The U.S. government is simultaneously trying to shut down a legitimate industry and replace it with a taxpayer backed version. Pretty much everyone has heard of Obamacare by now, but what about ObamaLoans? No, this is not a joke.
Section 1205 of Dodd-Frank included a provision that turned a local San Francisco program (Bank On USA) into a national program by making Community Development Financial Institutions (CDFIs) eligible to compete with payday lenders. This competition will come at the expense of taxpayers because CDFIs receive nearly $300 million in taxpayer subsidies each year, all in the name of promoting economic growth in low-income areas.
CDFI’s and their affiliates, such as the Center for Responsible Lending, have been arguing that payday lenders are predatory because they charge exorbitant rates of interest – nearly 400%, they claim – to people who simply don’t know any better and have no other options. This sort of argument is wrong on many levels.
First, value is subjective so there’s no way to objectively state that consumers are harmed when they pay, for example, $15 to voluntarily borrow $100 for two weeks. Second, it’s illegitimate to claim payday lenders are charging a 400% annual percentage rate (APR) on a two week loan – the APR represents the yearly interest cost over the term of the loan. The interest cost really is 15 percent.
Naturally, payday lenders’ competitors don’t argue that these loans shouldn’t be made at all. Instead, they want to make the loans and use taxpayer funds to help them do it. To help speed the transition to a fully government-funded financial industry, the Obama administration instituted Operation Chokepoint, a program which aggressively investigates banks and payment processors that deal with payday lenders. These actions amount to an abuse of power, and Rep. Darrell Issa (R-CA) is investigating the matter.
The Justice Department surely knows it’s much less costly for banks to stop dealing with these companies than to submit to special audits, so the hope is that banks will stop dealing with payday lenders. All the while, the taxpayer-funded companies that will take the place of payday lenders are being supported financially as well as through legislation. Aside from the CDFI grants, the President has asked for more than $100 million just to fund the ObamaLoan program.
Now, the US Postal service – an agency that has lost almost $50 billion since 2007 – wants in on the act. The only recent experience the Postal Service has with money is losing it, but now it insists it can step in and provide payday lending services for 90 percent of the cost that it currently takes private businesses to deliver.
In the span of five years, the Federal government has identified large financial institutions as too-big-to-fail, small financial companies as illegitimate businesses, and payment processing companies as public utilities. Members of Congress have to dismantle ObmaLoans and Dodd-Frank before the entire financial industry is transformed into one large public utility.
Payday lenders should be applauded for filling a market niche that others don’t want to touch, not vilified for providing a service that others are happy to provide if they can use taxpayers’ money to do it.