After the Great Recession: Regulating Financial Services for Low- and Middle-Income Communities

I. IntroductionI was asked several months ago to talk about payday lending on a television program hosted by Jesse Jackson. I've written about payday lending in the past,1 and because I have not condemned it entirely, my initial impression was that I was expected to provide a devil's advocate perspective that would collapse under withering questioning from the Reverend Jackson.But when the show was filmed, nothing could be further from the truth. The questions he wanted to talk about were things like "Why won't banks serve our communities anymore?" and "Why do people hate payday lenders so much?" and finally, "What do our communities need to know to use this product safely?" The other guests were legislators that had adopted legislation enabhng payday loans, a financial literacy expert, and Jackson's son. Ultimately, Jesse Jackson hoped the show would ease the way for payday lenders to thrive in the communities about which he cares so deeply.When I thought about this incident over the ensuing months, I became less and less surprised. From the perspective of financial services, the low- and middle-income (LMI) communities in our great cities face disheartening challenges. Their need for financial infrastructure has grown markedly during the Great Recession:* millions of LMI households are under water on thenmortgages;2* millions of LMI households are mired in long-term unemployment that strains their ability to meet regular expenses;3* millions of LMI households are so underinsured that they face rapidly rising out-of-pocket costs for health care;4* education costs are rising at rates far in excess of inflation at the same time as pressures from globalization make advanced learning a basic necessity for economic survival;5* and finally, because I like to talk about data, we have just learned from the Census Bureau's "Supplemental Poverty Measure" that the number of households in poverty has been undercounted - by millions - for the last several decades.6As their need for financial services has grown, Congress has moved briskly to undermine the financial institutions that serve these communities, especially the community banks and credit unions on whom they depend for deposit-account services and small-business lending. Among other things, by singling out large institutions for what amounts to a federal guaranty of their obligations,7 the Financial Stabihty Act8 raises the relative cost of borrowing for smaller institutions,9 which do not get that guaranty.Similarly, closer to home for me and our topic, the Durbin Amendment10 fixes prices for debit-card interchange at a markedly below-market level.11 Because of economies of scale in debit-card processing, the fixed price is several multiples of the costs large banks incur in those transactions, but substantially below the costs of the typical credit union or community bank.12 Both statutes relatively disadvantage those institutions. It is all but inevitable that they will close branches in areas populated by their least creditworthy customers - the LMI households about whom I am talking today.That brings me to my topic for the day. Can we make sense of this problem? Are those who care deeply about LMI communities lashing out in the wrong direction when they complain about bank closings? Are they insane to welcome the alternative- service providers that fill the gaps the mainstream financial institutions leave behind? How, precisely, should we think about regulating LMI financial services in the post-recession environment in which we live?I want to break this down into two stages. First, I want to discuss the modern, post-recession regulatory strategy, the Consumer Financial Protection Bureau (CFPB) being the exemplar here. Second, I'm going to explain two fundamental flaws at the heart of this strategy - its emphasis on solutions targeted at the problems of white, middle-class households, and its premise that the basic problem with financial services lies in the market interface between the financial-services firm and its customer. …