rssThe Sad and Scandalous Comeback of Payday Lenders
Wednesday, April 08, 2009 at 9:43 am
- 17 Comments
Mike’s excellent story today about the weak reforms of the payday lending industry proposed by onetime industry foe Rep. Luis Gutierrez (D-Ill.) details a disappointing setback for efforts to curb the insidious practice of charging down-on-their-luck consumers loan shark rates for short-term loans.
Until this move by Gutierrez, whose top contributor to his 2008 campaign was a payday lender, consumer advocates fighting the industry were on a roll. They were regularly convincing state legislators that had once bent over backward for the industry to change course, limiting the interest rates payday lenders could charge and banning some of the industry’s more abusive practices. The change of heart came about as states like Ohio found themselves inundated with payday lending stores on every block, and as the economic downturn put a focus on the plight of borrowers with payday loans. During a hotly contested battle in Ohio to limit payday lending, it even turned out that some lawmakers from hard-hit rural areas had themselves resorted to payday loans, experiencing the industry’s abusive practices first hand. Not surprisingly, the payday lenders lost that battle.
It’s hard to argue in favor of any industry that charges almost 400 percent interest and traps consumers with additional fees and repeated loans. But you can always count on the payday lending industry to offer outrages even beyond that, which makes the dishonesty of sudden apologists like Gutierrez even more breathtaking.
For example, The Wall Street Journal reported last year on how payday lenders specifically seek out customers among society’s most vulnerable: the elderly and disabled.
(Payday) lenders are increasingly targeting recipients of Social Security and other government benefits, including disability and veteran’s benefits. “These people always get paid, rain or shine,” says William Harrod, a former manager of payday loan stores in suburban Virginia and Washington, D.C. Government beneficiaries “will always have money, every 30 days.”
The law bars the government from sending a recipient’s benefits directly to lenders. But many of these lenders are forging relationships with banks and arranging for prospective borrowers to have their benefits checks deposited directly into bank accounts. The banks immediately transfer government funds to the lenders. The lender then subtracts debt repayments, plus fees and interest, before giving the recipients a dime.
As a result, these lenders, which pitch loans with effective annual interest as high as 400% or more, can gain almost total control over Social Security recipients’ finances.
Despite this, the industry lives to fight another day, as the Gutierrez about-face attests. It really is about the money, after all, and payday lenders always have been extremely generous with their largess. Watch the clip Mike refers to in his story, showing Gutierrez posturing in front of Jean Ann Fox, a longtime and well-respected consumer advocate who closely follows the payday lending industry. Gutierrez tries to put on a show of “reforming” the industry with his bill — but don’t believe a word of it. That’s an old tactic payday lenders use in the states as well, proposing measures they tout as “reforms” that are so filled with loopholes as to be meaningless. Their reforms are intended to draw support away from measures to limit them to charging 36 percent interest, which payday lenders contend would put them out of business.
Gutierrez should of course be ashamed of himself, but this isn’t just about him. If an industry that sinks as low as some payday lenders regularly have can gain enough respect in Congress to have Gutierrez spout such nonsense, imagine the fate of other reforms of the financial services world. Treasury Secretary Timothy Geithner talks a tough game when he envisions a sweeping expansion of the regulatory system. But as the Gutierrez debacle shows, even the bottom feeders of the financial industry still have enough sway to sometimes get lawmakers on their side. The disappointing comeback of payday lenders only proves that when it comes to cleaning up abusive and predatory lending, it’s far too early to get your hopes up for something real.
17 Comments
Comment posted April 8, 2009 @ 10:20 am
What is scandalous and outrageous is that opportunistic politicians, activists and reporters, looking for a target to criticize to advance their careers, are presenting this issue in a distorted and biased way. The APR of a loan is a statistical tool which has one use and one use only – to compare loans which you have access to. If all other factors are the same, choose the one with the lowest APR. But payday loan customers, due to their bad credit rating, by and large do not qualify for longer-term loans with lower APRs, so a payday loan is often their only alternative to being evicted, losing their job because they can't get their car repair quickly, having their power turned off, or simply paying more than the payday loan will cost them in bounced-check and overdraft charges, credit card late-payment and overlimit fees, etc.
The critics of payday lending, in complaining about “outrageous” triple-digit APRs, fail to mention that about 90% of the fees payday lenders charge go towards covering the costs involved in issuing the loans. Payday lenders are not making a triple-digit return on their investment, as the filings of the publicly-traded payday-loan companies very clearly show. Their ROI is in fact less than many Fortune 500 firms.
The payday loan critics are so gung-ho to crucify the industry that they have no respect for what should be unalienable rights. If the government can tell lenders how much they can charge, then why can't it tell all doctors, lawyers and free-lance maids how much they can charge as well? Should all lawyers should be limited to charging $36 per hour instead of the “outrageous” $300-500 per hour which so many of them charge now? Soon we will have a society where all economic activity is controlled by politicians and those who bribe them.
Usury laws are an authoritarian infringement of freedom of commerce, a tradition based on antiquated religious concepts, which should have been abolished along with the tradition of slavery. Many of the problems associated with payday lending are due to the fact that the lenders are operating under a very narrow exemption to the state usury law and cannot tailor the product to meet individual needs.
Comment posted April 8, 2009 @ 2:23 pm
I called Rep. Gutierrez's office to find out the total amount given to him to get him to change his position. Needless to say, they were unhappy with the call, but assured me that Rep. Gutierrez has been absolutely consistent in his position regarding payday lenders. Then they hung up the phone.
Pingback posted April 8, 2009 @ 3:30 pm
[...] Posted in Business, Congress, Daily life, Democrats at 12:08 pm by LeisureGuy [UPDATE: Mary Kane of the Washington Independent has a good supplement to the story below. Please read it.] [...]
Pingback posted April 8, 2009 @ 5:39 pm
[...] Also from The Washington Independent: [...]
Comment posted April 8, 2009 @ 8:24 pm
Let me tell you something alright? Leading up to the time that we had to take out a cash loan, we didn't see anything but negative remarks from others online about the cash loan industry. We ended up almost losing our car because we waited. At the last minute, we borrowed $400 from http://www.cashloancity.com and I really believe it is the only thing “at the time” that saved us. I understand that there's a problem with some people abusing this industry and crying about it later, but what about the people that really need it and pay it back on time? We're even getting ready to have a positive mark on our credit because of it. Why are the people that never need this type of loan the same people that keep others from being able to get one?
Pingback posted April 9, 2009 @ 12:48 pm
[...] A nice web master put an intriguing blog post on The Washington Independent The Sad and Scandalous Comeback of …Here’s a quick excerpt [...]
Pingback posted April 9, 2009 @ 9:33 pm
[...] bookmarks tagged payday The Sad and Scandalous Comeback of Payday Lenders saved by 5 others tbenightfreak bookmarked on 04/09/09 | [...]
Pingback posted April 10, 2009 @ 4:24 am
[...] The Sad and Scandalous Comeback of Payday Lenders – The Washington Independent.comMike’s excellent story today about the weak reforms of the payday lending industry proposed by onetime industry foe Rep. Luis Gutierrez (D-Ill.) details a disappointing setback for efforts to curb the insidious practice of charging down-on-their [...]
Comment posted April 10, 2009 @ 9:57 am
Cross-posted from the other story…
The real issue here is consumer choice and credit access. Sure, payday lenders lobby in support of their interest, but they do so because they know they provide a valuable service to consumers in need.
Payday advances are two week, not annual loans. For each $100 advanced, customers pay a typical fee of $15-$17. Because payday loans are two-week loans they cannot be offered at the same annual rates as annual credit products such as credit cards, auto loans and home mortgages. The only way to reach the much-hyped triple digit APR is to take out one advance and continue to renew the same advance every two weeks for an entire year. State laws and industry best practices do not allow this to happen.
At a 36% APR, the total fee charged on a $100, two-week advance would be $1.38. Payday advance lenders could not cover the cost of originating a loan, let alone meeting employee payroll and benefits and other fixed business expenses. An annual interest rate cap of 36% would result in the elimination of an affordable credit choice for consumers.
Pingback posted April 13, 2009 @ 5:18 pm
[...] The Sad and Scandalous Comeback of Payday Lenders – The Washington Independent.comMike’s excellent story today about the weak reforms of the payday lending industry proposed by onetime industry foe Rep. Luis Gutierrez (D-Ill.) details a disappointing setback for efforts to curb the insidious practice of charging down-on-their [...]
Pingback posted April 14, 2009 @ 10:34 am
[...] The Sad and Scandalous Comeback of Payday Lenders – The Washington Independent.comMike’s excellent story today about the weak reforms of the payday lending industry proposed by onetime industry foe Rep. Luis Gutierrez (D-Ill.) details a disappointing setback for efforts to curb the insidious practice of charging down-on-their [...]
Comment posted April 14, 2009 @ 11:36 am
The real sadness is that so many folks just gobble up populist news and don't think enough about what they're talking about. No one is “out to get you”, and no one seems to look before they leap anymore. The financial discipline and wisdom that helped build this nation into the world's leader has been pathetically eroded, and here we are with politicians looking for low-hanging fruit to rail about instead of punishing those deserving.
Comment posted April 28, 2009 @ 6:52 am
Interesting that the Center for Responsible Lending (CRL) and ally Jean Ann Fox continue to promote hypocritical rhetoric regarding annual percentage rate interest.
Short-term lenders charging $15-$20 per $100 (15%-20% fee) are a lot more economical than the average bank or credit union, (according to an FDIC national study) charging $27 plus interest on an average $36 overdraft (75% fee).
But just for the sake of argument, let's compare the annual percentage rates the way CRL and its allies do. A $15 per $100 short-term lender fee has an APR of 391%, however this rate is unattainable because rollovers are already not permitted in most states.
However, several divisions of CRL's parent organization, SELF-HELP CREDIT UNION, market overdraft lines of credit in North Carolina.
A customer paying the required $25 monthly fee to access this $100 line would be paying the equivalent of 651% in Annual Percentage Rate Interest if they used the full line once and repaid in 14 days – higher if they borrowed less. That customer would pay more than 3,000% APR if they paid the line back in 3-4 days.
Which product seems like a better option for consumers….I'll let your readers decide.
By the way, according to OpenSecrets.org, credit unions like Self-Help spent more than $6 Million lobbying last year and Self-Help, CRL's parent company spent hundreds of thousands of the past few years.
So Mary, let's try working off a level playing field.
Comment posted April 30, 2009 @ 7:49 am
It is important to understand that there are many different ways that a Pay Day Loan can actually help people if they take the time to carefully look over all of the details of the loan before taking it. Because of the amount of money that most people typically need, it is really easy to sink far into debt and find yourself struggling to ensure that you are able to cover expenses. Not taking the time to properly plan for a payday loan is how the problems arise, rather than incorrectly thinking that all payday loans are bad.
Comment posted April 30, 2009 @ 2:49 pm
It is important to understand that there are many different ways that a Pay Day Loan can actually help people if they take the time to carefully look over all of the details of the loan before taking it. Because of the amount of money that most people typically need, it is really easy to sink far into debt and find yourself struggling to ensure that you are able to cover expenses. Not taking the time to properly plan for a payday loan is how the problems arise, rather than incorrectly thinking that all payday loans are bad.
Comment posted February 15, 2010 @ 3:54 pm
Many people are falling vicim to Cash Advance scams , with the economic crisis and everything , and more and more people loose their homes and possessions due to illegal loans
Comment posted February 15, 2010 @ 8:54 pm
Many people are falling vicim to Cash Advance scams , with the economic crisis and everything , and more and more people loose their homes and possessions due to illegal loans
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