The Market Does Not Bind Us

NB: This post is part of a debate on the Loan Shark Prevention Act, a bill that would create a federal usury cap. Anne Fleming’s argument against the bill is here.

Emma Caterine–

The central fallacy of the arguments against the Loan Shark Prevention Act, including Professor Fleming’s, is the limitation of regulation to merely attempting to steer the market. I argue here the purpose of regulation should instead be to carry out a democratic vision of how our society, including the economy, functions. The Loan Shark Prevention Act is an ideal start to pushing back against the decades of economic control by a select, mostly white and male, few.

Actually, We Should Abolish Payday Lenders

An important assumption of Professor Fleming’s argument is that small dollar consumer credit from the private market is either a social good that should be preserved or a necessary evil that we should have done by “legitimate” companies rather than the black market. Quite simply, it is not.

The harms that private credit regularly visits upon working people falls heaviest on immigrants, people of color, and other marginalized groups. The relative benefit of dealing with “legitimate” lenders versus black market loan sharks can be hard to parse when one’s bank account gets frozen, one’s already miniscule income is taken, and one’s rent check bounces. Maybe this does not look like the kind of scoundrels that Professor Fleming has documented in her writing, but the name “loan shark” seems apt all the same.

Conversely, the benefit of payday loan abolition can be seen in what activists have dubbed “Payday Freelandia” – the states with usury caps which make payday lending unfeasible for private companies. The Center for Responsible Lending has estimated that these states save working class people who live there $5 billion dollars per year from not being victim to payday loan and autotitle fees. In another notable study, access to payday loans was found to increase the incidence of difficulty paying bills by 25%.

But even these states do not go far enough. Their caps are still high enough to allow rent-to-own stores and others to lend at predatory rates. Further, some subprime credit cards and other predatory lending through nationally chartered banks are exempt from state usury caps due to the precedent of Marquette Bank. In New York, for example, the cap is at 25%: 25% APR on a $3,000 credit card balance will more than double the debt ($5,324.82) within 28 months if no payments are made on it. A 15% APR would be at $4,195.53 at the 28 month mark, more than $1,000 less.

Lawmakers should be more concerned with this $1,000 margin –  for many the difference between rent and eviction, stability and bankruptcy –  than the profit margins of finance companies. The market and all its components exist at the behest of the public, and when they prey on the public as predatory lenders have done, the solution is not to have “legitimate” companies occupy the role, but to shut them down.

 

The Illusion of Persistent Demand

Setting a 15% usury rate does not eliminate the demand for small dollar short-term credit. But that raises a question: what creates this demand, and how should it be dealt with? Demand for consumer credit among the working class is created by several factors, most notably (1) insufficient income, (2) high rents, and (3) lack of social services such as healthcare and transportation. As such, regulators should not design law tailored to the current demand for consumer credit at all – they should actively seek to alter it. Lawmakers may think they are alleviating the pains of austerity with access to this kind of credit, but they are in fact enabling it.

There has long been a demand for small dollar loans among working class people, but the history of how that demand has risen tracks parallel to the history of neoliberalism as social services were substituted for credit and availability of credit was used to justify throwing the social safety net into the garbage.. Outstanding consumer credit excluding mortgages in 1945 was $6.8 billion dollars – about $48.61 per person. In 1975 it was $206.97 billion dollars – about $958 per person. Today it is $4.052 trillion – about $12,385.47 per person.

A good illustration of this increase is autolending in the Tidewater region of Virginia. Tidewater is infamous for its urban sprawl coupled with few to no options for public transportation after its trolley system in particular was dismantled. Only 1.6% of commuters in the area take public transportation to work (compared to 36.8% commuting by public transportation in nearby Washington, D.C.). Subprime autolenders have taken advantage of this lack of social services creating a need for credit to afford a vehicle, and then title loan lenders have taken advantage of the squeeze put on people by those subprime loans.

Crucially, once private credit has filled the gap, it becomes all the more difficult to build or rebuild the social services. Widening highways has become the go-to solution in Virginia, while even research on public transportation gets blocked. People in Hampton Roads broadly support more public transportation, but conservatives have been able to block a lot of it from happening by bemoaning the “costs,” even as people are drowning in debt from auto loans and title loans.

While generally scholars have looked at the neoliberal process as deregulation leading to an expansion of credit, Monica Prasad notes that it may well be that the causation is in reverse (credit expansion to deregulation), best conceptualized as “a trade-off between credit and welfare state spending.” I agree: this feedback effect should inform our policies with an understanding that expanding credit could contract social spending.

 

A Battlefield, Not A Ballet

The alternatives that Professor Fleming provides to the Loan Shark Prevention Act are incentivizing banks to provide the small dollar loans and requiring payday lenders to make loans that can be repaid. To address the first, banks already provide small dollar loans inasmuch as they provide credit lines to payday lenders that make their businesses possible. Every major bank has profited off the immiseration of working people through payday loans Wells Fargo, the worst offender, has investments in six of the eight largest payday lenders. Trusting the banks responsible for growing the payday loan industry with saving us from it seems inadvisable at best, and as previously noted, only will entrench the lack of social provision that caused the demand for the credit.

An example of that entrenchment is this bizarre “gotcha” journalism by Michael R. Strain. The piece tries to “fact check” a disturbing statistic: that close to 40% of families cannot cover a $400 expense. Strain points out that it refers to covering the expense with cash, and according to the study 28% of families could cover it with borrowing. The burden that comes with “covering”  $400 with subprime credit card debt is disregarded. All that matters is that it is covered at all. We do not have to worry about things like why those families could not pay it with their income or the social, including economic, consequences of meeting such needs by increasing household debt.

Lastly, the CFPB payday lending rule that Professor Fleming praises did not go far enough. The key part of the rule is that payday lenders would be required to determine whether borrowers have the ability to repay loans. While the “debt trap” of payday loans makes them particularly abominable, desperate working class people being subject to “affordable” exploitation is also wrong. One example is the all-too-common story of a once “affordable” credit card causing financial collapse due to a severe illness. As Abbye Atkinson writes, the inherent nature of private credit “requires low-income borrowers to fully bear the risks inherent in borrowing. The risk may be reduced, but it is still squarely borne by those borrowers.”

 

Conclusion

The Loan Shark Prevention Act is a necessary first step at reversing the free rein the government has given to private financial markets. Free rein to profit off of and reinforce the dismantling of the welfare state and social services, filling the gaps with extractive agreements that take advantage of the least well off in our society. While the resurgent Left is rightly focused on building new systems of social welfare like Medicare For All, we must also strike at the power of private finance to exploit our communities in the name of “covering” the very gaps our policies seek to fill. Our government should always prioritize people over profits, and the Loan Shark Prevention Act will reaffirm that priority.

Emma Caterine (@EmmaCaterineDSA) is a practicing consumer rights attorney in New York City.