The Iowa payday loan moratorium was sparked by concerns that payday lending causes urban decay. Image from Wikimedia Commons.

The city council of Des Moines, Iowa, has declared a moratorium on payday lenders and pawn shops throughout the city. The intention is to put a stop to any new businesses of that type setting up shop in the city while regulatory legislation is considered. No new payday loan stores or pawn shops may open for the next six months in Des Moines. Meanwhile, the Iowa legislature is considering legal restrictions on payday lenders, and the federal government is considering the same thing as part of the financial reform bill.

Payday lenders blamed for urban blight

The Des Moines City Council has put a temporary halt to any new payday lenders, according to the Des Moines Register, to mull over some potential changes in zoning code along with potential financial regulation changes.  It has been alleged that payday lenders are a cause, or at least implicated, in urban blight.

Potential new zoning

Des Moines City Council is looking into proposed zoning laws . There may be distance requirements between payday lenders and pawn shops, such as those that already exist for liquor stores and bars in Des Moines. Concerns are being raised that more payday lenders and pawn shops in the area would negatively impact the Des Moines area, especially real estate. This will not be the first time the urban blight argument has been raised.

The Urban Blight argument

There have been many allegations that payday lenders are a cause of urban blight, or urban decay.  Granted, sometimes there are payday lenders that operate in decaying areas, but it isn’t proven whether this is coincidence rather than causality. For instance, urban decay in Detroit has been tied to the decline of the auto manufacturing industry.  Jobs moving away from manufacturing plants and resulting urban decay, was going on well before payday lenders showed up. It also happened in other areas well before payday lenders opened their doors — apparently, no one has ever heard of the Rust Belt before.

Senator. Chris Dodd (Photo: Wikipedia.org)

The people of American are looking for debt relief any way they can find it these days, and it appears that the only way true gains in this area are going to be made is if major restructuring of America’s financial regulatory agencies occurs. Along those lines, controversial Connecticut Sen. Chris Dodd (who some consider to have turned a blind eye to the financial shenanigans that greased the way for the mortgage industry collapse) is hard at work. He wants to push through a new financial reform plan that would completely change the way the government would control banking oversight and debt relief.

Obama Praised Dodd’s Consumer Protection Agency Work

It appeared that Dodd was preparing to take banking regulation and debt relief in an exciting new direction much in tune with the president’s plans. However, recent signs indicate that Dodd’s plan will be significantly different that what was previously expected by the current administration. Specifically, Dodd wants nearly all bank-supervising powers to be removed from the Federal Reserve and FDIC (where they currently reside). An entirely new agency would pick up the reins. They would be responsible for all national finance institutions as sole regulator and guide toward debt relief on both the institutional and consumer level. It would replace the four federal regulatory agencies that exist.

Enter the Watchdog

Watching out for potential risks to the country’s banking and finance industries would become the responsibility of a new kind of watchdog council that would be a chaired by a single White House official. What this would accomplish is to take the teeth out of the Fed’s ability to conceive of consumer protection and debt relief measures on its own. America’s 12 Federal Reserve Banks would also potentially be in jeopardy or closing, according to the Wall Street Journal.

And guess what? In a time when President Obama constantly extols the virtues of bipartisan support, Senator Dodd’s actions could be seen as somewhat extreme. That’s because Dodd is going after his version of the finance reform/debt relief bill on his own. Sheila Bair of the FDIC is against Dodd’s ideas, and the Journal predicts that Senate Republicans will be as well.

The Frank-Man Commeth

Rep. Barney Frank (Photo: Wikipedia.org)

Rep. Barney Frank and the House Financial Services Committee is currently working on its own debt relief and regulation program. According to the Washington Post, Frank’s bill would take a much more conservative approach to regulatory reform. It would get rid of just the Office of Thrift Supervision. At the same time, rather than stripping the Fed of power, it would give them even more power to step in and control the actions of America’s banks.

Consumer Debt Relief Appears to Be Covered

That’s where the Consumer Financial Protection Agency the House has already concocted comes in. Mortgages, credit cards and various consumer loans will fall under that agency’s jurisdiction. Dodd and Frank are battling for a solution to the problems in the banking industry as a whole. Frank estimates the House will vote on his plan by the end of 2009, but Dodd is attempting to push his plan through even sooner than that, perhaps as early as next week if the Washington Post‘s sources are accurate. Get ready for some major debt relief debate, America.

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President Obama's plans for the Consumer Financial Protection Agency could mean that debt relief is closer than ever for the downtrodden. (Photo: flickr.com)

The recession has forced America to face some of its most deep-seated systematic financial troubles. One thing that has become clear is that unscrupulous mortgage lenders and credit card agencies have dined for far too long upon consumers who largely didn’t understand that they could hold out for something better. Foreclosure and bankruptcy have amplified the burden on consumers, courts and the economy as a whole tenfold, which makes the question of how debt relief should be handled a more pressing issue that it has been in decades.

Cornell and George Washington Law School Economics lecturer and former professor Dr. Neil Buchanan ponders in a recent FindLaw column entitled “Should Federal Agencies or Courts Protect Consumers in Financial Markets?” which side of the regulatory coin America needs most. Existing regulatory agencies are being given more extensive duties by the Obama administration in order to help make America’s financial markets safe and sound. At the same time, new agencies like the newly minted Consumer Financial Protection Agency appears to be on its way to receiving unprecedented powers. In theory, it will have the power to police how mortgage lenders, banks, credit card companies, payday lenders or any other consumer finance company interacts with consumers. It is Buchanan’s opinion that allowing regulatory agencies to protect consumers is the best route, as relying solely upon the courts wouldn’t be enough of a deterrent to keep suspect lenders from indulging in bad behavior. The ideal system would have both in place as a regulatory enforcement clearing house.

But Isn’t This Big Government Clogging the Market?

Some will surely feel that way. What I have seen from state governments is an overzealousness to regulate payday lending, to the point where it is impossible for such legitimate businesses to operate in some states. Mortgage lenders and credit card company supporters would likely have similar complaints, although the path of destruction their industries have carved is rather hard to ignore. Buchanan begins his argument by considering the “courts only” option. If it were possible t regulating a market in need of deep repair like the mortgage industry through simple enforcement of the law, that would be ideal. However, Buchanan doesn’t see that as being enough. Sometimes the courts might work in favor of the consumer and debt relief, but not often enough. Extreme circumstances would be required to convince most judges to see cause to invalidate a contract. The “non-elite” consumers, as Buchanan calls those most in need of debt relief, would not receive the help they need.

There is precedent here, but it could be a one in a million kind of thing. Buchanan points to a New York Times story where a judge ruled that a homeowner’s mortgage debt could be completely discharged during bankruptcy. This loop in legal convention happened due to a technicality: the mortgage company couldn’t prove it had the legal right to collect payments on the homeowner’s mortgage due to the fact that their mortgage had been repackaged and resold so many times that the paper trail had been lost. The mortgage company claimed this was “standard procedure” now, but the judge wouldn’t accept such shenanigans. Since the judge wasn’t exactly sure who was due the money, he decided he couldn’t compel the consumer to make mortgage payments to any one party.

“Saved by a Technicality” Won’t Work for Everyone

Buchanan rightly points out that not all judges will be as determined to call mortgage lenders’ bluff in such situations. “Standard procedure” should hold in most cases, meaning that homeowners would still be legally obligated to follow the terms of their mortgage contract. And mortgage lenders have certainly learned something from that case and are making sure all paperwork is in order. Once again, the deck will be stacked against consumers.

Don’t Depend Upon Courts for Debt Relief

Courts enforce the law. When a consumer enters into any legal contract with a lender, the terms of that contract are in most case subject to enforcement by law. Buchanan considers the vast majority of consumers to be “grossly mismatched” against mortgage and credit card companies. Mandatory arbitration clauses, hidden interest spike triggers and means of computing interest are always written in the best interests of the creditor. Consumers often agree to such contracts because they feel they don’t have any other choice. New regulatory agencies may be able to curtail abusive practices that are currently considered legal, but until that time officially arrives, there is too little hope that the average consumer will be able to fight back through the court system.

Courts Have Been Friendlier to Finance Companies

Families can go to court to attempt to prove that they shouldn’t have to pay under the terms of less than legal contract. However, Buchanan believes most judges will stick to enforcing contract language. In turn, the lending companies themselves are effectively using the court system to compel consumers to pay, even if it is through wage garnishment.

What about “Equitable Doctrines” for Debt Relief?

Hoping that lenders lose their paperwork isn’t a good strategy. That’s where “equitable doctrines” come into play. These can create situations where courts might be willing to set aside otherwise valid contracts because they feel that it there were unconscionable circumstances that placed the consumer under duress or undue influence to sign. Buchanan draws our attention to the “doctrine of unconscionability” itself, claiming that it works in two ways. First, in terms of procedure, there is the scenario where a contract was formed under suspicious circumstances. Second, there is the scenario where the substance of a contract is deemed grossly unfair. If both conditions are met, a contract like a mortgage, credit card agreement, etc, will not be enforced.

Too Good to Be True?

Perhaps it is. It all looks great on paper, says Buchanan, but debt relief is hard to come by via equitable doctrines. Only the most extreme cases are considered by courts, and for most people, having trouble paying a mortgage or credit card they signed up for won’t be enough to sway a judge. This raises the question in Buchanan’s mind as to whether courts should be compelled by stronger legislation to accept equitable doctrine arguments based on things like unconscionability. But as with any other action fought through courts, the cost would likely be prohibitive. Moreover, lenders would still be favored because “losing a contracts case legally cannot result in a company paying punitive damages,” writes Buchanan. “If you lose a contracts case, you merely pay what you would have paid anyway; and if you win, you are ahead. Thus, from the standpoint of repeat players, there is no reason not to abuse your customers (except to maintain goodwill, which many of the companies at issue here have already forfeited).” Then there are plenty of consumers who simply will not have the stomach to sue or be willing to accept a lesser settlement.

Calling on the Government for Debt Relief

Traditionally, the government has remained behind the scenes while consumers have pursued their right to take debt relief matters before the court system. As Buchanan suggests, however, this route has not often proved itself to be effective for the average consumer. In situations where genuine signs of abusive practices and unconscionable contracts are involved, new government agencies could take up the baton and make financial regulation more consumer-friendly.

“An agency can be empowered by Congress to order changes in behavior, changing business practices broadly and generally in order to level the playing field on which financial institutions and their customers do business,” says Buchanan. There could even be scenarios where lenders themselves could support agency regulation over the courts. “Out of control lawsuits” that financial institutions claim burden them unnecessarily would certainly be something lenders would be willing to leave behind so that a regulating agency can rule on matters. “But that hypothetical,” Buchanan writes, “ignores the financial industry’s real agenda, which is to fight to maintain both weak legal rules (allowing them to win in court) and weak-to-nonexistent agency regulation.”

Congress, Act Now

New agencies are about to spring forth from the executive branch to regulate the financial abuse of consumers through deceptive practices. Congress is in a perfect position to arm these agencies with more consumer-friendly laws that will make reasonable debt relief easier to attain. It’s that kind of consumer protection that Neil Buchanan and most concerned consumers are in search of as America looks to emerge from the darkness of the recession into the light of a stronger domestic America.