Consumer Protection Rules Blamed for Increasing Use of Loan Sharks

A recent op-ed piece in the WSJ (“Dodd-Frank and the Return of the Loan Shark” 1/4/11) blames an apparent rise in the number of Americans using payday lenders, pawn shops and local loan sharks for credit on the new federal limits on how credit-card issuers can price and adjust interest rates. These limits, mandated by Card Accountability Responsibility Disclosure (CARD) Act passed in 2009, protect consumers from exorbitant fees and interest rate adjusts. An unintended consequence of the legislation, claims the author, is that banks have had to raise interest rates, reduce credit limits and increase other banking fees pushing lower-income Americans into the laps of payday lenders who charge interest rates 10 times higher than bank credit card issuers.

This is nonsense of course. I wrote a blog post last June that Changes in Banking Regulations Will Impact the Poor. The fact is, through excessive overdraft charges and higher interest rates, the poor have been subsidizing many banking services used primarily by the more affluent. Now that new rules make it more difficult for the banks to reap profits from poorly informed consumers or those whose financial circumstances result in poor credit ratings and reduced credit limits, banks must charge everyone more transparently for their services. One way or another, we will all pay more—either directly through new fees or indirectly by forgoing interest on deposits that might earn more if invested elsewhere.

In another WSJ article published today (“At Banks, New Fees Replacing Old Levies”) a spokeswoman at Chase is quoted as saying “We don’t want to raise fees on our customers, but unfortunately, regulation is forcing us to do it, and as a result, some customers may end up unbanked.” More nonsense. Chase just needs to cover its cost and make a return for its shareholders. Fair enough. Just don’t blame the regulators for the fact that they must raise fees to compensate for the profits they were making over-charging for over drafts and late payments on credit card balances.

Serving the large number of people in the U.S. who are unbanked is a serious issue. The ranks of the unbanked are not growing because of consumer protection laws. They’re growing because too many people have been out of work too long and they are running out of financial resources. They are also growing because financial institutions in the U.S. haven’t developed innovative products and services that are available to the poor in many developing countries.

Rather than focusing on real solutions for serving the under-banked, financial institutions and their lobbyists are more inclined to spend their efforts convincing the new Congress to undo some of the recent financial reform legislation they find so inconvenient. What better way to do this than to claim it would help the poor?