At the Washington Monthly, and here at Political Animal, we’ve written from time to time about the Trump administration’s efforts to defang the Consumer Financial Protection Bureau, but none of us has done as comprehensive a job of it as Nicholas Confessore. His new piece in the New York Times Magazine focuses on Mick Mulvaney’s time as the CFPB’s acting director.
I often hear liberals wonder aloud how so many low-to-moderate income Americans can support the Republican Party when it is clearly not in their financial interests to do so, and nowhere is that more clear than on the issues surrounding the CFPB. Confessore demonstrates this very ably by doing a deep-dive into the payday lending/short-terms loans industry.
In the following excerpt, he explains how the payday loan industry rose in influence and power during the Bush administration by making loans to people who (they hoped) would not be able to pay back the money. The CFPB was the brainchild of Elizabeth Warren, who was convinced of its necessity by her research into consumer debt.
[Elizabeth] Warren and other consumer advocates argued that payday lenders built their industry on a similar sleight of hand. They marketed themselves as lenders of last resort, offering emergency loans for a broken-down car or an unexpected medical bill. But according to Nick Bourke, a former financial-services consultant who now directs consumer-finance research at the Pew Charitable Trusts, what fed the industry’s growth were not emergency expenses but the increasingly unstable incomes of the working poor. As their hourly wages fluctuated at the whims of workplace-optimization software, payday-loan customers — typically white women earning around $30,000, according to Pew’s research — borrowed to pay their rent or electric bills. The average customer paid $55 in fees to borrow $375, due on their next payday. But most found that they couldn’t afford to repay the loan after two weeks. They took out another loan to cover the first, and usually another.
Consumer advocates called this cycle a “debt trap” and argued that payday lenders, much like credit-card companies, disguised the true costs of their products. Store clerks emphasized the small-seeming fees and pushed customers to roll their old loans into new ones, so that the fees snowballed, eventually exceeding the cost of the original loan. While most banks made money by finding customers who could repay their debts on time, payday lenders made money by finding customers who couldn’t. “If borrowers repaid loans in just two weeks and walked away as advertised, lenders would go out of business,” Bourke says.
What really distinguishes the short-term loan industry from regular banks is precisely the focus on finding customers who will default. They’ve also historically been unregulated by the federal government and free to charge grossly usurious rates. Several states decided to regulate the industry at the end of the last decade, and some like North Carolina banned payday loans outright.
Naturally, there are some consumers who have good experiences taking out emergency loans, and it can work for someone with poor credit who genuinely needs to borrow money for a very short period of time. These feel-good stories are what the industry relies on to rationalize their predatory business model. The overall effect of the industry is ruinous, however, as it sucks up billions of dollars from the people least able to part with their money.
The CFPB didn’t initially think that the payday loan industry would be a high priority for them. But that quickly changed once they opened their doors under their first director, Richard Cordray:
As the human and financial costs of the subprime-mortgage crash mounted, the new bureau was inundated with whistle-blower tips and consumer complaints. Cordray and his leadership team initially planned to focus on the biggest consumer-finance players, like mortgage lenders and credit-card companies; payday lenders were a relatively small industry compared with Wall Street. But it was growing quickly: The crisis had been good for business, pulling more middle-class families into the payday-loan market. And unlike banks, payday lenders were unregulated by the federal government. “It was affecting a lot of people at the margins who could least afford to run into trouble,” Cordray told me recently.
In 2012, the C.F.P.B. began conducting supervisory exams of payday lenders, a process that required them to open up their offices and books, and sometimes yielded evidence of predatory lending for the bureau’s enforcement team to take up. A company called Ace Cash Express, investigators found, harassed overdue borrowers by using phony legal threats. The investigation yielded a potent illustration of the debt trap: Ace Cash’s training manual, which instructed employees to pressure borrowers into paying off overdue loans by taking out new ones, illustrated its customer-service doctrine with a graphic resembling a recycling symbol, with one “short-term” loan fueling the next in an endless loop of debt.
At first, the CFPB went after the most egregious examples of exploitative behavior they could find, and they also put an emphasis on online lenders. In 2015, they began developing a new rule to apply to the industry that they hoped would end the practice of making deliberately bad loans. Lenders would be scrutinized, and they would be expected to examine a borrower’s ability to repay a loan before granting them one. Systemic abuse of the system could lead to hefty fine and even criminal charges. Before the new rule could be implemented, however, Donald Trump surprisingly won the 2016 election.
He then jammed Mick Mulvaney in as the interim replacement for Richard Cordray, and Mulvaney set about not only saving the payday lenders from oversight and regulation but cutting the teeth out of the entire bureau. He was so effective at this job that Trump was convinced to make him the White House chief of staff.
All is not lost, and if a Democrat wins the presidency in 2020 the bureau may be salvageable as an advocate for working people. I imagine a President Elizabeth Warren would be especially invested in that outcome. It seems to me that if people grasped that the Republican Party is on the side of predatory lenders and against protecting people from fine-print scams and debt traps, that a lot of them would be less inclined to take their side because of cultural issues.
The problem is getting them to understand this when there is not much effort going on to keep them focused on NFL players and scary immigrants and the War on Christmas.