A Comment on the Senate Banking Committee Hearing on Alternative Financial Products

by Jeff Sovern

Last week, the Senate Banking Committee held a hearing on Alternative Financial Products. The
American Banker account is here, albeit behind a paywall.   I found most interesting the payday lending discussion, and in particular the arguments made against regulation.  At one point, a Senator (I think Toomey, Republican of Pennsylvania), questioned a witness, Stephanie Klein, Director of NetCredit Consumer Lending, Enova International, about payday lending. The senator seemed to be trying to make the point that payday lending need not be regulated because payday lenders already verified borrowers' ability to repay loans and also face competition, therefore forcing them to charge low rates or else lose market share, and was trying to elicit answers from Klein to support that position.  The only problem was that the witness, Klein, while working for a payday lender, does not seem to have anything to do with payday lending!  Rather, she works with installment loans. Consequently, while she was able to testify that her company verifies borrowers' ability to repay installment loans and faces competition in offering such loans, she was not able to speak to payday loans.  The senator's attempt therefore was what my 11-year old son would call an epic fail.

Senator Toomey's opening statement included an argument against payday lending regulation.  According to the American Banker report:

"What about allowing free men and woman to decide what works for them?" said Sen. Pat Toomey, R-Penn., the top Republican on the Senate financial institutions subcommittee. "I've got to say there's a breathtaking underlying arrogance by the presumption of wealthy people who have never been in those circumstances that they know better than those people who make these 'foolish' decisions and borrow money from these institutions."

I think we all agree that people should be able to decide what they want to do, within limits. The question is what should those limits be. The law blocks people from doing certain things that are harmful to themselves or others. Thus, "free men and women" can't buy heroin even if they think it "works for them" because heroin is harmful to them.   Nor can they get antibiotics without a prescription just because they want them because overuse of antibiotics is harmful to all of us.  So it is with payday lending for some people. Payday lending is like alcohol: a positive for some but a disaster for others (according to the CFPB's latest report, about which Brian blogged here, it's a disaster for many more people than it helps).  The argument for restricting people's freedom with payday loans is that (1) payday loans harm some payday borrowers; and (2) just as bad borrowing and lending brought down the economy in the Great Recession, bad payday borrowing can harm others.  To paraphrase then-professor, now-Senator Elizabeth Warren, we wouldn't allow people to buy a toaster which would start a fire that would destroy lives, nor should we allow people to borrow in a way which would destroy their lives. This isn't to say that payday lending should be barred in all circumstances; the CFPB's goal is to craft rules which make payday lending available to those who benefit from it while keeping those who would be destroyed by it away. It will be interesting to see what mechanisms they come up with to do that. And if expressing those views means I am breathtakingly arrogant (not that I'm wealthy), then I guess that's something I share with those who banned the sale of heroin. 

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