Predatory Lending Goes Deeper than the Corruption of the Trump Administration
The Trump administration is a boon for predatory lenders. Even before the latest rollback of protections from payday lenders, the administration had already been undermining a number of other borrower safeguards. Secretary of Education Betsy DeVos deserves special mention for all that she has done to aid predatory for-profit colleges.
But predatory lending, of course, is bigger than the Trump administration. In the Land of the Fee: Hidden Costs and the Decline of the American Middle Class, historian Devin Fergus shows us that several presidential administrations contributed in various ways to help build the current fabric of predatory lending. Fergus’ analysis focuses on four areas where many Americans have been subject to predation in recent years: subprime mortgages, student loans, auto insurance, and payday loans. He reports that these financial products “are now collectively costing working- and middle-class consumers in the United States more than roughly $1.46 trillion each year.” To varying degrees, the profits from of each of these products stem from the fact that corporations have exerted their power over policymakers to stack the deck against consumers.
Subprime Mortgages
Fergus informs us that the financial deregulation that led to the explosion in subprime lending began with the argument that if state anti-usury laws on mortgages were undone by federal legislation Americans would save more. If savers could earn higher interest in their savings accounts, they would put more money into these accounts. But a major reason why Americans weren’t saving more was because their wages were stagnant. For consumers, though, the cost of living continued to rise. This dynamic led some homeowners to use their home to generate income when home values rose rapidly over the 2000s.
Many of the home loans consumers obtained in this period were predatory. Fergus observes, “By 2005, at the height of the subprime mortgage boom, a majority (55 percent) of subprime loan recipients actually qualified for prime or conventional loans but were instead steered into the subprime lending market.” Investors could make more profits off the higher-interest subprime loans than off prime loans so investors followed the incentive and channeled customers into higher-interest products. While subprime loans benefited investors, their higher costs increased the risk of default for consumers.
Student Loans
In the 1990s, the Clinton administration proposed that loans for higher education should be issued directly by the federal government. Fergus states,
A direct loan was simpler, faster, and cheaper because it did not require the kinds of subsidies and guarantees that the federal guaranteed loan system did. The loan would be issued by the US Department of Education (with money from the Treasury) and not a private lender. . . . Multiple cost-benefit analyses of direct lending concluded that it was a more efficient and cheaper alternative than the incentive-laden deal of guaranteed loans.
While cutting out the bankers in the middle of the student loan system would be good for students and taxpayers, it would be bad for the bankers. The Republicans in Congress, always defenders of handouts for the rich, weakened and effectively killed the direct loan program.
Republicans also helped to create an environment where lenders would game the student loan system. Fergus reports,
For example, in 2002, the lender Student Loan Xpress controlled 5.15 percent of the loan volume at Columbia University. That figure more than doubled to 12.17 percent, however, after financial aid officers at Columbia received SLX shares from company president Fabrizio Balestri.
Fergus adds, “The Illinois state attorney general alone counted 270 colleges participating in rigging the loan process via preferred lending lists and other dubious practices.” US News & World Report compared “Sallie Mae and other private student lenders to ‘old time political ward bosses, [who] used money and favors, along with their friends in Congress and the Department of Education, to get what they wanted’.”
Thus, lender profits depended not on the quality of their product but on the fact that Republicans in Congress eliminated a cheaper alternative, and on bribes of government and university officials. These profits, of course, came at the expense of borrowers and taxpayers.
Auto Insurance
Fergus documents the sordid history of Charles Quackenbush, California’s first elected insurance commissioner. Insurance-industry money was crucial to Quackenbush winning his campaign and then, not surprisingly, he supported policies highly favorable to insurance-industry profits. Fergus states that Quackenbush serves as an illustration of “how special interest money in the political system distorts social policy and democratic will.”
While Quackenbush is a powerful example of what is wrong with our political system, auto insurance is also important because it is one of the forms of economic inequity that receives too little attention. Fergus states,
Auto insurance continues to be pegged primarily to where one lives rather than how one drives. As a result of this subsidy, the premiums of rural and suburban motorists were underwritten by central- and inner-city motorists. Over the driving span of the typical motorist, this subsidy costs urban motorists more than tens of thousands of dollars. Postal code profiling has continued to perpetuate one of the most surreptitious policies of wealth redistribution in our society.
As these points hint, a less explicit theme in Land of the Fee is that predatory capitalism often preys on people of color.
Payday Lending
Fergus reports that a 2012 study of payday lending found that “borrowers wound up paying $895 in fees and interest for a $375 loan.” And as with subprime lending, he points to stagnating wages as part of the root cause for the rise in payday lending.
But stagnating wages is not the only cause. Many states had anti-usury laws that prohibited loans as expensive as payday loans. Payday lenders found a way around these laws by partnering with traditional banks in states without these anti-usury restrictions.
Fergus concludes,
The short but significant history of payday lending since the early 1990s offers a glimpse into high-risk lending and how a laissez-faire policy agenda contributed to the spread of arguably the most hazardous of all consumer loan products, with interest rates ten to twenty times higher than those charged by credit card companies and with a track record of two out of every three borrowers ending up in default. Not only did a deregulatory environment make high-cost, high-risk (predatory) consumer products possible, but by also refusing to regulate rent-a-bank arrangements between paydays and federally insured banks, policymakers made sure that the buck stopped with the American taxpayer. Payday lending sheds light on the world of shadow bankers and their ability to skirt regulations even when engaged in the most risky of financial transactions.
Another feature of the era of predatory capitalism is the fact that while the profits are privatized, the risks are socialized. Any major financial meltdown in the payday lending industry will be paid for by taxpayers.
Land of the Fee presents a detailed history of how these predatory products came to be. In doing so, it provides a view into one major problem in contemporary American capitalism. Predatory capitalism is eating away at the foundations of the American economy.
The good news is that the Trump administration would not be working so hard to undo the Obama-era policies of the Consumer Financial Protection Bureau and Obama administration policies on for-profit colleges if those policies were not working to reduce predatory lending. In other words, we already have tools to begin to address the problem. What we are currently lacking is political leadership. Only when we find ways to elect policymakers who are truly interested in serving the American people as opposed to wealthy special interests will we be able to bring an end to predation.
