Save the predatory lending practices
Behold the gruesome corruption, sleaze, and all-round disgustingness of US politics.
Back when Dodd-Frank mandated the creation of the Consumer Financial Protection Bureau, an agency proposed by Elizabeth Warren with the goal of protecting American families from predatory lending practices, few probably imagined the agency would face pushback from the chair of the Democratic National Committee. And yet, here we are in 2016, in the midst of one of the most bizarre election seasons on record, and Wasserman Schultz, along with several other Floridians in Congress, is challenging the CFPB’s forthcoming payday lending regulations.
Because what could be more worth protecting from regulation than an “industry” that preys on poor people by charging sky-high interest rates on payday loans?
Wasserman Schultz is listed as a co-sponsor on the bill that would stall CFPB’s regulations and give states the opportunity to opt out of them.
Wasserman Schultz has plenty of support in this endeavor, much of it from Republicans, as The Huffington Post’s Zach Carter points out. But Wasserman Schultz, who has received over $30,000 from the payday loan industry, will lend legitimacy to the Democratic minority that supports the bill.
Sleazy sleazy sleazy.
Corruption runs deep through the system.
It’s the insignificant amounts of money that always startle me. Should I ever become a corrupt overperson, I’d hold out for more.
It’s just as bad in most Western countries.
And the 30,000 Wasserman Shultz is KNOWN to have received may not be the full amount.
With the destruction of the middle class, for which BOTH Republicans and Democrats are equally responsible, the spread of pay-day loan sharks has been unstoppable.
Pay-day loans branches, dollaramas and a proliferation of pawn shops; the new face of retail!
I don’t know enough about that industry to say much for or against it.
In principle, though, I note that the people who need payday loans are also at high risk of default. I can venture the anecdotal observation that I’ve given loans “just until payday” to coworkers (not to mention family and friends), and the repayment rate was quite poor.
The interest charged in practice may indeed be predatory (I honestly know nothing about it), but the interest collected would need to cover the money lost through default, so it would have to be higher than, say, interest on a mortgage secured by real estate, or a personal loan to someone with excellent credit.
Regulation is good and appropriate. I don’t know what the correct limits are. But I do wonder whether the limits one is inclined to set would be such that these people would be unable to secure any kind of loan at all. The minimum rate necessary to cover default might well seem predatory to those of us with stable incomes and good credit. *I* would sure as hell never take such a loan. I won’t even carry a credit card balance, because I find that “predatory.” Except in emergencies, when my perspective changes in a hurry.
PatrickG @2: One thing that’s always thrown me is how often Democrats, in particular, settle for such paltry amounts. Remember the congresscritter who was keeping foil-wrapped bills from bribes in his office freezer? It came to, like, a couple hundred grand, which is chump change compared to the millions most Republicans get via post-office board appointments, consultancy fees (all from the industries they had the biggest hand in [de-]regulating) and the like.
AMA- you’re right that the real question here is the choice between a system where desperate people can get short term loans at rates that are reasonable if paid off instantly and terrible if rolled over, versus a system where they cannot get these loans at all. And you’re right that most critics of payday lending try to avoid discussing that second half of the equation, and it’s likely consequences. They usually focus on arguments about effective annual interest rates, which are arguably beside the point to a short term loan.
Except… not actually, once you look into how the system functions in practice.
IMO- The elimination of short term loans for those too poor and too credit unworthy to have access to better lending options (even credit cards are better) will have downsides, yes. A lot of people use these loans to pay other bills and living expenses, so we’ll see an increase in utility cutoffs, evictions, end of pay period hunger, etcetera. But the sheer volume of that same group of people who end up rolling those loans over into extravagant amounts is unbelievable. It’s so much of the overall payday lending system that it seems extremely unlikely that payday lending would survive if it’s customers weren’t so likely to be unable to pay off the loan in a timely fashion. Which means that it’s less a lending system, and more a means by which people sell themselves into long term debt servitude in order to avoid short term harm. Those who use the system in a healthy way are effectively free riding on those who are using it unhealthily.
So I’m with those who want to regulate it out of existence. On balance, I think it’s hard to imagine how it couldn’t be a net improvement.
“Except for emergencies”.
Check your financial privilege, A Masked Avenger. What the heck do you think people are using these loans for?
It’s for car repairs, emergency dental work, a need to buy a medicine now while there’s still time to save grandma’s life. It’s for survival.
John Oliver’s segment on payday loans a while back was excellent. Great starting point for those who don’t know much about it.
https://youtu.be/PDylgzybWAw
They are ridiculously common in Alabama. I could drive a couple of miles to the supermarket and pass a dozen such businesses. A bill is working through the legislature that was going to bring down the interest rate cap from over 450% to 36%, but a “compromise” changed it to “only” 180%. Huge improvement, but not nearly as much a cut as appropriate. And it’s not law yet; the lenders are, no surprise, fighting it tooth and nail.
Wages need to improve along with getting rid of predatory lenders.
Hello? Duh?
My privilege is that emergencies are rare, and my emergencies are things like blowing a tire when I’m on vacation and have no cash on me. The folks who get payday loans’ emergencies are regular occurrences, and are things like needing to buy groceries.
What was it that gave you the impression I didn’t understand this perfectly well? And how did I manage to give the impression that this wasn’t in fact precisely my point?
I have a credit card which I pay off every month precisely because I can almost always afford to, because paying 18% interest seems outrageous to me, and therefore I never carry a balance unless a rare, sudden, unexpected expense forces me to–the last time being when I had my roof replaced, and I only carried that balance for a couple of months.
TO SOMEONE AS LUCKY AS ME paying $15 per $100 for a one-week loan, which annualized is 180% simple interest, seems so outrageous that I’d spit on your shoe for offering me such a loan. I call it predatory. Most everyone would agree with that assessment. BUT MOST OF US ARE LUCKY ENOUGH NOT TO NEED SUCH A LOAN, because we have sufficient income and good enough credit to at least get a credit card (which charges 1/10th as much interest) or a personal loan. Not to mention home equity and other sources of ready funding in a pinch.
The reason I mentioned my own financial position WAS PRECISELY FOR THE PURPOSE OF CHECKING MY PRIVILEGE. Specifically, if I were to condemn all payday loans, and call for legislation fixing the interest rate at, say, 18% (the same as my credit card), I would probably be condemning the people who need payday loans in the first place to have no options whatsoever. If they could get a credit card like mine, they’d already have one. If a lender is willing to settle for 18%, they’ll lend to people like me who are pretty much guaranteed to pay on time. I have no idea what interest rate would be necessary to cover the failures to pay, but I’m pretty confident that it’s a higher rate than the one I can easily get with my good job and excellent credit rating.
Payday loans suck, and should be regulated to prevent abuses, but we need to check our privilege to avoid stripping the poor of what few options they do have.
My, how shouty you get when someone misunderstands what you said…and yet you keep actively misrepresenting what I say. Funny how that works.
I just looked it up, and apparently about 46% of people who take payday loans end up in default. Half of them default on their second payday loan; the other half take multiple loans before defaulting.
Suppose a lender wants a 12% return (1% per month for easy math–less than my own credit card’s rate of 1.5% per month). Ignore the 23% who borrow multiple times before defaulting. Assume defaulters and non-defaulters borrow roughly the same amount on average. Then 23% of borrowers repay their first loan but not their second, and 77% of borrowers repay on time, meaning that roughly $0.115 of every dollar loaned is lost to default. If the average term is one week, then the desired return is $1.0025 for each dollar loaned. The interest required to collect that amount is: 1.0025 = (1+r) * 0.885 * 1; so r is approximately 0.133. In other words, if 23% of borrowers default on every second loan, and a 1% return per month is desired, then borrowers need to be charged approximately $13.30 per $100.
There’s probably something wrong with my back-of-the-envelope calculation. It’s obviously a simplification, possibly an oversimplification. On the other hand it’s conservative in that it ignores the residual default rate from the 23% of borrowers who repay successfully for a while before defaulting. But it suggests that to get a 0.25% return, on a one-week loan, that is defaulted on about 12% of the time, requires an interest rate around 13% per week–which annualized would be about 675%. The actual return on that obscene rate is still only 12% per year, which is on par with the lowest-rate credit cards.
If you redo the calculation assuming a 0% return, and suppose a not-for-profit company issued these loans out of the goodness of their hearts, charging only enough to break even, the interest rate would basically equal the default rate, which is very high.
I’m not going to run around defending fees of $15 per $100 on the basis of this envelope calculation; I’m confident there’s too much I don’t know about the realities of the industry. But it does illustrate why nobody would issue loans to these people at all if the rates were set by law on par with a credit card.
I’ll cop to both. Patience is not one of my virtues, and perfection is not one of my vices.
$15 fee for a $100 one week loan comes out to more like 780% annual simple interest. You are thinking of $15 for a one month loan.
780% is realistic, which is why my state has a cap of 456% or thereabouts, and why some are trying to reduce the cap (36% proposed, but 180% is more likely).
A friend who used to work in the industry talked of repossessing cars, and of people destroying their own property to keep it out of the hands of the loan company. Sickening crap.
Good catch, thanks.
If my back-of-the-envelope noodling is anywhere in the ballpark, 180% per year–or more to the point, 3.5% per week–is probably low enough to shut down all payday loans completely. If the default rate is higher than about 3.4%, the lender will lose money. What information I could find in a casual search suggests that the default rate is much closer to 12% than 3%.
I don’t know the answer. I suspect that a fairly high rate (commensurate with the default rate) would have to be allowed, but perhaps the term of the loan would have to be restricted, and the rate cap would be inversely proportional to the term of the loan or some such. In other words charging 13% is by itself not necessarily the problem, as long as it isn’t allowed to compound for 50 weeks until the borrower now owes 800% of the original amount.
If I recall correctly, these lenders like defaults, as they take possession of property worth a great deal more than the lent amount.
See? That’s one of the things I know nothing about: how these things are collateralized. I sort of assumed they were unsecured, actually–in part because the only semblance of justification for the interest rates is that the payers are subsidizing the defaulters.
Side note: in a past life I worked in law enforcement, which involved collecting fines for summary offenses and/or levying and confiscating property. As far as I’m concerned, that kind of work is for the birds. There’s got to be a less risky way of making one’s living.
I looked it up. I was partly mistaken. “Predatory lending” covers both “payday loans” and “title loans”, the latter of which I incorrectly thought was a subset of the former. The latter is secured, the former is not. The same companies often offer both.