Table of Contents Introduction I. Access to Credit Debates A. The CFPB's Payday Lending Rule: Regulating Fringe Credit 1. A primer on payday lending 2. Debating the Payday Lending Rule B. Madden v. Midland Funding, LLC II. The Rise of Credit as Social Provision A. The Beginnings of Credit as American Social Provision B. Success in the Halcyon Days of Economic Prosperity C. The Essential Decline of Credit as Productive Policy 1. Credit and civil rights 2. Credit deregulation as social provision 3. Credit as social mobility III. The Limits of Credit as Intertemporal Redistribution A. The Limits of Intertemporal Redistribution for the Working Poor B. Credit Dependency as Regressive Redistribution Conclusion Introduction
"The poor stay poor, the rich get rich. That's how it goes. Everybody knows." --Leonard Cohen (1)
Credit has become an important source of American social provision. (2) Consequently, access to credit has come to rest at the center of the discourse on economic well-being, particularly with respect to low-income communities. (3) For example, this discourse has focused on the relative risks and benefits of subprime small-dollar lending--particularly payday lending--in low-income communities. (4) Increased access to credit forms the premise on which rest varying approaches of how best to regulate this subprime credit market. (5) Although these approaches may diverge in perspective and prescription, they converge on the notion that credit is important for low-income Americans, (6) whether as a viable mechanism of smoothing consumption (7) or as a catalyst for social mobility. (8)
For example, the legislative debates that have emerged in the wake of the Second Circuit's 2015 decision in Madden v. Midland Funding, LLC (9) and the 2017 "Payday Lending Rule" promulgated by the Consumer Financial Protection Bureau (CFPB) (10) center merely around the optimal regulation of credit for high-risk, low-income borrowers. (11) There is otherwise minimal engagement with the essential threshold question whether credit is a viable component of social provision for low-income Americans. Even the fiercest proponents of low-income financial rights and equality regard credit as a second-best playing field on which to engage questions of economic equality for the working poor. (12) Thus, even as these advocates fight for economically disenfranchised communities, they do so in inherently market-based terms.
This notion of credit as social provision for the working poor is deeply flawed. The logical problem with credit as a form of social provision for low-income Americans is that there is an essential "mismatch" between the problem and the solution. (13) At its best, credit is a form of intertemporal and intrapersonal redistribution--credit shifts an individual's future capital to facilitate present consumption. (14) This means that for credit to be "productive," the resulting debt must be "repaid by a much richer borrower to whom that amount of debt is worth less." (15) Put another way, for credit to work as social provision, it must be extended on terms that are likely to result in an overall improvement in welfare. Consequently, credit as meaningful social provision for low-income borrowers implies an expectation that notwithstanding their present condition, low-income borrowers will be better off in the future and able to repay their debts without hardship. This is an unduly optimistic expectation given both the high interest rates that low-income borrowers tend to pay and the fact that decades of data suggest that low-income Americans can consistently expect to be in worse economic shape as time passes. (16) Credit is fundamentally incompatible with the entrenched intergenerational poverty that plagues low-income Americans.
How then did credit come to enjoy such seemingly universal support as a source of meaningful social provision for the working poor? One answer is that credit has been a tool of social provision since at least the Progressive Era, deployed at the margins by poverty advocates and policymakers to address the needs of newly urbanized and vulnerable Americans. (17) Successful New Deal innovations transformed credit from a marginal welfare device into a central means of broad social provision. The National Housing Act ushered in advances in state-backed, private credit subsidies, which worked to smooth unpopular distributional dilemmas during the recovery from the Great Depression. (18) Thus, by one account: "The real innovation of New Deal policy was neither direct state investment nor planning ... but more the practical harnessing of private capital for social ends." (19)
President Franklin D. Roosevelt's embrace of this credit-based mortgage Keynesianism established government-subsidized consumer credit (specifically to facilitate the consumption of homes) as central to broader economic well-being.(20) The United States was on the cusp of the "Golden Age of Capitalism"--the approximately thirty-year period of unmatched economic growth after World War II. (21) Accordingly, the Americans (largely white) who took advantage of government-sponsored credit were able simultaneously to borrow and save because their real wages were rising each year and their property values were ever increasing. (22) Hence, government-subsidized, private credit became a catalyst for building the white middle class, engendering in this new cohort a level of personal wealth not previously experienced in American history. (23)
Credit during the New Deal and at midcentury was successful as social provision because it coexisted with consistent economic growth and opportunity. This view reflects the notion that credit and debt often amplify the underlying set of circumstances into which they are introduced. (24) Thus, where credit and its amplifying qualities are concerned, what is good gets better, and what is bad gets worse. (25) Decades of credit policy in the midst of decades of economic stagnation and decline for low- and middle-income Americans underscores this notion. (26)
Because persistent privation is common among the working poor, (27) even credit extended on good terms is unlikely to have positive welfare effects. (28) Indeed, against the backdrop of decades of entrenched and vice-like poverty that leaves low-income Americans consistently in economic distress without reasonable hope for improvement, the notion that low-income people can borrow their way to economic stability or even out of poverty is "passing strange." (29) As an essential matter, their problems cannot be productively addressed by a device that requires future growth. If anything, such a device is likely to make their economic existence appreciably worse.
Without expressly acknowledging this essential mismatch between problem and solution, the access to credit discourse at best evinces a form of optimism bias normally attributed to low-income borrowers themselves. (30) At worst, the discourse is a politically convenient way to avoid difficult and unpopular conversations about economic inequality (31)
In either case, policymakers have left low-income Americans in a terrible position by decimating public-assistance forms of social provision--for example, by limiting direct assistance to just sixty months' worth of benefits over an individual's lifetime (32)--yet failing to solve the threshold problems of persistent wage stagnation and other entrenched social pathologies. Thus, high-risk, low-income borrowers must provide for their own welfare in the credit marketplace, (33) where lenders build their business models on the expected transfer of wealth out of economically vulnerable communities. (34) In this light, credit does not make sense as a form of social provision where economic growth is intractably arrested. (35)
Moreover, the limited value of credit as social provision has implications beyond low-income Americans. Credit as social provision is a similarly delimited device for the middle class who, although continuing to struggle through decades of stagnant real wages, (36) are currently fed a steady diet of more and more credit to ease the reality of a bleak financial future. (37) Against these persistently poor economic prospects for the middle class, the regressively redistributive consequences of credit are likely to be similar.
Accordingly, this Article makes two contributions. First, it situates credit squarely within the frame of social provision and welfare, a perspective that is largely missing from the legal literature. (38) Second, it reframes the current legal discourse of access to credit against this construction of credit as an institution of social provision for low-income Americans. In so doing, it aims to unsettle the premise that credit, as an essential matter, can function as a mechanism of meaningful social provision. (39) Thus, it proposes that it is time to grasp the nettle and critically rethink whether credit should continue to be shoehorned into the discourse of social provision for low-income Americans.
This Article proceeds in three Parts. Part I describes recent legislative debates about access to credit that have followed the CFPB's 2017 Payday Lending Rule and Madden v. Midland Funding, LLC. (40) What is most surprising about this access to credit talk is that the same fundamental premise, namely, that credit is a functional means of social provision, underpins the otherwise divergent motivations and approaches of both progressive and conservative voices in addressing the needs of low-income Americans. Part II provides historical context for this surprising convergence. It marshals existing, largely multidisciplinary accounts of credit at work in the American economy to show how credit as social provision not only has deep roots in the Progressive Era, but has also persisted as a well-kept device in the toolbox of social welfare provision.
Credit reached a high point in the New Deal and postwar eras...