Last week, I had an interesting conversation with a man who used to work in automotive lending. Do you know who the car-finance guys really miss? “Saab,” he said. “The Saab customer was the best.” The people who bought Saabs turned out to be as sensible and practical as the people who designed them — good credit, appropriate incomes, sensible down payments. “It wasn’t like Porsche or Land Rover,” he said. “Nobody bought a Saab because it fulfilled some fantasy.” But fantasy moves a lot of cars, too. I used to know a guy who owned a used-car dealership, one of those buy here, pay here, your job is your credit! places that cater to the low end of the market. Not the Saab buyer. One afternoon, he sold a flashy 280ZX to an obvious no-money scrub. But he wasn’t worried. “I’ve already sold that car nine times,” he told his friends, “and when this guy misses his payment, I’ll repo it and sell it again.”
Saab is long gone, but there are still Saab types out there. A lot of them, in fact, and lenders love doing business with them — not only automotive lenders but other kinds of consumer lenders, mortgage lenders, credit-card companies, commercial banks, etc. People with banged-up credit, negligible savings, lower incomes, etc. may present more tempting investments on paper, because they pay higher interest rates and more fees, but you have to do a lot of work to collect that extra revenue, and that work costs money — which is, of course, why it’s only the Saab guys who get to borrow on Saab-guy terms. But not everybody is a Saab guy, and the alternative for the scrubs isn’t some magical regulatory solution that empowers them to borrow on Saab-guy terms — the alternative is little or no access to credit at all.
Elizabeth Warren has the soul of a Saab guy — and a constituency of Saab guys who think they know what’s best for the scrubs.
Senator Warren has made a crusade of interfering with the business of payday lending, a high-risk, high-interest portion of the consumer-credit game in which borrowers with few or no alternatives take out unsecured short-term loans intended to tide them over until the next payday. Typically, a payday loan has a repayment period of a couple of weeks. (The term “payday loan” is a figure of speech, with repayment rarely actually connected to paydays.) The fees may be modest in absolute terms, say $13 on a $100 loan paid back in two weeks, but that $13 two-week fee ends up looking absurdly usurious when expressed as an annualized rate of several thousand percent. It’s especially bad if you assume compounding debt, i.e., that the borrower will go back and borrow again on the same terms every two weeks to cover the principal and accumulated interest. When you read about a payday loan with an APR of 34,125 percent or something approximately that outrageous, that’s what you are reading about.
It looks like a terrible arrangement, until you ask the always-relevant question: Compared with what?
People do not turn to payday lenders because they temporarily misplaced their American Express Platinum cards. Borrowers turn to payday lenders because those are, as the borrowers calculate, their best alternative — maybe their best bad alternative, but their best alternative nonetheless. All that silly talk about “predatory” lenders is little more than rhetorical cover for the patronizing insistence that poor people are too stupid or dysfunctional to make their own financial decisions. (And maybe they are; if that’s your argument, say so.) But first take reality into account: As the payday lenders themselves are eager to point out, their allegedly usurious interest rates compare pretty favorably with the plausible alternatives: bank-overdraft fees, or late fees and penalties on credit-card debt, utility bills, and housing payments. The real-world near competitors to payday lending — pawn shops and car-title loans — do not have a great deal to recommend them, and in many cases they are worse for borrowers than payday loans are. And because so many low-income and bad-credit borrowers already have bad debt in collection, gentler and more orthodox alternatives — lines of credit through a bank or credit union, short-term lending in the guise of “overdraft protection” — often are off the table. So unless you have something worth selling or borrowing money against, the choice ends up being a payday loan or informal borrowing from friends and family. (That the latter option apparently is unavailable to so many people speaks to a broad and significant failing in American civil society.) Or risking eviction or having the lights turned off. Or not being able to provide something immediately needful to your children.
Being poor sucks, and no regulation is going to change that.
Senator Warren’s immediate target is the likely repeal of a 2017 rule from the Consumer Financial Protection Bureau, the regulatory love child of her and the Obama administration, that requires payday lenders to perform much of the same loan underwriting that a bank would when extending consumer credit: verifying employment and income, analyzing the borrower’s existing obligations and assets, and then lending exclusively to those who meet a certain standard described as “ability to repay.” (Willingness to repay is a big part of the lending equation in the real world, but never mind that for now.) The problem is that borrowers who can satisfy ordinary bank-underwriting standards can just go to banks, and those who go to payday lenders do so because they can’t — and also because the bank-lending process is more invasive, time-consuming, and, in many cases, humiliating, especially for the tens of millions of Americans who have no bank account and rarely if ever set foot in a bank. In fact, the Pew Charitable Trusts — not remarkably friendly to payday lending — found in a survey that many borrowers turned to payday lending particularly to avoid those things. (And many of them ended up turning to more conventional lending to pay off their payday loans.)
In a slavishly cheerleading piece on Senator Warren’s campaign, Emily Stewart of Vox accurately described the senator’s fundamental agenda: empowering a “cadre of energetic, ideologically committed regulators.” (That Vox apparently believes “ideologically committed regulators” are to be preferred to regulators whose commitment is to the law rather than to ideology says a great deal about the state of the progressive mind circa 2019.) But ideology does not trump math. Of course, the government can lean on lenders to make more credit available on easier terms to scrub borrowers. That’s a big part of what created the subprime-mortgage meltdown, and what is likely to produce the next one. The same thinking helped create that $1 trillion–plus in student-loan debt and encouraged tuition inflation at the same time. Risk comes with a price, and somebody is going to pay it — either the borrower, or someone else, or everybody else.
In the short term, the question is whether our laws will be made by our lawmakers in Congress or whether they will be cooked up by Senator Warren’s “cadre of energetic, ideologically committed regulators,” which is what the CFPB was designed to be, and is. If the federal government wants to preempt the states in the matter of regulating payday lending (which already is prohibited outright or severely limited in many states), then it should at least go through the motions of passing a law. And then the people’s elected representatives can bear whatever political price there is to pay for cutting poor people off from the credit that, defective though it may be, is what they have.
But in the long term, we are going to have to answer the question of just how patronizing we intend to be toward people with low incomes and modest means. If we allow the market to produce credit products for them, then we can be quite confident that the market will charge them relatively high prices, reflecting the relatively high risk of lending to people without much in the way of money or good credit. We could enact proactive measures such as forced-savings programs that would tax the earnings of the poor and then make these funds available on an emergency basis subject to the approval of their masters. We could distribute maps to the nearest food pantries and homeless shelters on the theory that would-be payday borrowers are better off relying on philanthropy than on credit.
Or we could have some more vague politicians’ talk about the “rigged economy,” as though people could be shriven of responsibility for their own financial condition by the ministrations of senators and presidents. That’s what we’ll get from Senator Warren, and from other patronizing, self-appointed tribunes of the plebs.
Of course, there are a lot of broke-ass suburbanites driving around in Land Rovers they cannot really afford. It is not only the poor who make bad financial decisions. (I could produce a conspectus of my own.) But the poor always have less room for error, and for their errors, as for most things, they pay a proportionally higher price. Simply cutting the poor off from credit is one way to keep them from going more deeply into debt, but that will produce consequences nobody will much like, the poor themselves least of all. If the payday lenders are regulated out of existence, Senator Warren et al. will find someone else to blame, a new scapegoat. They’ll probably end up creating one, in fact, without ever intending to or quite understanding that they have.
This article appears as “Saab Guys and Scrubs” in the October 14, 2019, print edition of National Review.