Sales receipts for Black Friday dropped this year for the first time since 2009 and holiday hiring numbers are expected to be disappointing as well. A major reason for the still-stalled seasonal economy is the lack of consumer spending, including persistent unemployment but also a lack of access to consumer credit. Thankfully, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) recently made major improvements to consumer lending — improvements that the Federal Reserve should also endorse.
Recently, the FDIC and OCC issued guidance warning banks selling payday lending products that these practices will now be monitored closely. Their actions are expected to inspire banks that sell such products, including Wells Fargo and US Bank, to discontinue or reform them significantly. This is good news for borrowers, as these loans carry triple-digit interest rates and routinely trap families in a cycle of debt. Research from the Consumer Financial Protection Bureau found that more than half the users of these products returned for another loan within 12 days.
But we’ve seen this movie before. This is not the first time the Federal Reserve has looked the other way on predatory lending. During Alan Greenspan’s tenure as Fed Board Chair, predatory mortgage lending exploded. These products started out as a fringe business but in time were adopted by mainstream financial institutions. The Fed wasn’t only missing in action, but actively riding the housing bubble that started with predatory subprime lending. Chairman Greenspan rebuffed advocates and Federal Reserve Board members alike who encouraged regulation of the subprime market.
Payday lending undermines the economies of specific communities and populations, including low-income neighborhoods as well as the disabled, elderly, low-wage workers, and the un- and underemployed. The Fed looked the other way when mortgage lenders targeted these communities in the late 1990s. They still have a chance to get it right this time.
If the Fed fails to act, it won’t be because of the popularity of payday lending. The industry is not well liked. Apparently if there is one thing Republicans and Democrats agree on it’s their disdain for payday lenders. According to a recent poll commissioned by Americans for Financial Reform, 75 percent of Republicans and 74 percent of Democrats have an unfavorable opinion of payday lenders. And yet for banks regulated by the Federal Reserve, the practice of payday lending continues un-checked.
For most of our nation’s history usury laws were in place that set 36 percent as the highest interest rate any banking institution could legally charge. In fact, until 1916, the rate was much lower, but the U.S. raised interest rate caps to 36 percent for specifically licensed lenders in return for adherence to strict lending standards. But in 1978 the U.S. Supreme Court ruled in Marquette National Bank of Minneapolis v. First Omaha Service Corp that banks could set their own interest rates. In reaction, many legislatures have capped interest rates in their states. But banks and their trade associations have succeeded in pushing for the most liberal interpretation of the law for exempted federally chartered savings banks and others from state usury limits. This is what allowed for the spread of payday products that banks have been issuing of late, eventually motivating last week’s guidance from federal regulators.
Whether it is mortgage default swaps or predatory payday lending, financial product “innovations” have a dangerous track record in the American and global economy. And at a time when consumers need more access to cash to spur holiday spending and boost the economy, we need sensible lending — not reckless interest rates that compound the economic crisis in our communities. Simply put, banks should stick to the business of banking and help families build wealth, not strip it away. Chairman Bernanke and the Federal Reserve can move us one step in that direction by joining the FDIC and OCC and providing similar guidance to the banks that they regulate.
Goehl is executive director of National People's Action.