By Kevin D. Williamson
Thursday, September 26, 2019
Last week, I had an interesting conversation with a man
who used to work in automotive lending. Do you know who the car-finance guys
really miss? “Saab,” he said. “The Saab customer was the best.” The people who
bought Saabs turned out to be as sensible and practical as the people who designed
them — good credit, appropriate incomes, sensible down payments. “It wasn’t
like Porsche or Land Rover,” he said. “Nobody bought a Saab because it
fulfilled some fantasy.” But fantasy moves a lot of cars, too. I used to know a
guy who owned a used-car dealership, one of those buy here, pay here, your job
is your credit! places that cater to the low end of the market. Not the Saab
buyer. One afternoon, he sold a flashy 280ZX to an obvious no-money scrub. But
he wasn’t worried. “I’ve already sold that car nine times,” he told his
friends, “and when this guy misses his payment, I’ll repo it and sell it
again.”
Saab is long gone, but there are still Saab types out
there. A lot of them, in fact, and lenders love doing business with them — not
only automotive lenders but other kinds of consumer lenders, mortgage lenders,
credit-card companies, commercial banks, etc. People with banged-up credit,
negligible savings, lower incomes, etc. may present more tempting investments
on paper, because they pay higher interest rates and more fees, but you have to
do a lot of work to collect that extra revenue, and that work costs money —
which is, of course, why it’s only the Saab guys who get to borrow on Saab-guy
terms. But not everybody is a Saab guy, and the alternative for the scrubs
isn’t some magical regulatory solution that empowers them to borrow on Saab-guy
terms — the alternative is little or no access to credit at all.
Elizabeth Warren has the soul of a Saab guy — and a
constituency of Saab guys who think they know what’s best for the scrubs.
Senator Warren has made a crusade of interfering with the
business of payday lending, a high-risk, high-interest portion of the
consumer-credit game in which borrowers with few or no alternatives take out
unsecured short-term loans intended to tide them over until the next payday.
Typically, a payday loan has a repayment period of a couple of weeks. (The term
“payday loan” is a figure of speech, with repayment rarely actually connected
to paydays.) The fees may be modest in absolute terms, say $13 on a $100 loan
paid back in two weeks, but that $13 two-week fee ends up looking absurdly
usurious when expressed as an annualized rate of several thousand percent. It’s
especially bad if you assume compounding debt, i.e., that the borrower will go
back and borrow again on the same terms every two weeks to cover the principal
and accumulated interest. When you read about a payday loan with an APR of
34,125 percent or something approximately that outrageous, that’s what you are
reading about.
It looks like a terrible arrangement, until you ask the
always-relevant question: Compared with what?
People do not turn to payday lenders because they
temporarily misplaced their American Express Platinum cards. Borrowers turn to
payday lenders because those are, as the borrowers calculate, their best
alternative — maybe their best bad alternative, but their best alternative
nonetheless. All that silly talk about “predatory” lenders is little more than
rhetorical cover for the patronizing insistence that poor people are too stupid
or dysfunctional to make their own financial decisions. (And maybe they are; if
that’s your argument, say so.) But first take reality into account: As the
payday lenders themselves are eager to point out, their allegedly usurious
interest rates compare pretty favorably with the plausible alternatives:
bank-overdraft fees, or late fees and penalties on credit-card debt, utility
bills, and housing payments. The real-world near competitors to payday lending
— pawn shops and car-title loans — do not have a great deal to recommend them,
and in many cases they are worse for borrowers than payday loans are. And
because so many low-income and bad-credit borrowers already have bad debt in
collection, gentler and more orthodox alternatives — lines of credit through a
bank or credit union, short-term lending in the guise of “overdraft protection”
— often are off the table. So unless you have something worth selling or
borrowing money against, the choice ends up being a payday loan or informal
borrowing from friends and family. (That the latter option apparently is
unavailable to so many people speaks to a broad and significant failing in
American civil society.) Or risking eviction or having the lights turned off.
Or not being able to provide something immediately needful to your children.
Being poor sucks, and no regulation is going to change
that.
Senator Warren’s immediate target is the likely repeal of
a 2017 rule from the Consumer Financial Protection Bureau, the regulatory love
child of her and the Obama administration, that requires payday lenders to
perform much of the same loan underwriting that a bank would when extending
consumer credit: verifying employment and income, analyzing the borrower’s
existing obligations and assets, and then lending exclusively to those who meet
a certain standard described as “ability to repay.” (Willingness to repay
is a big part of the lending equation in the real world, but never mind that
for now.) The problem is that borrowers who can satisfy ordinary
bank-underwriting standards can just go to banks, and those who go to payday
lenders do so because they can’t — and also because the bank-lending process is
more invasive, time-consuming, and, in many cases, humiliating, especially for
the tens of millions of Americans who have no bank account and rarely if ever
set foot in a bank. In fact, the Pew Charitable Trusts — not remarkably
friendly to payday lending — found in a survey that many borrowers turned to
payday lending particularly to avoid those things. (And many of them ended up
turning to more conventional lending to pay off their payday loans.)
In a slavishly cheerleading piece on Senator Warren’s
campaign, Emily Stewart of Vox accurately described the senator’s
fundamental agenda: empowering a “cadre of energetic, ideologically committed
regulators.” (That Vox apparently believes “ideologically committed
regulators” are to be preferred to regulators whose commitment is to the law
rather than to ideology says a great deal about the state of the progressive
mind circa 2019.) But ideology does not trump math. Of course, the government
can lean on lenders to make more credit available on easier terms to scrub
borrowers. That’s a big part of what created the subprime-mortgage meltdown,
and what is likely to produce the next one. The same thinking helped create
that $1 trillion–plus in student-loan debt and encouraged tuition inflation at
the same time. Risk comes with a price, and somebody is going to pay it —
either the borrower, or someone else, or everybody else.
In the short term, the question is whether our laws will
be made by our lawmakers in Congress or whether they will be cooked up by
Senator Warren’s “cadre of energetic, ideologically committed regulators,”
which is what the CFPB was designed to be, and is. If the federal government
wants to preempt the states in the matter of regulating payday lending (which
already is prohibited outright or severely limited in many states), then it
should at least go through the motions of passing a law. And then the people’s
elected representatives can bear whatever political price there is to pay for
cutting poor people off from the credit that, defective though it may be, is
what they have.
But in the long term, we are going to have to answer the
question of just how patronizing we intend to be toward people with low incomes
and modest means. If we allow the market to produce credit products for them,
then we can be quite confident that the market will charge them relatively high
prices, reflecting the relatively high risk of lending to people without much
in the way of money or good credit. We could enact proactive measures such as
forced-savings programs that would tax the earnings of the poor and then make
these funds available on an emergency basis subject to the approval of their
masters. We could distribute maps to the nearest food pantries and homeless shelters
on the theory that would-be payday borrowers are better off relying on
philanthropy than on credit.
Or we could have some more vague politicians’ talk about
the “rigged economy,” as though people could be shriven of responsibility for
their own financial condition by the ministrations of senators and presidents.
That’s what we’ll get from Senator Warren, and from other patronizing,
self-appointed tribunes of the plebs.
Of course, there are a lot of broke-ass suburbanites
driving around in Land Rovers they cannot really afford. It is not only the
poor who make bad financial decisions. (I could produce a conspectus of my
own.) But the poor always have less room for error, and for their errors, as
for most things, they pay a proportionally higher price. Simply cutting the
poor off from credit is one way to keep them from going more deeply into debt,
but that will produce consequences nobody will much like, the poor themselves
least of all. If the payday lenders are regulated out of existence, Senator Warren
et al. will find someone else to blame, a new scapegoat. They’ll probably end
up creating one, in fact, without ever intending to or quite understanding that
they have.