Consumer finance needs better morals

Drawing moral lines in our rough-and-tumble capitalist system can be hard. But it should not tax too many ethical muscles to set aside some protections for trusting, unsophisticated borrowers of modest means. That is, unless you’re a politician working on behalf of predatory lenders.

And it’s amazing how many politicians do, making the recent successes of the Consumer Financial Protection Bureau seem all the more miraculous. The CFPB was created in 2010 to set rules of the road for consumer financial products — mortgages, student loans, payday loans and such.

Last month, the bureau nabbed its first payday lender, Cash America. The company was caught robo-signing loan documents in Ohio, where that’s illegal. Robo-signing refers to mass approval of documents without proper review. The sloppy paperwork often traps borrowers in a bureaucratic nightmare designed to wear them down.

Cash America also bilked military personnel on their loans. The legal limit for interest charged to American service members is 36 percent, itself no small amount.

Payday loans are the bottom of the borrowing barrel. Some borrowers are desperate for quick cash. Some don’t have great credit histories. Thus, one expects them to pay higher rates of interest.

But lenders slip in outrageous charges on top of already steep borrowing costs. Those unable to pay off the entire amount in two weeks (the supposed next payday) are often forced to renew the loan, with another $50 fee tacked on each time. Some borrowers end up paying 400 percent interest.

For these lenders, the working poor are the perfect mark. They have a steady stream of income to divert but little schooling in the tricks being played.

Payday lending is so lucrative that “respectable” names in finance do it through subsidiaries. Cash America is listed on the New York Stock Exchange.

The CFPB addresses abuses further up the consumer-loan food chain — in mortgages, student loans and other common credit tools. For home loans, it wants the contracts easier to undertand. During the housing bubble, many borrowers took loans with initially low “teaser” rates that later grew to shocking numbers. They should have been more careful, but piles of paper and legalese hid the snakes. The improved forms would show projected monthly payments, plus break down insurance and closing costs.

Mortgages will always be complex transactions. Much money is involved and paperwork required. Those too lazy to study the deal may be unpleasantly surprised. But borrowers willing to apply themselves should have more of a fighting chance to understand what’s going on.

Last month, the bureau proposed new rules on collecting debts, which if approved would strike a new blow for decency. It would make financial institutions responsible for the behavior of the companies they use to deal with customers.

What happens is that big-name banks make loans and then outsource the servicing of them to thuggish third parties. The hirelings casually sue, harass and otherwise abuse borrowers, often using deceptive claims based on shabby paperwork. (See “robo-signing” above.) Sometimes they lack proof that the money is owed. But they have lawyers, and the little guy doesn’t.

If the bureau prevails, the big banks won’t be able to look away from the carnage. For example, they would have to monitor customer service calls.

Since its inception, many Republicans, led by Sen. Richard Shelby of Alabama, have been trying to kill the Consumer Financial Protection Bureau. They filibustered against the director, former Ohio Attorney General Richard Cordray. They’re still demanding the power to slash the bureau’s budget, thus rendering the CFPB toothless.

Follow the contributions going into their coffers. You get the money part. But is there no political price for not having a conscience?

Froma Harrop is a Providence Journal columnist. Her email address is

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