It is called the vine that ate the South. Kudzu was first introduced at the 1876 Centennial Exhibition in Philadelphia as an ornamental plant for home gardens. It pretty much stayed that way for half a century, until the federal government got involved. The Roosevelt administration decided that kudzu would be helpful against soil erosion and made it a mission of the Soil Erosion Service to plant kudzu all across the South. Now kudzu covers 12,000 square miles. Kudzu is estimated to smother another 150,000 acres each year.
As with kudzu, the idea of the Bureau of Consumer Financial Protection seemed like a good idea at the time, seeded and fertilized by good intentions. Its sponsors may have little imagined the bureau’s remarkable appetite for turf, little sated by the transfer of 14 federal statutes by the Dodd-Frank Act. At a May conference on “big data,” a senior bureau official reportedly observed that the failure of Congress to enact laws is not necessarily a significant impediment to bureau involvement.
Where Congress has spoken, statutory restrictions may prove imperfect barriers to the bureau’s efforts to bypass obstacles. While Dodd-Frank excludes auto dealers from bureau jurisdiction, the agency has given enforcement attention to lender compensation of auto dealers for arranging car loans. In recent days, the bureau announced a major inquest into lending programs by nonbank auto finance companies. Community banks are likewise finding little comfort in their statutory exclusion from bureau examination teams as mortgage, remittance and deposit product rules in the bureau’s bailiwick are energetically applied by their banking regulators.
The bureau’s reach also extends to areas that fall under the purview of other agencies. Eyebrows were raised by enforcement actions against telecom companies. Colleges and universities have received unsolicited bureau advice on how to partner with banks. Bureau leaders do not disown influence in current proposals by the Defense Department to expand restrictions under the Military Lending Act.
To some, this might sound like the usual Washington empire-building, and certainly it is. Its effects, though, go even further. Much like planting kudzu in a rose garden, the unchecked spread of the consumer bureau threatens to smother when it tries to protect.
Consider the very real needs of people in the market for small-dollar loans. Banks effectively supply most of this market through credit cards. For those who either do not want or do not qualify for credit cards, banks struggle to offer alternatives. Regulatory pressures, however, have been raising costs, marginalizing millions of people in need of small-dollar loans.
In the name of helping borrowers, the bureau is actively working on regulations that would only compound problems and choke off access to small-dollar credit. The bureau’s contemplated design would mandate an installment loan straitjacket, a bad fit for the marginally employed for whom one-time loans with one-time payments are workable but regular installment plans are a challenge. Another proposal would impose customer examination requirements more expensive than what a lender could earn from the loan. The bureau-inspired rules under the Military Lending Act would render off-limits many military borrowers, a group in which the need for small-dollar funding is particularly concentrated. The bureau’s consideration of debit-card overdraft services could close yet another door to small-dollar credit, popular with millions of customers.
While erecting these hurdles to bank funding, the bureau’s well-known animus to payday lending could complete the smothering of all but “informal” sources for small-dollar loans.
A paternalistic few would assert that credit to these borrowers encourages profligacy among the poor. The need, however, to use credit to manage the timing of income with expenditures borders on the universal. When crisis or unexpected hardship creates a demand for credit, lack of access can foment desperation. The consumer bureau’s advocates surely did not intend that effect on consumers. There are social as well as economic reasons to serve this market. What we need are approaches that cultivate small-dollar lending, not choke it off.
By the way, in 1998, some 60 years after promotion by the federal government, Congress officially declared kudzu a “Federal Noxious Weed.”
• Wayne A. Abernathy is executive vice president of the American Bankers Association. Previously, he served as assistant secretary of the Treasury and as staff director of the Senate Banking Committee.