The Consumer Financial Protection Bureau Should Protect Fair Negotiations (not the poor)
Recently, President Obama appointed Richard Cordray to be the head of the new Consumer Financial Protection Bureau, created in the wake of the financial crisis to protect consumers. What exactly does it mean to ‘protect consumers’?
To some, the goal of the agency is to protect the poor, by regulating companies that provide “payday loans” to poor consumers, often charging extremely high interest rates. I recently listened to an old episode of This American Life, entitled The Giant Pool of Money, which detailed the struggles of some who were given loans that they couldn’t pay and the resulting human cost. As a liberal, I am prone to be sympathetic to whatever we can do to improve the lives of the lease fortunate among us.
However, the thing that angered me most in the episode was the story of a veteran who qualified for a Veteran’s Home Administration loan, but was instead given a loan for which the mortgage broker received a higher commission, and now pays a 10% interest rate. This veteran has a job and continues to pay his mortgage, but clearly was taken advantage of by someone who likely presented themselves as working on his behalf, but instead wanted a better commission. According to the episode, the commission for this purchase was $18,000 and mortgage brokers at the time were earning $75-100 thousand dollars per month (for a job with little societal benefit).
There will always be a way for people to take advantage of others, whether due to the desperation/need of others or due to their lack of understanding. However, not all immoral ways of making a living are necessarily illegal. Republicans have been consistent in their criticism of the Dodd-Frank law which created the Consumer Financial Protection Bureau. Mitt Romney has promised to repeal it. There is something to be said for the idea that sometimes protecting the poor can cause inefficiencies in the economy and there is no doubt that the liberal impulse to help the poor, and extend them credit, was one of a number of contributing factors to the financial crisis, in that incentives were created to loan money to those who could not afford it. However, I think both liberals and conservatives would agree that when financial negotiations take place, steps should at least be taken to ensure that everyone understands the process.
Below is some data that is suggestive, though not definitive, that liberals and conservatives (as well as moderates and libertarians) might agree more about ensuring a fair process, as opposed to making sure that the poor are protected from predatory lenders. While liberals might feel that protecting the poor is a more immediate concern, the most consensus exists (higher wrongness scores for conservatives/libertarians) for ensuring that everyone completely understands the process when a negotiation occurs.
In the wake of his controversial nomination, Cordray himself positioned the agency as ensuring a fair process, rather than a fair outcome.
The battle between liberal and conservative ideas can be seen as the battle between the balance between ensuring a prosperous society and ensuring a society that cares for the least fortunate in it. Both goals are served by fair, open negotiations where all parties understand what is agreed to, and where people earn a living through activities that add societal value. Whether it is via Dodd-Frank, the Consumer Financial Protection Bureau, or some other means devised by Republicans, I’m hopeful that a consensus can occur around protecting consumers from those who might take advantage of their relative lack of information.
- Ravi Iyer