New protection agency can’t fully protect yet, UAB prof says
Posted Jul 22 2011 10:40am
The federal government's Consumer Financial Protection Bureau (CFPB) opened yesterday. Their website says their central mission “is to make markets for consumer financial products and services work for Americans.”
One thing the website fails to tell you is they do not have a director. So what happens now?
“Obviously, the agency needs leadership and a public face, but at the same time it is also an enforcement agency that looks to enforce rules that have already been established. For that, they do not need a director,” says Andreas Rauterkus, Ph.D., corporate government expert with the UAB School of Business .
The agency has oversight of more than 100 of the nation’s largest banks. They have no oversight over nonbank financial institutions such as payday lenders. The CFPB cannot make any rules concerning nonbank financial institutions without a director
“The legislation that is currently being discussed would curb the fees and would limit the annual interest to 36%,” says Rauterkus. “Given the current economic conditions any legislation that would protect consumers from those lenders would be very helpful.”
If you think 36% sounds high, here is an example of a payday loan today: a payday lender will charge the consumer $15 per $100 of a two-week loan. To calculate the APR you multiply 26 x 15. In this case, the payday lender’s APR is 390%. If you can’t cover that check on time and you’re charged another $15 the APR is now 780% so the consumer pays $30 to borrow $100.
“Payday lenders are preying on the people that do not qualify for loans from banks or do not have a bank,” says Rauterkus. “The people that go to payday lenders are desperate and are being taken advantage of.”
The slang definition of treading water is “to make efforts that maintain but do not further one’s status, progress or performance.” It is a fitting description of the consumer who relies on the murky ocean that is nonbank lending. If the current system remains they will tread water until they drown or they are eaten by a shark.