Friday, July 23, 2010

Government to Get Into the Pay Day Loan Business

Here's the latest discovery in the Dodd-Frank Bill, via ZeroHedge:
Deep in the bowels of Donk (DOdd-fraNK Financial abomination bill, whose 2315 pages nobody has read in their entirety), in Title XII: IMPROVING ACCESS TO MAINSTREAM FINANCIAL INSTITUTIONS, section 1205 is a provision titled "Low-cost alternatives to payday loans" in which the government outlines its plans for establishing what is essentially a payday loan advance business (and even odder, the title of Sec. 1205 in the Index references "payday" loans while the actual title of the section is "small dollar" loans - was mere "payday loans" too narrow a definition for the government and got changed in drafting, with the index remaining unchanged?)

(a) GRANTS AUTHORIZED.—The Secretary is authorized to establish multiyear demonstration programs by means of grants, cooperative agreements, financial agency agreements, and similar contracts or undertakings, with eligible entities to provide low-cost, small loans to consumers that will provide alternatives to more costly small dollar loans.

(b) TERMS AND CONDITIONS.—19 (1) IN GENERAL.—Loans under this section shall be made on terms and conditions, and pursuant to lending practices, that are reasonable for consumers.
Does this mean the government is going into the business of direct lending and bypassing the stingy banks completely? As payday loans tend to be the most usurious of all short-term credit instruments for the lower classes, will the government's intervention into this most recent arena result in the obliteration of the existing business model for payday lenders? But far more importantly, will the government use this platform as a means to provide cash to virtually anyone in exchange for shoddy collateral and mere promises to repay the loan? And nowhere in the text is it said the loans are  even collateralized with something like a deferred paycheck: these loans could very easily be on par or even worse than NINJA loans, in which the ability to breathe and walk at the same time is sufficient for eligibility, while the ability to actually repay never even figures in the loan officer's mind?

And lastly, what will be the penalties for delinquency and/or charge offs? Since this will come straight from the government's balance sheet (i.e. the Treasury), without bank intermediation, this will be the perfect forum for the government to lend out at any terms it desires, with the implicit understanding that it has no interest in getting paid back.
I smell a huge buy the vote campaign here. Obama has the unions in his pocket, but that's not enough to put him over the top. In Chicago, there have always been reports that get out the vote programs include cash payments to voters in poorer sections of the city so that they go to the polls.

This section of the Dodd-Frank Bill is all about Pay-Day Loans that are going to look a lot like those get out the vote payments, and a lot less like loans where you actually will need a job to back-up the loans.

With provisions like this, inflation will be back sooner than most expense, unless, of course, the Chinese decide to finance this insanity also.