customers she dealt with overwhelmingly preferred the personal service they received from the company to the impersonal service they had received at their previous banks.
Yet the industry is under attack from holier-than-thou “poverty” advocates who claim that it exploits its customers. Their main tool is a comparison of annual percentage rates (APR), even though most payday loans are short-term in nature. Thus, a two-week payday loan of $100 with a fee of $15 shows an APR of 390 percent, which looks outrageous. And it would be for a long-term debt, but payday loans are short-term by definition. There are, of course, some hard cases of people who irresponsibly rolled over their loans and got themselves into a spiral of fees, but hard cases make bad law.
Indeed, even Dodd-Frank recognized the importance of these companies and forbade the newly created Consumer Financial Protection Board from capping such rates. So the administration is trying a different tack — choking off the companies’ financial oxygen. The Department of Justice has cracked down on payday lenders and third-party payment providers through an initiative called Operation Chokepoint, which was revealed by a government attorney in a presentation to the Federal Financial Institutions Examination Council (FFIEC).
Joel M. Sweet of the Justice Department’s Consumer Protection Branch, in his presentation to the FFIEC, said the main focus of Operation Chokepoint is fraud, which the regulators identify through a high rate of returns, cancellations, or complaints. This is associated with a list of “high risk merchants/activities” that includes payday loans and credit-repair services, as well as firearms/fireworks sales, ammunition sales, “As Seen on TV” products, gambling, home-based charities, pornography, online pharmaceuticals, and sweepstakes. What these various products have in common is a high rate of returns, which occurs for various reasons — from buyer’s remorse to the embarrassment of being caught by a spouse. Yes, fraudsters do operate in these areas, but that should not delegitimize entire industries.
Operation Chokepoint has gone after payday lenders especially vigorously, trying to choke off their financial air by bullying banks that do business with them. The regulators want greater monitoring and checks on these companies, which significantly increases the costs of doing business with them. According to American Banker, regulators “have audited banks to determine whether they work with some online lenders.” No one likes an audit. As a result, many banks, which are already suffering the increased regulatory costs described above, are ending their relationships with the payday lenders.
For payday loans, where does this leave the customer? As noted, many have left banks behind, so where do they go? Here is the true genius of the administration’s scheme. A program called Bank on USA, which attempts to persuade the “unbanked” to join an approved credit union, began in San Francisco but was turned national by, of course, the Dodd-Frank Act. This made approved Community Development Financial Institutions (CDFIs) eligible to participate in the program.
To date, over 1,000 CDFIs — which already receive significant federal subsidies — have been approved. For example, the Self-Help Credit Union in North Carolina and its affiliates have received over $300 million in taxpayer money since 1996. One of Self-Help’s affiliates is the nonprofit advocacy group the Center for Responsible Lending (CRL), which is the leader in the intellectual campaign against payday loans, advancing the APR argument described above.
Self-Help founder Martin Eakes has stated his intent clearly. According to Jay Richards, author of the New York Times bestseller Infiltrated, about what the Left is doing to the financial system, Eakes boasted that the CRL was “started because we got really angry at the financial services sector” and “hired fifty lawyers, PhDs and MBAs to basically terrorize the financial services industry.” Mark Pearce, one of those (Harvard-educated) lawyers, who became president of the CRL, is now head of the Federal Deposit Insurance Corporation’s Division of Depositor and Consumer Protection, which is conducting the audits of banks that have relations with payday lenders.
This brings us full circle back to Dodd-Frank, which, besides establishing Bank On as a national program, also contains this title:
SEC. 1205. LOW-COST ALTERNATIVES TO SMALL DOLLAR LOANS.
(a) GRANTS AUTHORIZED. — The Secretary is authorized to establish multiyear demonstration programs by means of grants, cooperative agreements, financial agency agreements, and similar contracts or undertakings, with eligible entities to provide low-cost, small loans to consumers that will provide alternatives to more costly small dollar loans.
In other words, Dodd-Frank establishes the means for CDFIs to compete with payday-loan providers and other financial companies at taxpayers’ expense. When the private industry has been choked to death, the taxpayer-funded CDFIs — the Obamaloan providers — will be the only game in town.
Of course, when you have an Obamaloan, you can bet your bottom taxpayer-funded dollar that the providers will be interested to know how you spend your money. In fact, Section 1205 also includes the requirement to provide “counseling services” to customers. They’ll certainly be interested in any purchases of gambling products, firearms, or ammunition. Such purchases have already led a CDFI in Rhode Island to turn down customers’ requests for further loans.
The budget impasse has so far kept the Bank On program from being fully funded. Now that the budget deal seems likely to go through, it could get funded to the tune of the $100 million the president requested last year. If that happens, then the regulatory nationalization of the U.S. financial system will be well under way from top to bottom.
— Iain Murray is vice president of the Competitive Enterprise Institute and the author of Stealing You Blind: How Government Fatcats Are Getting Rich Off of You.