A number of diverse stakeholders gathered at George Mason University (GMU) on Nov. 18, 2019, to participate in a program entitled "Consumer Debt in America: What Would Rate Caps and Student Loan Forgiveness Mean?" The debate, which was moderated by Thomas Vartanian, executive director of GMU's Program on Financial Regulation & Technology, focused on two important streams of consumer lending: small-dollar loans and student education loans. Both are hot topics in the news right now as policy debates circle around the federal preemption efforts to avoid state usury caps and growing calls for student loan forgiveness.
The discussion on small-dollar loans took place the same week the Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) proposed a rulemaking to reverse the Madden v. Midland decision. The regulators hope this rulemaking will serve to clarify that entities to which a bank transfers or assigns its consumer loans can enforce those loans according to their terms so long as the loans were legally permissible when made. This clarification roils consumer advocates who believe it will permit predatory lenders to continue to use "rent-a-bank" schemes to circumvent state usury caps. Financial technology (FinTech) firms that engage in marketplace lending welcome the clarification, believing it will make it easier for them to offer loan products nationally.
Regarding the student loan crisis, debt forgiveness is being debated among Democratic policymakers and presidential candidates. In addition, the U.S. Department of Education finds itself with a number of requests for loan forgiveness based on the fraudulent representations and activity of certain for-profit colleges. Recently, students who attended for-profit colleges operated by Dream Center – the now-defunct Art Institute of Colorado and Illinois Institute of Art – between Jan. 20, 2018, and Dec. 31, 2018, had their federal student loan debts canceled and Pell Grant eligibility restored.1 At the same time, Congress and the Education Department are examining significant failures in the implementation of the public service loan forgiveness program, which has resulted in the rejection of 99 percent of all applications.2 The impact on federal investors in the related securities is not clear, but certainly has negative implications for the holders of this debt.
It is in the context of these headlines that participants gathered to discuss these topics. Ashley Harrington from the Center for Responsible Lending (CRL) supported a 36 percent interest rate cap on small-dollar loans and appeared to prefer, among other options she identified, a $10,000 across-the-board student loan debt forgiveness program. Karen Thomas presented the views of the Independent Community Bankers of America (ICBA), which mostly represents smaller community banks – the most likely partners for FinTechs in the small-dollar lending market. She maintained that such a cap would make it virtually impossible for community banks to make small-dollar loans profitably, and that student loan forgiveness does nothing to curb ever-rising tuition costs, one of the prime causes of the student loan debt crisis. In addition, Todd Zywicki, a GMU Foundation Professor of Law and one-time finalist to run the Consumer Financial Protection Bureau (CFPB) for the current Administration, said that price controls on credit do not work and are dangerous. He added that because of low repayment rates, the student loan program has morphed into a social welfare program.
The Nov. 18, 2019, consumer debt debate at GMU included:
Below is a summary of the questions addressed and the panelists' comments:
Q. Is a nationwide 36 percent interest rate cap on small-dollar loans a good idea as a matter of public policy?
Panelists disagreed, with Harrington in favor and the others opposed.
Harrington pointed out that such a cap:
Other panelists asserted that:
Q. What can/should be done to solve the student loan debt crisis?
All panelists agreed that student loan debt is a huge concern but that solutions to the crisis are difficult and must take into consideration unintended and potentially harmful consequences.
Thomas pointed out that:
Zywicki observed that:
A PowerPoint presentation for this program is available.
While the panelists' views diverged, there was consensus that a policy that cuts off the availability of credit to small-loan borrowers would be counter-productive, and that the search for a solution to the student loan debt crisis will be extremely difficult and require careful deliberation to prevent unforeseen adverse consequences.
For more information or questions regarding the GMU program, small-dollar loans and student education loans, please contact the authors.
2 As of June 30, 2019, 102,051 applications were processed, but only 1,216 were approved. Public Service Loan Forgiveness (PSLF) Program data
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