When financial regulatory reform was being debated in the House, an amendment was successfully adopted that would exempt the financing arms of auto dealerships from the authority of the proposed Consumer Financial Protection Agency (CFPA). And now that regulatory reform legislation is working its way through the Senate, a new slew of exemptions are under consideration.
According to the New York Times, Sen. Bob Corker (R-TN), who has been spearheading negotiations for the Republicans, “pressed to remove a provision from draft legislation that would have empowered federal authorities to crack down on payday lenders.” And as Bloomberg reported, “among those benefitting would be a Tennessee-based company whose officers have been generous campaign contributors” to Corker:
Executives of Jones Management Services LLC, based in Cleveland, Tennessee, and its loan companies contributed $17,325 to Corker’s 2006 and 2012 Senate campaigns, according to the Center for Responsive Politics…Corker has also received $1,000 from the political action committee of the payday lenders’ trade group, the Community Financial Services Association, based in Alexandria, Virginia.
The Times called W. Allan Jones a “longtime friend and supporter” of Corker’s, dating back to Corker’s 2001 campaign for mayor of Chattanooga, Tennessee. Corker said that these contributions did not influence his decision to press for the payday exemption. “Categorically, absolutely not,” he said. In his career, Corker has received more than $3 million from the finance, insurance, and real estate industries, which makes them far and away his biggest contributors.
The exemption for the auto financiers was bad enough, but starting to exempt non-bank financial institutions like payday lenders from whatever new consumer protection regime is installed would be a big mistake. Payday loans are one of the uglier instruments found in the non-bank financial sector, with interests rates climbing to 400 percent or more.
As the Center for Responsible Lending found, 76 percent of payday loan volume (and $3.5 billion in annual fees) is due to “churning,” which is repeat borrowing by customers who paid off their loan, but because of the interest, require another loan before their next paycheck. We already have laws in place rendering payday lending to military members illegal, as the Defense Department considers them “predatory.”
Payday lending is well worth regulating, but in the grand scheme of things, it alone will not cause a financial crisis. But I’m worried that exemption will unleash a larger move to exempt more and more of the non-bank financial sector, which includes entities that can cause systemic risks. As FDIC Chairman Sheila Bair explained, “one of the important causes of the current financial difficulties was the exploitation of the regulatory gaps that existed between banks and the non-bank shadow financial system,” particularly with regard to mortgages and derivatives.
“The CFPA would eliminate regulatory gaps between insured depository institutions and non-bank providers of financial products and services by establishing strong, consistent consumer protection standards across the board,” Bair added. “It also would address another gap by giving the CFPA authority to examine non-bank financial service providers that are not currently examined by the federal banking agencies.”