Megan McCardle antidote and all-around smart guy Mike Konczal has an interesting post up at the Atlantic on the military's approach to predatory consumer financial products.
The typical response to this topic goes along the lines of "increasing financial literacy" or "people are stupid", and since most of the regulatory agencies tasked with oversight are more closely associated with the sellers of these products than the buyers, the government response is predictably tepid.
However, there's one part of the government with its hand so firmly wedged in the taxpayer's pocket that it has no need at all for the financial sector. Way back in 2006 the DOD gave its take on predatory lending in a report to Congress. What they had to say on the flip.
Here's Konczal's describing how the DOD approaches the problem:
How do they define predatory lending (PL) in their report? (Their report doesn't touch on mortgages.) PL seeks out young and inexperienced borrowers with bank accounts and steady jobs who have flawed credit; they make loans "based on access to assets (through checks, bank accounts, car titles, tax refunds, etc.) and guaranteed continued income, but not on the ability of the borrower to repay the loan without experiencing further financial problems." So the first isn't bad; it's what we expect from anyone who is going to be lending to distressed consumers. The second is more worrisome. How much worse does it get?
"Predatory products feature high fees/interest rates, with some requiring balloon payments, while others pack excessive charges into the product. The result of their efforts is to obfuscate the comparative cost of their product with other options available to the borrower." [ ... ] (nb. snipped for fair use, reading the whole thing is encouraged)
And lastly: "Most of the predatory business models take advantage of borrowers' inability to pay the due loan in full and encourage extensions through refinancing and loan flipping. These refinances often include additional high fees and little or no payment of principal." This is the subprime model of course; 80% of subprime loans were refinanced within 30 months, collecting a nice prepayment penalty (usually denoted in terms of months of interest, to make it harder for consumers to think in terms of the mortgage itself.)
None of this is particularly controversial. See, for example, Felix Salmon's nice posts on financial literacy and the credit card business model. Since these posts were written, credit card default rates have shot up to around 10%, with issuers happy to get anything back in some cases.
Which brings us to the punch line of the DOD report. It recommended simply banning the worst products and requiring fee structures to be clearly stated. Konczal again:
They requested, among other items:
"Require all fees, charges, insurance premiums and ancillary products sold with any extension of credit to be included within the definition of finance charge for the computation and disclosure of the APR."
- "Lenders should be prohibited from directly or indirectly imposing, charging, or collecting rates in excess of 36 percent APR with regard to extensions of credit made to Service members and their families. This APR must include all cost elements associated with the extension of credit, including the "optional" add-ons commonly used to evade ceilings, such as credit insurance premiums...It is understood that such an interest rate cap may limit the availability of credit to certain Service members...A clear, unambiguous rate ceiling is justified given the high fees, interest and other charges associated with loans to Service members."
- "Prohibit lenders from using checks, access to bank accounts and car title pawns as security for obligations. These methods provide undue and coercive pressure on military borrowers and allow lenders more latitude in making loans without proper regard for the Service member's ability to repay. They also place key assets at undue risk."
- "Prohibit provisions in loan contracts that require Service members and family members to waive their rights to take legal action."
Essentially this package was passed into law by Republicans before the great tanking. So why isn't Obama's Consumer Financial Protection Agency already through Congress with enthusiastic support from the minority?