Obama on Predatory Lending

http://www.futureofcapitalism.com/2010/05/obama-on-predatory-lending

From the president's weekly address: "I just wanted to take a few minutes to talk about why every American has a stake in Wall Street reform. First and foremost, you have a stake in it if you've ever been treated unfairly by a credit card company, misled by pages and pages of fine print, or ended up paying fees and penalties you'd never heard of before. And you have a stake in it if you've ever tried to take out a home loan, a car loan, or a student loan, and been targeted by the predatory practices of unscrupulous lenders."

A FutureOfCapitalism reader writes in response:

Predatory lending—what is the definition of it?

Can you force somebody to borrow money?

Most attempts to prevent "predatory lending" or "usury" usually end up with people who want or need credit not getting it. They also end up protecting the interests of the most powerful, usually the dominant banks and financial institutions.

What is a good example of predatory lending that Obama wants to stop? The issue often gets distorted by translating fees and the like into annual rates of interest. So, if I am going to get my paycheck next week and it is $500 and I need $50 this week that I don't have, somebody may charge me $5 to borrow the money for a week. If you annualize that as an interest rate, the rate would be very high. But, is the $5 really interest or is it a fee for a service where the service has a certain degree of risk? What if this type of service were prohibited? Would the $50 that I owed to somebody cause me to lose an item I want or need, would it cause me to incur penalties on that obligation, etc.?

From a lender's perspective, getting paid $5 and sometimes not having the loan paid back at all is the risk I take on providing this service. This issue is very similar to the ATM fee issue. There are no fees for withdrawing money from an ATM at the bank I have an account, but there is from banks in which I don't have an account. Why should anybody expect a bank to provide ATM services to non customers for free?

Of course there are borrowers who are not as good at managing their affairs as other borrowers and some lenders willing to take more risk and providing loans to those who are less likely to repay them, but that is for the market to sort out.

These politicians don't even realize (or maybe they do) that they are reducing competition, reducing risk taking, reducing the discovery of new ideas that can solve or lead to solutions to problems that real people have.

The Wall Street Journal writes up the address basically uncritically and the commenters at the Wall Streeet Journal site are more skeptical that the reporter: "It's hardly surprising that President Obama announces that he's interested in keeping 'predatory lenders at bay' without giving us any idea of what he considers a 'predatory lender' to be."...."if lenders should be responsible for ensuring that borrowers can repay their loans, then why shouldn't all other merchants and service providers be similarly responsible? Then we'll have a society where nobody can buy anything without first divulging their financial information so the seller can make a determination as to whether they can afford it."..."Restrictions on pay day lending is a prime example of the proposed 'nanny state.'"

by Editor  |  May 16, 2010 at 7:51 am Related Topics:  Banking, Capital Markets Regulation, President Obama, Press receive the latest by email: subscribe to the free futureofcapitalism.com mailing list