Amelia Warren Tyagi has contributed a thoughtful editorial about payday loans and other forms of consumer credit in the Chicago Tribune.The title of the piece, “Stop Governing Credit Like It’s 1799,” refers to how laws may be pertinent at the time they’re written, but must evolve to keep pace with the march of time.
When the framers of the United States Constitution laid down the laws of the land, they could not have predicted a financial crisis of the magnitude currently faced. The laws protecting consumers were written during the formative years of the American Republic, long before mega-banks, credit cards or no fax payday loans. Once consumer safety laws began to appear, their intention was to protect consumers against dangerous products. Financial products, however, have always been an exception. Thus, the author suggests adopting financial product regulations that keep pace with the degree of protection afforded consumers by standard product regulations.
Financial products can be dangerous, but…
Part of the problem is that American law looks at financial products as a contract between equal parties, rather than as products that can potentially be harmful. As the author points out, this way of viewing financial products is the same as it has been in America since colonial times. Back then, “the typical contract was between a merchant and a shopkeeper who were haggling over the price of a handmade plow.” Faxless payday loans were, of course, unimagined.
Is it still an equal transaction when the average consumer is negotiating with a monolithic bank? We may be financially savvy, but the average person doesn’t have the time or legal resources to negotiate terms on the same level as a bank or credit card company.
Why is there such an imbalance now?
Most financial agencies are designed primarily to protect banks. As states’ rights eroded following America’s Civil War, much of their ability to dictate laws was lost, and Congress did little to fill the gap when it came to finance law. The Federal Reserve’s recent announcement that it will restrict credit card companies is one sign of movement (even though it is not a government agency), but the author calls for more to be done.
Striking a balance between regulation and overregulation is difficult
Tyagi believes that mortgages, car loans, payday loans and other financial products should be regulated by a Financial Product Safety Commission (based upon the Consumer Product Safety Commission (see http://www.cpsc.gov/)). The primary goal of this new organization would be to “review financial products to ensure that they do what they’re supposed to do, without any hidden dangers or unreasonable tricks.”
What such an organization cannot and should not do is try to save people from themselves. Charging too much, taking out a mortgage larger than can be easily handled – these are potential dangers in consumer credit, but buyers must exercise their own restraint. The same holds true with payday loans. Lenders encourage customers never to borrow more than they can afford to repay. If payday loans are used responsibly, they can be a real lifesaver during small-scale crises. Used without restraint, they can cause problems, just the same as credit cards or gigantic mortgages (albeit on a much lesser scale than the latter two). Ideas like those of Amelia Tyagi are good, but we must always be careful not to give up our individual right to free choice in favor of big brother government overregulation.
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Regulation and freedom of choice in the market are things which have to be balanced out – there should be such a federal agency in place, but it should exist in a context where the right of consumers to purchase products that are fully and transparently disclosed up front (no fine print) and also to make it so that businesses can compete in the marketplace for consumers aren’t just looking for any income they can get to keep from bankruptcy. The fact of the matter is that corporate entities have been enjoying advantage over consumers for decades, and it is high time they were held accountable.
well said perky!
This article makes a good point.