Trump’s regulatory rollback boosts odds of a financial crisis

What will trigger the next financial crisis? Economists have been raising alarms about high-risk debt, but the real danger may be closer to home.

Since taking over, Trump’s administration has been wiping out measures designed to prevent consumers from being ensnared in unsustainable debt and, at the same time, eliminating borrowers’ ability to seek court-ordered relief when they are.

{mosads}Consumers are the engine of the economy, accounting for 6 to 7 cents of every dime spent, so these policies put everyone, including taxpayers, at risk. It’s a scenario eerily reminiscent of events that drove the U.S. into a ditch in the Great Depression of the 1930s and the Great Recession 10 years ago.

Lenders who created the more recent mess and reaped hundreds of billions of dollars in fees weren’t held accountable, leaving consumers and taxpayers to pay the consequences of loans that never should have been made.

For now, economic growth has been relatively solid, but the New York Federal Reserve Board reported household debt reached $13.54 trillion in 2018, higher than the previous peak of $12.68 trillion in 2008 when the mortgage crisis was in full swing.

U.S. household wealth fell by $3.8 trillion at the end of 2018, a 3.5-percent decline and the biggest quarterly loss since late 2008. The biggest wealth gap since the 1920s — with the rich getting richer, the poor poorer — persists.

Trump’s undoing of the Dodd-Frank Act, which Congress passed in 2010 to end the unsustainable consumer debt that triggered the mortgage crisis and plunged the country into the worst downturn since the Great Depression —produces a toxic mix: rising consumer debt and decreasing oversight of lenders.

Take student loans. Federal Reserve Board researchers find student loan debt, which more than doubled to $1.5 trillion in the last decade, hobbles the housing market, a bedrock of the economy: Student debt kept 400,000 buyers out of the home market in 2014, the most recent year available, alone.

Despite such evidence, Secretary of Education Betsy DeVos has declared her department’s authority preempts recent efforts by states to police abuses by student-loan servicers and debt collectors.

Hers is the same argument regulators used to prevent states from enacting safeguards in mortgage lending that might have prevented the crisis a decade ago.

The Department of Education’s inspector general finds inadequate oversight may have increased “interest or repayment costs” and otherwise made it harder for students to wrestle debt.

Trump appointees have turned the Consumer Financial Protection Bureau (CFPB), created by Dodd-Frank, from an office enforcing safeguards against such abuses into one that merely offers information.

Last August, a key CFPB official resigned in protest, saying under Trump “…the Bureau has abandoned the very consumers it is tasked by Congress with protecting. You have used the Bureau to serve the wishes of the most powerful financial companies in America.”

Trump appointees also stripped enforcement powers from the bureau’s unit responsible for pursuing discrimination cases in all lending.

Other instances abound:

Veterans: The administration claims it lacks the power to enforce the Military Lending Act, which caps interest rates at 36 percent. High-cost lenders often target military families.

Farmers: China’s retaliatory tariffs have pushed soybean sales alone down 94 percent, despite Trump’s doling out billions in taxpayer subsidies to soften the blow. Farm debt is now $409 billion, up from $385 billion last year and approaching levels of the 1980s agricultural crisis.

The Wall Street Journal found bankruptcies in three major farm regions rose last year to their highest levels in a decade, even before massive flooding hit the Midwest.

Consumer loans: Requiring lenders to assess a borrower’s ability to repay a loan before extending credit makes common sense. Trump’s regulators, however, say payday lenders and car title lenders — the legal loan sharks of finance — and even some mortgage lenders don’t have to do this.

Lax underwriting behind the risky home loans that sparked the mortgage crisis caused millions of Americans to lose their houses and required hundreds of billions in tax dollars to bailout the nation’s biggest bankers.

The Federal Reserve Bank of New York recently found 7 million auto loans were 90 days or more behind in payments, with subprime lenders who charge the highest interest rates causing much of the slump.

Denying a day in court: Forcing consumers into arbitration instead of letting them sue if they have a grievance has been top of lenders’ wish list for decades.

Trump, aided by Congress, has killed a rule that would have preserved consumers’ rights to go to court in class-action cases, typically the only way poorer consumers can afford legal counsel.  

Barring lawsuits disadvantages consumers, who in a populous state like California lose in arbitration 94 percent of the time when companies file complaints or counterclaims.

Overriding state laws: Federal bank regulators now offer a national charter for lenders who make mortgages but don’t take deposits.

The charter exempts these so-called “non-banks” from state laws aimed at safeguarding consumers, such as legislation Maryland lawmakers are considering to require lenders to assess a borrower’s ability to repay a loan and to protect students from excessive debit card fees.

Retirees: Trump has effectively killed a rule to require financial advisers to act in the best interest of soon-to-retire workers seeking advice on investing savings. It would have prevented conflicts of interest when financial advisers earn commissions on recommendations that might yield lower earnings for investors.

FHA borrowers: In an exception that proves the rule, the Federal Housing Administration announced it will tighten standards on its loans to the highest-risk borrowers.

{mossecondads}President Barack Obama’s administration imposed similarly tough rules in 2013 as mortgage defaults rose during the recession, only to lift them under pressure before the 2016 election. A rise in troubled mortgages ensued, prompting the FHA’s decision to re-toughen standards.

Regulators elsewhere in the Trump administration should take heed: Debt has its place in a healthy economy. With appropriate safeguards, there’s a lot to like, but without them, there’s a lot to lose.

Martha Hamilton was a Washington Post business reporter and editor for over 20 years, before joining the International Consortium of Investigative Journalists as a senior editor, where she was part of the team that won the 2017 Pulitzer Prize for the Panama Papers.

Kathleen Day was a business reporter for the Washington Post for over 20 years, specializing in financial services, before joining the Johns Hopkins Carey Business School in 2013 as a full-time lecturer. Her new book is “Broken Bargain: Bankers, Bailouts and the Struggle to Tame Wall Street,” (Yale, 2019).