Jeff Sovern and I come at most issues from different sides of the street but I want to credit him for the open mind he showed in his recent blog post on deposit advance loans. Unlike many of his colleagues in the consumer advocacy business (to say nothing of the staff at the FDIC and OCC), Jeff is not prepared to eliminate deposit advance loans before someone gives serious consideration to “what would the borrowers who are now taking out such loans do if they could no longer get them.”
Jeff worries about whether deposit advance borrowers recognize that credit card and family loans are cheaper than deposit advances. I have much more confidence in the ability of the average borrower to know what is in their financial interest. If they could borrow more cheaply, they would. In any event, some sort of enhanced disclosure regimen would serve as a much better approach than eliminating the deposit advances and payday loans entirely.
Jeff asks who should make the judgment whether deposit advances are in the consumer’s interest—the consumer or regulators? Respectfully, I think this is an easy question, at least based on present knowledge. The FDIC and CFPB have not even attempted to show that, on balance, the costs of deposit advances exceed the benefits and the CFPB has effectively promised regulation of payday loans prior to completing any cost-benefit analysis. They don’t like features of the products—primarily the high rates—and are way too willing to impose their views on the consumers they claim to represent.
As to the Elizabeth Warren analogy Jeff cites, deposit advances and payday loans are not defective toasters in danger of burning down houses. If there are problems with these products—and the problems need to be established, not assumed—the CFPB should deal with them. But let’s not burn the house down in the name of consumer protection.