by Jeff Sovern
Deposit advance loans are banks' answer to payday loans. Just like payday loans, they tend to be for short periods and high interest rates. And just as with payday loans, consumer advocates fear that consumers get trapped in them, in the sense that many borrowers can't come up with the money to pay off the principal, and so just keep rolling them over and over--thereby paying the high interest rates for a succession of short-term loans, rather than paying a lower interest rate for a longer term loan. Regulators have responded by proposing limits to such loans. Last week, the Wall Street Journal reported that some banks issuing deposit advance loans are threatening to stop making the loans if the regulators carry through on their proposal.
That raises the question of whether it would be a bad thing if the banks did so. No doubt many consumer advocates would see it as a positive for banks to stop making the loans. On the other hand, as CFPB director Richard Cordray has noted, there is a demand for these products. What would the borrowers who are now taking out such loans do if they could no longer get them? If they ended up with payday lenders, it's hard to see how that would be an improvement. If, on the other hand, they found a cheaper way to borrow (credit cards? family member?) that would be a positive, but if they had access to such a source of funds, presumably they would already choose it over the high cost borrowing--though that assumes they recognize it as cheaper. If they couldn't borrow from another source, and so did without the money, would that be better? Does the answer depend on what they would have used the money for and whether they wouid have been ensnared by a debt trap? And who should make that judgment? The consumer or regulators? All this raises one of the most fundamental questions in consumer protection law: should consumers be able to make these judgments for themselves, or does the fact that so many consumers have made such judgments poorly mean that regulators should make the judgment for them?
When Elizabeth Warren first proposed the CFPB, she often drew an analogy to a defective toaster. She said you can't buy a defective toaster that can burn down your house, but you can take out a bad mortgage that will cost you your home. Are these loans like the defective toaster, in that consumers can't see them for what they are? I envy the certainty of those who believe they know the answer.