This political season, health reform has rightly held center stage in Washington, but another kind of reform also deserves serious attention. Members of Congress are now considering how we can best achieve fair and sustainable financial services in this country. Will we keep the current regulatory structure – the one involving multiple agencies riddled with conflicts of interest and competing priorities? Or do we start fresh with a Consumer Financial Protection Agency – a single entity that would focus solely on consumer protections?
While the financial meltdown and the foreclosure crisis have shone a national spotlight on predatory lending and unfair financial practices, these issues have been pervasive in Indian country for some time. Predatory lending can trap people in a cycle of debt, ruin credit, and cause stress that leads to divorce, bankruptcy, hopelessness and even suicide. Abusive lending keeps the flow of money going away from the reservation, destroying the potential for asset-building that is desperately needed to bring economic security to Native families and their communities – often communities that are struggling to fund basic services and badly-needed improvements.
Predatory lending can trap people in a cycle of debt, ruin credit, and cause stress that leads to divorce, bankruptcy, hopelessness and even suicide.
In a survey we conducted in 2007, 73 percent of tribal housing counselors said predatory lending was a problem in their communities, particularly refund anticipation loans and payday loans. And Native families fall prey to subprime mortgage loans more frequently than white families. Because too many in our community were economically vulnerable before the crisis, and because so many of us are targeted for bad loans, we have a lot to lose if banking oversight remains weak.
The business model of predatory lenders centers on offering loans that encourage never-ending cycles of debt. For example, payday lenders aren’t really in business to help people deal with an occasional financial emergency. Instead, their business is built on the premise that an initial short-term, high-interest loan can hook borrowers into a cycle of debt. In fact, three-quarters of all payday business is generated by people who, right after paying one loan, must borrow again before their next paycheck. For the payday lenders, that’s a sweet deal.
Unfortunately, banks are not above engaging in questionable financial practices either.
While banks are subject to a great deal of oversight, most of this scrutiny involves the banks’ own safety and soundness. Not surprisingly, the safety and soundness of bank customers almost always takes a back seat. There are three agencies that have primary responsibility for making sure banks don’t engage in harmful consumer lending: the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Reserve.
All three of these agencies have fallen down on the consumer part of their job and, in doing so, failed to slow down the reckless lending that triggered the financial crisis. They ignored increasing complaints about predatory lending. Even in the face of scathing evidence, enforcement actions related to bad lending practices were virtually non-existent. They denied having authority to tighten rules until forced to admit otherwise.
A new Consumer Financial Protection Agency would not add to the federal bureaucracy, but instead shift the consumer protection functions scattered throughout the government into a single, focused entity whose sole purpose is to protect consumers from faulty financial products and services. Congress must ensure that this agency is not only created, but that the protections it offers serve as a floor upon which state and tribal governments can layer stronger protections that fit their particular circumstances if necessary.
As expected, the financial services industry is lobbying to weaken the bills moving through Congress. They have their interests, but there’s too much at stake for ordinary Americans and the health of the economy to allow weak and ineffective oversight of consumer lending.
There’s particularly too much at stake for Native communities. Too many in our communities have been set back by lending practices that never should have been permitted. Unfortunately, all of the factors that led to weak banking oversight in recent years remain firmly in place. Without the Consumer Financial Protection Agency, our financial security is likely to fall through the cracks. Again.
Michael E. Roberts is president of First Nations Development Institute.