The first Latin phrase I ever learned was caveat emptor. I learned this vocabulary from The Brady Bunch episode where Mike Brady (the father, as you know) intended to help his son Greg select a car to buy. Instead of consulting his father, Greg went to his friend Eddie who suckered him into buying an absolute piece of junk. In discussing his purchase with Mike, Greg learns an important lesson:
Greg: Boy, did I ever get stuck with a lemon…
Mike: I think maybe you learned something about the business world.
Greg: What d’ya mean?
Mike: Well, look. You take sellers. They’ve got something to sell, right?
Mike: Naturally they’re going to make it sound as attractive as possible even if they have to exaggerate to do it.
Greg: You mean lie.
Mike: Yes. Quite often they do. Though they might call it “gilding the lily.” But the important thing is that you’re the buyer. You have to keep your guard up, See? It’s the old principle of caveat emptor.
Greg: Caveat emptor?
Mike: It’s Latin for “let the buyer beware.” Or to put it in the vernacular, “them who don’t look, sometimes gets took.” (The Brady Bunch, Season 3 Episode 4, “The Wheeler Dealer.” Redwood Productions, Paramount Television. 1971.)
Extrapolating on Mike Brady’s idea, I think we can learn something from this about the payday-lending world. Payday lending works like this: an individual needs some extra money, so they borrow from a payday lender on the basis that they will pay it back from their paycheck—and there is, of course, a huge fee associated with doing this. However, the system breaks down (on the consumer’s side) quickly, because most people do not pay back the full loan when they receive their paycheck. This creates a cycle of amazingly high interest costs as the consumer continues borrowing and borrowing, unable to pay off the entire loan amount or the interest rates. Just like Eddie, payday lenders create nice and friendly personas, only to get the best of their consumers. To the Greg Bradys out there, it sure sounds like a lemon!
That’s where the CFPB steps in. Recently, the bureau issued a fairly scathing report about the evils of payday lenders. The CFPB has already gone after some of them, but is waiting to snare more.
It would seem that the CFPB’s ultimate goal is to establish a certain amount of egalitarianism—putting everyone on the same playing field. The CFPB strives to protect the Greg Bradys of this world from themselves by doing everything it can to prevent payday lenders from charging these colossal fees so hopefully consumers can get out of their debt cycles. However, when you eliminate these fees, you destroy the business, and when you destroy the business, they no longer offer the service. Unfortunately, many people depend on payday lenders for their financial survival, so this is not necessarily an improvement. Indeed, it might actually worsen the situation as hard-pressed consumers turn outside the regulated finance industry and find themselves at the mercy of unsavory characters far more exorbitant rates and heavy-handed collection practices.
I was once involved in a very complex fair lending case against one of the bravest financial institutions I have ever known. This institution was geographically isolated in the great state of Texas, and many of their customers needed very small loans from time to time. These loans were not money makers for the Bank as they were personal loans often under $1,000 given as a way to help certain borrowers avoid the exorbitant fees and practices of alternative lenders. The Bank’s rates for these loans varied, but were significantly lower than alternative lenders. Unfortunately, the government asserted that the rates were inappropriately set for a certain group of borrowers, which resulted in an aggressive fair lending case against the Bank. The Bank stood its ground and ultimately won the case, but the cost of the defense resulted in the Bank electing to stop making such loans. Naturally, the alternative for individuals needing these type of loans are now the same entities that the CFPB is targeting.
Personally, I take a neutral stance on the politics, but I do think regulatory agencies (like the CFPB) would do well to examine the ultimate results of their efforts. (Perhaps all government institutions should do that as well, but that’s another matter).
So whose job is it to protect whom? Is it the CFPB’s job to protect people from making decisions like going to a payday lender and paying outrageous interest rates, or is it people’s job to protect themselves?*
I assert that there should be a balance between the two. Obviously buyers are responsible for their own decisions, but it is also a good thing to have a certain amount of regulation in the lending world in order to prevent unscrupulous lenders from misleading their customers. That’s what the CFPB was founded to accomplish, and I believe that they are striving towards this goal. But who watches the people who are supposed to be protecting us to make sure they don’t overstep their bounds? When those that are in the position of policing aren’t policed themselves, the result is often a reduction in needed products. Perhaps the CFPB needs a watchgroup to ensure that their good intentions do not have unintended consequences. If the CFPB eviscerates payday lending or other similar programs that allow consumers to make and be responsible for their own choices, the CFPB won’t chase the need away, they’ll only chase it out of the light. And then what kind of protections will consumers have?
Whatever happened to caveat emptor anyway?
* April happens to be financial literacy month and that is where greater efforts should be directed—increasing the general level of financial literacy to empower consumers.