Consumers Need Protection -- From Government

Posted: Oct 12, 2009 12:01 AM
Consumers Need Protection -- From Government

The latest installment of "change we can believe in" is sweeping reform of the financial services industry.

Central to proposed Democrat reforms is the establishment of a new Consumer Financial Protection Agency. This agency would have broad authority to oversee and regulate financial service products like mortgages and credit cards and will be responsible to protect consumers from "unfair" and "abusive" products.

Unfortunately, when bureaucrats get authority to determine what is fair, the very people who they supposedly are charged to protect -- us -- are the ones who get hurt.

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The most important product in our country is freedom and, unfortunately, it's this product that President Barack Obama and House Financial Services Chairman Barney Frank find most defective. They really think that politicians and bureaucrats can take better care of people than we can take care of ourselves.

Consider one of the most politically besieged financial services businesses in the country. Payday advance loans.

According to the website of the industry trade association, the Community Financial Services Association of America, the industry is relatively new -- it got started in the 1990's -- and now delivers about $40 billion in short term, low denomination loans.

You can't help but conclude this is a service many consumers want.

Sure, it's tough out there. Families trying to make ends meet and dealing with short-term cash flow problems is not a pretty picture. There's a lot of ways the challenges have been and are met. Bounced checks, pawnshops, bank overdraft protection, late fees on payments, informal extension agreements with creditors, etc.

Payday advance loans emerged as another way for families to deal with these challenges. And, as indicated by pretty phenomenal growth, it's clear that the product is successful.

Yet the industry is under constant attack by groups who appoint themselves to be the champions for consumer protection.

Regarding payday advance loans, their claim is that fees are too high. The business is regulated at the state level. State by state political initiatives have been advanced to put ceilings on rates loan providers can charge. Voters in Ohio last year approved capping annual rates on payday loans at 28 percent.

The result? According to one industry spokesman, "700 of the 1600 payday loan offices in the state have closed."

No one has been protected. They've only limited options available to free men and women. They can't seem to conceive that these consumers are adults who would not buy this product if they didn't want it.

There are many companies providing payday advance loans -- I count 55 on the membership list of their trade association -- so clearly competition is fierce to price these loans competitively.

I reported a number of years ago about the Illinois Fairness in Lending Act that established state oversight on mortgages offered in targeted low income-zip codes. Bureaucrats were given authority to dictate conditions of the loans and to require lenders to provide credit counseling. The result was drying up of credit in these zip codes.

Politicians can write their own music. But so far we're still free enough that people cannot be forced to dance to it.

So it will be with CFPA.

It's not an accident that the same organizations that attack the payday advance business are actively lobbying for the Consumer Financial Protection Agency. Nor is it an accident that one of these organizations has been the now scandal drenched ACORN.

These organizations, which unfortunately have the sympathies of our president and of Barney Frank, have little respect for creative dynamism of free markets. Their business is accumulating and exercising political power.

The great economist Milton Friedman once observed, "Many people want government to protect the consumer. A much more urgent problem is to protect the consumer from the government."

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