Patricia Nelson took out a $550 payday loan in December 2007. By September 2009, she had rolled the loan over more than 22 times, and paid upwards of $2,700 in interest alone. In the wake of the messy and catastrophic financial market meltdown of 2008, President Barack Obama invited the 64-year-old to the White House. Nelson was a living, breathing representative of the dark side of the financial services industry—which Obama and his Democratic colleagues in Congress are trying to regulate with a new Consumer Protection Financial Agency (CFPA), designed to stop abusive practices like the one that took Nelson and so many other African Americans for a ride.
Following the Obama White House's directive for comprehensive financial regulatory reform, the House of Representatives has already passed a blueprint for a new, independent watchdog agency modeled on the same regulatory principles that ensure food and appliances are safe for American consumers. Having lost Republican co-sponsors during the Senate negotiation process, Banking Committee chairman Sen. Chris Dodd (D-Conn.), has just released his own draft bill containing similar new regulations addressing hedge funds, the derivatives marketplace, executive pay, failing banks and systemic risk-as well as a vision for the new agency.
In both House and Senate bills, the proposed CFPA would centralize and standardize the rules for lending among banks and non-banks (such as payday lenders, pawn shops, auto dealers, and the like) in a way aimed at providing and enforcing protections for Americans looking to borrow money. Under the status quo, the financial services industry is subject to a patchwork of rules run by seven agencies, that allow some lenders to comparison shop for the most lenient terms of lending—and slam consumers with high interest rates, deceptive banking fees, retroactive penalties and interest rate hikes, and other ills. The CFPA would change that. "It's not about bigger government," says Austan Goolsbee of the president's Council of Economic Advisers, but rather "streamlining the rules of the road and creating a clear accountable government office that's going to make sure these kind of shenanigans never get us to a place where they can take down the economy."
The bill, still working its way through Congress, is under fire from the left (for sacrificing independence to the Federal Reserve and a "systemic risk council"), and from the right (for agitating the powerful lending lobbies and the U.S. Chamber of Commerce, which is adamantly against the CFPA). But when it comes to the creation of the CFPA, "the stakes are extraordinarily high for communities of color," says Heather McGhee, Washington Director of DEMOS, a progressive think tank. "Not just because of racial targeting, but because African Americans and Latinos have lower incomes and lower wealth. We rely on debt more because we don't have savings to turn to," she says.
Indeed, the statistics on financial solvency and literacy for African Americans are not encouraging. One-fourth of black women do not have bank accounts, and, as The Root has reported, single black women have "zero or negative" median wealth. Troubles with savings aside, that negative wealth results from the debt burden that has become a central part of the modern American economy, making the top credit card issuers almost $6 billion in profits in 2008—despite the market collapse. (Overdraft fees on 37 million debit cards linked to checking accounts, for example, provides about $20 billion in revenue for Bank of America every year.)
Elizabeth Warren, a Harvard Law scholar and policy analyst who first proposed the idea of a consumer protection agency to rival the FDA, says such "tricks and traps have no place in a well-functioning market." Testifying before the House Financial Services Committee last week, NAACP analyst Hilary Shelton tied these discriminatory practices to the need for a CFPA: "The result of this lack of standard rules and strict enforcement of the rules that we do have has been the financial stagnation, and in too many cases, the economic ruin, of entire communities." Shelton was referring to subprime mortgage lending in the black community, which he called, in an interview with The Root, "a national disgrace." McGhee also included auto loans, payday loans and tax refund anticipation loans (in which borrowers may lose hundreds of dollars out of the progressive Earned Income Tax Credit) as "the worst and most racially discriminatory" financial products on the market.
Strong regulation of these transactions is necessary to protect American and particularly black wealth. Indeed, Federal Reserve chairman Ben Bernanke told membership of the American Economic Association that it was actually a regulatory failure and not Fed policy itself that caused the disastrous housing bubble of the 2000s.
The problem is not only the targeting of communities of color but also the activities of lenders other than those "too big to fail." Subprime mortgages were issued by many financial companies not classified as banks, and so were not subject to the same (inadequate) regulations as big lenders. Similarly, payday loans like Nelson's, which carry average interest rates upwards of 400 percent annually, have not traditionally fallen under the government scrutiny. It's no surprise that payday lenders and pawnbrokers have lobbied furiously against the CFPA (the payday lenders have doubled their lobbying efforts in the last five years, spending $2.1 million in 2008).
Despite industry opposition and Republican dissent, the idea of the CFPA is very popular—75 percent of Americans and 67 percent of small businesses support tighter control over the financial products being lobbed at them right and left. Even the Department of Defense believes cracking down on auto lenders who have in the past fleeced the U.S. government and members of the military, is paramount. "We believe the intervention of the CFPA in overseeing auto financing and sales for service members may help protect them and will assist us in reducing the concerns they have over their financial well-being," said a Pentagon spokeswoman in an official statement.
Dodd's proposed CFPA will lack some of the strongest enforcement mechanisms that advocates had hoped for, but could be an integral part of the Democratic Party's claim to be responsible stewards of an economy run wild during the last decade. Since the crucial 1990s, deregulation of financial markets—notably the 1999 removal of barriers between investment and commercial banks, "financial products have become so important to working families," says McGhee. "And we just haven't had the modernization of our federal regulations to make sure that there is someone whose sole purpose is to protect these interests."
Shelton acknowledges that better educating communities about their financial well-being must also accompany the structural reforms—particularly in black America. But, he adds, "financial literacy has to come with real options. You can teach people all about what you should have done, but unless you provide a way for them to get out of the debt trap—restructure those loans, support their good decisions, and protect them from bad ones—they won't have the opportunity to begin again."
Dayo Olopade is Washington reporter for The Root. Follow her on Twitter.
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Covers the White House and Washington for The Root. Follow her on Twitter.