By Nicole Woolsey Biggart and Dina Biscotti
In campaign years candidates highlight issues likely to engage broad voter concern. A surprisingly a hot issue in the run-up to the 2020 US presidential election was what the Center for Responsible Lending (CRL) has described as “predatory” consumer lending practices. CRL won a 2012 MacArthur Award for Creative and Effective Institutions and is part of the consumer financial protection movement.
Presidential candidate Senator Elizabeth Warren (D-MA), a Harvard Law School professor and expert in bankruptcy law, championed the creation of the Consumer Financial Protection Bureau, established by the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama in July 2010. Senators Cory Booker and Kamala Harris (D-CA) also ran for presidential candidates, raised the issue in their campaigns.
Lenders assume that borrowers make independent choices when signing up for loans or credit cards. Lenders assume too that individuals know best their own needs and can make rational decisions when borrowing. They believe borrowers can compare the offerings of different lenders and can make the right choice for themselves. This is the way a price logic works.
On the other hand advocates for reform in consumer lending—typically with regard to mortgages, payday loans, credit cards, bank overdrafts, for-profit educational loans and auto loans—often employ moral and associative logics. The moral arguments relate to notions of justice and fairness - how can individuals saddled with pressing financial needs remain coolly rational? How can an unsophisticated individual avoid manipulation by a corporate marketing effort? Moral arguments often claim that individuals may be legally equal but that poor schooling and social inequities disadvantage some borrowers over others, for example students from less affluent areas. As Senator Booker wrote in a letter to the New York Federal Reserve Bank protesting banking policies,
"African American college graduates owe $7,400 more in debt on average than their white peers when they receive a bachelor’s degree. This alarming difference is a crippling weight on the shoulders of borrowers of color, who are less likely to be able to afford a higher education"
The associative arguments against predatory lending focus on the collective power of financial institutions who lobby together through industry associations for lax regulations. Banking critics argue that this can undermine financial stability in the U.S. economy as a whole.
The consumer financial protection movement has gained momentum and recently recorded some notable victories. Many leading banks, such as Bank of America and U.S. Bank, have agreed to settlements from class-action lawsuits relating to the industry practice of reordering debit card transactions to boost fees.
Check out this brief video from CRL that explains how banks boost their fees by reordering transactions in their daily account balancing:
Additional Information:
Sara Garcia, Gaps in College Spending Shortchange Students of Color (April 5, 2018) https://www.americanprogress.org/issues/education-postsecondary/reports/2018/04/05/448761/gaps-college-spending-shortchange-students-color/