Editorials of The Times: There's only one way to stop predatory lending

Congress in 2010 created the Consumer Financial Protection Bureau to stand watch, and it instructed the bureau to significantly expand the scope of the reports that mortgage lenders must file each year. The new data, which lenders submitted for the first time this year, makes it easier to identify predatory lending and discrimination.

This month, the Trump administration formally announced that it was reconsidering those new rules. It also proposed to increase the number of small lenders exempted from the requirements. And the administration made its sympathies clear by announcing it would not penalize lenders that failed to follow the new requirements this year.

Mortgage lenders have been required to submit basic data to the government since the 1970s, and that data has consistently revealed evidence of discrimination. At first, the problem was a lack of access: Minority applicants for mortgage loans were rejected at much higher rates than white applicants in similar neighborhoods with similar incomes. Then, in the 1990s and 2000s, the absence of lending was replaced by predatory lending. Over the last decade, lenders have returned to the older pattern of discrimination, according to an analysis published last year by the Center for Investigative Reporting.

Lenders long insisted that disparities did not prove discrimination, because the data did not include relevant information, such as credit scores and property values. They also fought fiercely to keep that information secret. The 2010 law stripped that shield, and the Trump administration lacks the power to restore it completely. That would require a new law. But regulators have a lot of room to weaken the current law.

Exempting smaller lenders would leave people in communities served by those lenders unable to assess their performance. It would also hamper assessment of aggregate lending patterns, particularly in rural areas. And the Trump administration could significantly reduce the value of the new data by tinkering with the details of the reporting requirements. A proposal to exempt loans to limited liability companies, for example, would shield a large chunk of the mortgage lending for multifamily housing.

The see-no-evil approach to mortgage lending is part of the administration’s broader effort to prevent the Consumer Financial Protection Bureau from protecting consumers of financial products. Under the leadership of Mick Mulvaney, who has since become President Donald Trump’s acting chief of staff, the bureau suspended a crackdown on payday lending, walking away from a plan to hold the industry responsible for making affordable loans. One of Mulvaney’s first decisions at the agency was to drop a lawsuit against an online payday lender that charged annualized interest rates of up to 950 percent on some loans.

The bureau ended special examinations of lending to members of the military and their families, who are often targeted by high-rate lenders whose offices are clustered around military bases. The bureau also moved to shield student loan servicers from state regulation. “The bureau has abandoned the very consumers it is tasked by Congress with protecting,” Seth Frotman, the official charged with supervising student loan companies, wrote to Mulvaney in a fiery resignation letter submitted last year. “Instead, you have used the bureau to serve the wishes of the most powerful financial companies in America."

The pattern extends beyond the bureau. The Labor Department last year abandoned a rule written during the Obama years that required investment advisers to act in the interest of their clients, and to tell clients when the advisers stood to benefit financially from a particular product. Advisers, for example, often earn large bonuses by persuading clients to buy fixed indexed annuities, which eliminate the risk of investing in the stock market at the expense of a significant chunk of the upside. After the Obama administration issued its rule in 2016, sales plunged as advisers became more cautious about marketing the annuities, perhaps adopting the view of independent experts that the products can be a waste of money. Then, in 2018, a federal judge set aside the rule and the Trump administration embraced the decision. Sales of fixed indexed annuities have since grown by more than 40%.

The Consumer Financial Protection Bureau was created because other financial regulators are ill-suited to the work of protecting borrowers. Those agencies are primarily responsible for the health of the lenders, and they have a long history of indifference to the welfare of borrowers — and even of prioritizing the health of lenders at the expense of borrowers.

Recent articles by Brian M. Rosenthal of The Times have documented this familiar pattern in the New York taxicab industry. Credit unions and other lenders profited by making loans without regard to the ability of the borrowers to repay those loans. The National Credit Union Administration, the industry’s regulator, issued special waivers to facilitate the lending binge, for example waiving a requirement for borrowers to make a 20 percent down payment. Rosenthal reported that the agency’s employees repeatedly documented violations of lending rules. But the agency did not act until 2014. The agency, by its own account, was focused on the solvency of the lenders — not the welfare of the borrowers.

There is a persistent myth that education is the solution, that well-informed borrowers will protect themselves. But lenders almost always have more experience and information, and the gap tends to be largest for the biggest and most consequential transactions, like the purchase of a home or a taxi medallion. A former Federal Reserve chairman, Ben Bernanke, wrote in his memoir that the 2008 crisis convinced him to abandon his view that financial consumers ought to be responsible for protecting themselves. “Like flammable pajamas, some products should just be kept out of the marketplace,” Bernanke wrote.

It is maddening that a lesson learned at such great expense is already being tossed aside.

This article originally appeared in The New York Times.