Friday, November 7, 2008

How might an Obama/Biden administration change p2p lending?

With the historic election of Senator Obama and Biden this week, the focus is now on what changes they will bring to the country. There are many proposed changes that might have an impact on peer to peer lending. According to change.gov, a site set up by the Obama-Biden Transition Project, "In the Illinois State Senate, Obama called attention to predatory lending issues. Obama sponsored legislation to combat predatory payday loans, and he also was credited with lobbying the state to more closely regulate some of the most egregious predatory lending practices."

While I do not believe Obama has ever specifically mentioned p2p lending, there are several of his economic proposals that are likely to impact the industry. Some of these proposals may influence the demand for loans or have other second and third order effects. Other changes may have a regulatory influence on the industry. Here are some of the specific proposals from change.gov:

Address Predatory Credit Card Practices

Obama and Biden will establish a five-star rating system so that every consumer knows the risk involved in every credit card. They also will establish a Credit Card Bill of Rights to stop credit card companies from exploiting consumers with unfair practices.

  • Create a Credit Card Rating System to Improve Disclosure: Obama and Biden will create a credit card rating system, modeled on five-star systems used for other consumer products, to provide consumers an easily identifiable ranking of credit cards, based on the card's features. Credit card companies will be required to display the rating on all application and contract materials, enabling consumers to quickly understand all of the major provisions of a credit card without having to rely exclusively on fine print in lengthy documents.
  • Establish a Credit Card Bill of Rights to Protect Consumers: Obama and Biden will create a Credit Card Bill of Rights to protect consumers. The Obama-Biden plan will:
    • Ban Unilateral Changes
    • Apply Interest Rate Increases Only to Future Debt
    • Prohibit Interest on Fees
    • Prohibit "Universal Defaults"
    • Require Prompt and Fair Crediting of Cardholder Payments

Reform Bankruptcy Laws

Obama and Biden will reform our bankruptcy laws to protect working people, ban executive bonuses for bankrupt companies, and require disclosure of all pension investments.

  • Cap Outlandish Interest Rates on Payday Loans and Improve Disclosure: Obama and Biden will extend a 36 percent interest cap to all Americans. They will require lenders to provide clear and simplified information about loan fees, payments and penalties, which is why they'll require lenders to provide this information during the application process.
  • Encourage Responsible Lending Institutions to Make Small Consumer Loans: Obama and Biden will encourage banks, credit unions and Community Development Financial Institutions to provide affordable short-term and small-dollar loans and to drive unscrupulous lenders out of business.
  • Reform Bankruptcy Laws to Protect Families Facing a Medical Crisis: Obama and Biden will create an exemption in bankruptcy law for individuals who can prove they filed for bankruptcy because of medical expenses. This exemption will create a process that forgives the debt and lets the individuals get back on their feet.

Higher Education

  • Create the American Opportunity Tax Credit: Obama and Biden will make college affordable for all Americans by creating a new American Opportunity Tax Credit. This universal and fully refundable credit will ensure that the first $4,000 of a college education is completely free for most Americans, and will cover two-thirds the cost of tuition at the average public college or university and make community college tuition completely free for most students. Recipients of the credit will be required to conduct 100 hours of community service.
  • Simplify the Application Process for Financial Aid: Obama and Biden will streamline the financial aid process by eliminating the current federal financial aid application and enabling families to apply simply by checking a box on their tax form, authorizing their tax information to be used, and eliminating the need for a separate application.
Will any of these proposals, if enacted, have an impact on the p2p lending marketplace? What do you think?

4 comments:

Jared said...

You go Obama, before too long we will all have to wear the same color shirts! Capping interest rates on payday loans at 36% will do nothing but take that option away from the consumers who really need it.

ironblue said...

Nobody, but nobody is able to stop someone act foolish. If you have to eat without money nor savings nor place to go to work, whatelse can you do? Commit suicide? If the one has been disabled to have knife, gun, rope or anything. Nobody loan you a penny. That is where the social security comes in. Other than that, you have to learn in hard way with your own responsibility. One unserstands foolishness only after he learns that it is foolish, don't you think?

Dana Seilhan said...

I am outraged that people actually think payday lending is impossible at lower than a 36 percent interest rate. How in the world do you think credit cards stay in business with rates below 25 percent? They spend a lot more on advertising and swag (same thing, only tangible), too.

I guarantee you that if people aren't overwhelmed with crushing interest debt, you will see a much higher repayment rate on payday loans. Then there will be higher turnover--loans are repaid, then people can take out new ones, and ultimately the lender makes its money anyway. Also, the lender doesn't have to lose all kinds of money going after people who default.

There is no universal law of nature or science that forces lenders to charge usurious fees to people with bad or nonexistent credit. None. Payday lenders choose to go out of business or to cut back on branch locations when states pass laws requiring them to quit screwing over the poor. Lenders in general choose to hit borrowers with higher interest rates when the borrowers don't have the income to keep their heads above water at 30 percent or 40 percent or more. None of this is forced. They chose to act this way and they can make a different choice.

It's amazing how the poor are always expected to perform superhuman acts of discernment, heroics, bravery, and morality while every single other economic class can screw around all it wants, make all kinds of dumb mistakes and then go to Uncle Sam with its collective hand out, without a twinge of guilt. The rich get away with this far more than anyone else because they can grease the palms of Congress to a greater degree. But the poor are supposed to be perfect or else they are not worthy of help or consideration or even of being treated like human beings.

I didn't vote for Obama (I favored Cynthia McKinney), but I'm GLAD he's talking about these changes. Even if he can't or won't follow through on all of them, the man's done his homework on what sorts of financial obstacles are faced by the poor. Which is a lot more than you can say of anyone else who's ever sat behind the desk in the Oval Office.

Dana Seilhan said...

I should add that here in Ohio, we just passed a law requiring payday lenders to lower their interest rates to something more closely approximating a rate that a low-income person has any hope of repaying. And the payday lenders haven't even waited to see how it would play out. They're going ahead and closing locations. Probably because they threatened to do so during campaign season and don't want to lose face.

I would love to help lower-income people figure out peer-to-peer lending, because if the payday lenders don't want their business anymore, they've got to go somewhere.