Protect Consumers from Other Consumers

The CFPB's mission is to protect consumers from financial harm.

Before rushing to grab privileged documents and punish unintentional "discrimination," the CFPB should figure out who's siphoning money unfairly from consumers—rather than just assuming that banks and those nasty "shadow banks" are the greedy culprits. But the CFPB seems to have tripped on the first step, so I'll help.

Example: an unusual, intensively advertised credit card program appeals to customers with no credit or bad credit, and approves 70% of applicants. These people send in $95 to get $225 in credit. Over half those who borrow default and are charged off. The others pay hefty additional fees and interest.

So, each defaulter comes out ahead by $225 minus $95, or $130. Having no credit in the first place, these people had nothing to lose. Very few will ever need to pay. If they are clever enough to send a "Do Not Contact" letter, they won't be bothered by collectors — assuming they can be found. The courts offer no feasible recourse. I’ll refer to these people as deadbeats.

If half the customers are deadbeats then every customer who pays off his balance, every payer, is providing $130 for a deadbeat. Think about that, check it out.

The bank is intermediary for this extraordinary transaction, and takes an additional cut. Whatever the bank is making, and they say they make very little — they get much less than the deadbeats. The bank has a lot of expenses, even marketing. The deadbeats have none.

Now, if you were Picketty or Saez, French economists using skewed data to decry allegedly horrifying economic inequality in America, then you might say this bank is performing a wonderful, Robin Hood-like function: transferring wealth from hundreds of thousands of "rich" to the "poor" (deadbeats) every year.

But are the deadbeats poor? Or are they just clever? Or crooked? Yes. But if rich, they wouldn't sacrifice their credit to steal $130.

In any case, it's the deadbeats who are getting the lion's share of the money, not the bank. If someone is ripping off the payers, that's the deadbeats.

This is not a "subprime card.” Subprime cards approve a much smaller fraction of applicants, incur far lower losses, and don't demand cash up front.

The most practical way to stop this would be to lean on the bank. For that to become politically possible, you'd probably have to provide 1,800 jobs in South Dakota, plus some contributions.

Another, much larger example: mortgages. Only a miracle could cap the GSE losses at $200 billion. These losses are incurred by taxpayers — once again, "the rich," since the poor don't pay taxes.

Who got that $200 billion? The banks? No, they got at most a few percent of what was improvidently lent. Hard-to-regulate street corner mortgage brokers probably got more. They're pretty close to being consumers.

Almost all of the $200 billion, at least $175 billion, went, once again, to deadbeats. Consumers. Some of them put up no down payment, never paid, and wlll stay for years. Many gambled on asset values--not much different from gambling on the stock market.

Any lending incurs losses, and these losses are part of the costs that borrowers who pay interest and fees have to cover. But if regulators such as the CFPB did their job, then the transfer of wealth from payers to deadbeats would be way smaller. In a well-run mortgage program, it's a fraction of a percent. In a typical card program, it's a few percent.