The Two-Income Trap - Elizabeth Warren [78]
Attempting to stamp out “predatory” and “unfair” practices is certainly better than ignoring them, but it puts legislators in the position of trying to uncover the latest shenanigans and redefine abuses, always two steps behind the lenders who keep changing their products to sidestep regulations.85 It also gives far too much room for lenders to circumvent the intent of the law. For example, the New York State Banking Department recently banned “unaffordable loans,” except “under compelling circumstances.”86 We suspect that any crafty loan marketer could dream up some “compelling circumstances” that would permit a lender to sell overpriced loans. The only way to stop predatory lending once and for all is to go directly to the heart of the loan—the interest rate. Limiting the amount of interest that creditors can charge avoids the hide-and-seek game over what is and what is not “predatory,” offering instead a simple, effective means of regulation.
In order to achieve the real dream of “credit democratization,” it is time to recognize, once and for all, that families are not better off getting credit at double, triple, or even ten times the market rate. If a family does not have the income to qualify for a loan at a reasonable rate, then they should not get that loan. It does no one any favors to impose a modern-day debtor’s prison on hard-working families. They would be better off renting an apartment and putting whatever extra money they have into savings accounts rather than paying double the market rate for a mortgage. If the private market cannot meet the needs of all communities, then it may be necessary for the government to step in to provide alternative sources of credit.87 The point worth emphasizing is that overpriced credit is no solution. Getting robbed to buy a home or to get a cash advance is still getting robbed, and it should be illegal.
Deafening Silence
If America’s crippling addiction to debt could be shaken off with a simple regulatory change, what are the politicians doing about it? The answer, quite simply, is nothing.
As the number of mortgage foreclosures skyrockets, as credit card debt soars, as the lines at the bankruptcy courthouse stretch out into the street and around the block, all we hear from Washington is the sound of silence. There has been no serious progress on any proposal to rein in predatory lending: no measure to control credit card fees, no proposal to ban creditors from trying to collect from a dead person’s brothers and sisters, and certainly no bill to bring back meaningful limits on interest rates. The national political parties have found time to take positions on the speed of the Internet, ergonomic standards in the workplace, and regional restrictions on dairy products, but they have claimed no position on the financial issues that profoundly affect millions of middle-class families.88
There is, however, one notable exception to all that inaction. Congress has paid attention to one troubling statistic—the rapidly growing number of families filing for bankruptcy. High interest rates and aggressive marketing of complicated debt products echo through the bankruptcy statistics, as record numbers of families seek refuge in the bankruptcy courts after getting in over their heads with too much easy credit at exorbitant interest rates.89 In 1994, Congress created a bipartisan commission to study the issue. The group’s charter was relatively straightforward: to investigate why so many families were in trouble and to develop recommendations to improve