Somebody recently quizzed me about my political affiliation: Am I conservative, liberal or libertarian? As I started talking, I realized that what’s really important to me is simply being American and having the liberty to decide for myself what’s right and what’s wrong regardless of any party ideology. Let politicians and philosophers wrestle with the definitions. So when I stumbled on this story in the Wall Street Journal, “Payday Lenders Join with Indian Tribes,” it really made me question my views on entrepreneurship, the free market and the unintended consequences of regulation. From the Journal piece:
“Because of the sovereign immunity granted to tribes by the U.S. government, they are shielded from interest-rate caps and other payday-loan regulations. Tribal lenders can even lend in the 12 U.S. states where lawmakers have kicked out the rest of the payday-loan industry.”
In other words, certain creative payday lenders — companies that make short-term, low-denomination loans — have found a way, upheld by the courts, to avoid all state and potentially any federal regulations issued by the Consumer Financial Protection Bureau (CFPB). Even if I support entrepreneurship and the free market, is this creative capitalism or the Wild West?
Let me try to wrap my mind around this. Indian tribes, looking to clone their lucrative but controversial casino model, lend their sovereign immunity out to the highest bidder — no questions asked. The Internet lenders rent a P.O. Box based on an Indian reservation and blow off all the state attorneys general who file lawsuit after lawsuit against them. They even get to operate in the 12 states that have banned their competition — brick and mortar short-term lenders.
The CFPB, the darling of liberals, who want to regulate all monetary transactions in America in order to eliminate any winners and losers, is left completely out of the loop by this scheme. Right after the agency figures out what color ink to mandate for our mortgage documents, they’ve promised to begin regulating the small-loan market of payday lenders, title lenders, pawn brokers, etc. This means the store-front lenders who choose to follow the rules, operate in their hometown communities and employ their neighbors will be left to face the wrath of the CFPB while the rogue lenders — hiding behind the ponchos of Indian reservations — will be free to charge customers whatever they want and snicker all the way to the bank. No wonder that the national trade association representing the store-front lenders wholly denounces the Indian partnership model.
So, as someone who’s always believed in the free market and feels that unregulated commerce is the key to liberty, how should I feel about this issue? Should the payday lenders who have found a way around state and federal laws by operating on Indian reservations be rewarded for their entrepreneurial ingenuity? Ultimately, I have to say no. Why? Because the free market only works when similar businesses are regulated by uniform laws, and the winners and losers are determined by the market’s decisions alone. The CFPB, by trying to regulate away free market choice, has already awarded the jackpot to the (currently legitimate) Indian tribes and online lenders and made consumers the rubes. This isn’t the free market or liberty — it’s what happens when regulators get outsmarted.
Natasha Mayer is a political consultant in Washington, D.C.