Now that the Consumer Financial Protection Bureau is awake and lumbering through the streets, it might be a good idea for financial reporters to do some background reading. At the very least, they should try to get the details right when reporting on it.
Check out this story with Maria Bartiromo and Herb Greenberg. Bartiromo introduces Greenberg, saying they’re going to “zero in on the housing market” with “Herb Greenberg watching a subprime lender.” Greenberg then says that his story is about a “consumer installment lender” called World Acceptance.
A couple of problems here. Although Greenberg seems to know that installment lending and mortgage lending are different things, the whole set up seems designed to confuse and conflate the two. This might not matter except that it’s crucial to know the difference for evaluating their presumably newsworthy factoid, namely, that World Acceptance charges a rate of up to 204 % on loans (though the average is around 67%).
This is all set up so that Greenberg can then introduce the work of the CFPB, which he notes could make trouble for companies such as World Acceptance.
Viewers who are unfamiliar with the consumer installment loan industry will imagine someone buying a thirty year mortgage at this rate. And the multiple references to “subprime” in this context can only conjure up images of the disastrous government meddling in the mortgage market that triggered the financial crisis.
But these mental associations are the result of an illusionist’s tricks. As Greenberg himself explains (in an otherwise misleading set up), World Acceptance gives small loans averaging about $1,000 to people that are “otherwise unbankable,” “they can’t really get credit elsewhere.” In other words, the people who use these loans are almost certainly not watching CNBC, and the average CNBC viewer probably doesn’t even know anyone who relies on such loans. So World Acceptance and other comparable companies are a “safe target.”
It’s extremely misleading to compare these installment loans to mortgage loans that most people are familiar with. On small loans to such borrowers, processing costs are proportionately very high and the risk is considerable. Moreover, these institutions don’t enjoy a federal safety net if they get into trouble. So an annualized interest rate will look very high to anyone who doesn’t understand the details, even if the rate accurately represents the underlying work and risk of the loan.
Though misleading, this is exactly how you’d frame the story if you wanted to portray the CFPB as a benevolent defender of the poor and downtrodden against greedy capitalists.
We are going to see this type of story repeated over and over as the CFPB acquires its taste for blood. The only question is whether financial reporters will carry its water, and give it the scrutiny it deserves. In Greenberg’s accompanying article, he tells readers to “keep an eye on this 204% lender.” On the contrary. Discerning viewers and readers should keep their eye on this scary government agency that suddenly has the power to torment law abiding private industries.