The Community Financial Services Association of America, the main payday lending trade group, sued U.S.banking regulators, accusing them of applying “back room pressure” on banks to stop serving the group’s members.
A federal anti-fraud initiative known as Operation Choke Point unfairly targets online and storefront lenders by claiming they pose a reputational risk to the banks serving them, according to the complaint filed yesterday in federal court in Washington. [Emph. added]
Good. As I’ve said here before, if the federal government wants to put an end to payday lending, Congress should act, or at least the CFPB should write some rules that would restrict it. In the meantime, the business is legal, and regulated to varying degrees, in 37 states. The Justice Department’s “Operation Choke Point”—wherein DoJ browbeats banks into refusing to provide banking services to businesses, like payday lending, it deems unsavory—is an outrageous infringement on voters’sovereignty. The project is un-American in a very basic way. Payday lenders are doing the right thing in fighting back.
What’s more, payday lenders actually provide valuable service. You may not like it, but the fact is that occasionally low-income consumers need emergency cash to, say, pay an electric bill or get the car repaired so they keep showing up for work. In cases like that, the alternative to paying the emergency bill—the lights going out or the loss of a job–is much worse than the extra interest the payday borrower has to pay. Absent a payday loan, the borrower’s only other choice is to intentionally overdraw his account. That’s just as expensive and also illegal.
Even lefty progressive types seem to be starting to realize this. I’m at a consumer finance conference in California at the moment; one of the speakers here was a professor at the New School in New York (about as lefty and progressive as you can get), who told the group that she reflexively reviled payday lenders as unscrupulous price gougers—until she invited one to speak in her classroom and then later spent time at his store in the Bronx. Now she understands first-hand the benefits payday lenders provide. Their borrowers are under constant financial stress. Payday lenders help relieve that stress. Do they charge too much for the service? Believe me, if a new competitor could find a way to profitably provide the same service at a lower price, it would enter the market and mop up.
Duly elected state legislatures have considered these very issues and, in the vast majority of states, have determined that payday lending should not be put outside the bounds of legal commerce. They are free to change their minds at any time. That the Justice Department is seeking to end-run the judgment of elected officials is a scandal—and a disservice to low-income consumers. Good luck to the payday lenders in their lawsuit.
What do you think? Let me know!