Small banks and credit unions feel the CFPB is brandishing a big whacking stick. (Photo Credit: CC BY/dullhunk/Flickr)

The Consumer Financial Protection Bureau has been called out by the American Bankers Association, reports Investors Business Daily. The banking conglomerate insists that once the CFPB begins enforcing new Dodd-Frank Act laws regarding loan disclosure and transparency this summer, the costs of bureaucracy will send 1,000 community banks and credit unions to their doom. It’s the kind of change small banks can’t see a good reason for.

Strong enforcement arm in consumers’ corner

Elizabeth Warren, the interim chief of the CFPB, has warned that “change is coming” and that all U.S. financial institutions will have to play by new rules. More than half of the Consumer Financial Protection Bureau’s budget will be directed at supervision and enforcement, a fact Warren has used on multiple occasions to accentuate talk of the fervor with which the CFPB will defend the financial rights of U.S. consumers.

Community banks and credit unions fear their own Rapture

ABA representatives have stated publicly that if Dodd-Frank rules go into effect as they are currently written, more than 1,000 banks will be forced out of business before the end of the decade. As the CFPB will be able to request any information it wants at any time and in any format, the ABA believes that the strain of compliance will take too many resources away from small banks’ customer service efforts. Furthermore, the Home Mortgage Disclosure Act’s eye against predatory lending will reportedly require banks to collect more borrower demographic information than ever before so that the CFPB can determine whether discrimination is occurring.

ABA Chairman Stephen Wilson told Investors Business Daily that all of this amounts to bad news for community banks and credit unions, as smaller financial institutions tend to make loans that larger banks avoid. The more small banks that shut down, the fewer capital sources remain available. This is passed on to consumers in higher rates and fees, argues Wilson.

“If we tie up our capital system, it’s going to take money away from the people who need it to create jobs,” warned U.S. Chamber of Commerce President Tom Donohue.

The battle over Elizabeth Warren

Though the organization is slated to launch July 21, the CFPB still doesn’t have a permanent chairperson in place. Elizabeth Warren will likely be nominated by President Obama, but numerous lawmakers who support the banking industry have attempted to derail the Warren nomination. House Republicans believe the CFPB will have too much power, while Warren has countered that her critics’ true goal is to make the CFPB “toothless.”

By way of comparison, the Sarbanes-Oxley Act of 2002 – one of the more significant pieces of financial regulatory legislation, pre-Dodd-Frank – changed 16 rules over two-and-a-half years. The Dodd-Frank Act will require more than 250 rule changes over several years.

Sources

American Bankers Association

Florida Realtors

Investors Business Daily

Sarbanes-Oxley Act of 2002

Rep. Sean Duffy (R-Wisc.) fights for community banks and credit unions

A new report has been released by the Center for Responsible Lending, slamming payday loans lenders. Photo Credit: MoneyBlogNewz/Flickr.com/CC-BY

The Center for Responsible Lending has released a new report on payday loans, bashing the product. The CRL is among the chief lobbyists against the payday lending industry, though it allies itself with other consumer credit causes. Payday lending will soon fall under the jurisdiction of the Consumer Financial Protection Bureau.

Payday lenders blasted for lending practices

Payday lending is often reviled as predatory, as opponents accuse payday lenders of trapping people into vicious cycles of debt. One of the leading advocates for reform or eradication of the practice is the Center for Responsible Lending, a consumer advocacy foundation that conducts research and lobbies on behalf of consumers. The organization has released a new report on payday lending, according to Daily Finance, asserting that people who take out payday loans tend to get trapped into debt for more than a single pay period. The report is titled “Payday Loans Inc: Short on Credit, Long on Debt” and is available on the CRL’s website.

Frequent targets

Payday lenders are often targets of increased regulation and of ardent criticism. Some lenders deserve it; the number of violations committed by payday lenders as well as the number of lawsuits including class actions show that not all short term loans lenders are on the level. Many are hoping for payday loans as an industry to get reigned in by the Consumer Financial Protection Bureau when it begins operation later this year, as many advocates have asserted a cap on repeat borrowing will be effective, though the CFPB will not be able to regulate interest rates. The CRL recommends the CFPB should do as much.

Credit involves risks

The scholarly literature that exists on payday loans and similar credit products indicates there is a risk of consumers falling into a fair amount of debt once they begin borrowing from payday lenders. For instance, the CRL report asserts that many people are indebted to a payday lender for one to two years. That’s better than 30 years, the length of the typical mortgage. That is also better than 10 years, the length of time that people are given to repay student loans. However, those debts don’t have the stigma that payday loans have been bestowed with. Credit cards are also seen as more respectable than payday loans even though a minimum payment schedule can keep a person in debt to credit card companies for decades.

Sources

Daily Finance

Center for Responsible Lending (PDF – Requires Adobe Reader)

Predatory lenders attack when a loan is originated; loan sharks attack later, when the loan is being serviced.

Earlier this month, the Virginia House of Representatives voted overwhelmingly (96 to 2) to place new restrictions on car-title lending. Loans secured by vehicles have become very popular. Increasingly, however, they are being attacked by consumer protection advocates and other special interest groups as a particularly virulent form of predatory lending.

Following the lead of a similar law in Tennessee, law-makers in Virginia made a failed attempt to regulate car-title lenders last year. Two years ago, however, they managed to enact legislation regulating payday lenders.

Virginia places limits on car-title loans

According to the Washington Examiner, the Virginia legislation will do away with open-ended car-title loans and limit loan terms to one year. It will also establish minimum standards for borrower eligibility, restrict loan amounts to 50 percent of vehicle values, establish interest caps and prohibit the charging of interest after a vehicle has been repossessed.

What is predatory lending?

Predatory lending generally refers to unfair, deceptive or fraudulent practices by lenders during the loan origination process. There is no precise legal definition of predatory lending, but according to Wikipedia, the FDIC has broadly defined the term to mean the imposition of “unfair and abusive terms on borrowers.”

There are, of course, many state and federal laws prohibiting specific practices that satisfy the FDIC’s definition of predatory lending, but the term is basically used as a catch-all for various illegal activities in the generation of loan agreements. Predatory lending issues frequently concern loans secured by cars or real estate, which can be structured to facilitate a borrower’s default and to create unfair profits for the lender as a result of repossession or foreclosure.

Will the new Virginia law stop predators?

At least one outspoken Virginian thinks the new car-title loan regulations are, to put in inelegantly, “a joke.” Writing for the Daily Press, Carol Capó points out that the enactment of payday lending regulations in Virginia opened the door for unscrupulous lenders to circumvent the intent of the law by shifting their business to car-title loans.

Car-title loans,  Capó says, inflict even more harm on borrowers in precarious financial situations than payday loans do. When borrowers in desperate need of money pledge cars as collateral for high-interest loans, they don’t just risk losing their cars. They risk being unable to get to work where they can make money to pay off the car-title loans as well as the other debts that drove them to desperation in the first place.

What do predators do with all that money, anyway?

Capó says the interest rates allowed by the new legislation are exorbitant, and that they resulted from proverbial lobbying efforts. Car-title and open-ended lenders, she says, bought the interest rates they wanted by contributing more than $1.5 million to Virginia politicians over the last five years.

When it comes to credit cards, many consumers have been getting shafted. All of the major banks providing credit cards have gotten away with reaping profits, and they have no problem lobbying and distributing the money to any Washington lawmaker that get in their way. Washington lawmakers are getting this dirty money from these banks to keep their regulatory laws and their profits in tact so it will not affect the credit card industry if it becomes law in a few years. During George W. Bush’s presidential terms, if anyone attempted to change any provision regarding the credit card regulatory laws, the changes were usually fizzled out and swept under the rug. The credit card industry was fine and there were more choices for the consumers and there was no reason to amend anything. There was no credit card reform in sight.

On the other hand, the United States has been in a recession and we have a new president and an administration in Washington, and they have made credit card reform one of their top priorities. The credit card industry is directly linked to consumer debt and as a result, the industry must be reformed. In May of 2009, the Credit CARD Act of 2009 was implemented. However, the bill’s first provisions were not in effect until just recently.

Things you should consider if you are a credit cardholder.

1. There must be a written notice forty-five days in advance by the credit cardholder if your interest rate of your credit card has increased.
   This will eliminate the unethical practice of allowing lenders to raise your interest rates on your account that is outstanding, delinquent, or unrelated to other credit card companies.
2. Credit card companies are prohibited from changing terms of your original contract. They can no longer charge you at any time or for any reason.
   You will no longer get an automatic late fee on your credit card because the payment due date fell on a non-business day or non-work day at your bank. If your due date falls on a holiday or a weekend, the due date will fall on the next business day and this is now required by law.
3. Credit cardholders are allowed twenty-one days to pay their credit card balances instead of the minimum fourteen day period.
   Credit cardholders are now given three billing cycles to pay off their balances via existing terms if the interest rate has skyrocketed.
4. It is required that all payments are allocated in portions of the credit card balance with the highest interest rate descending the lowest interest rate.
   Your highest rates are paid first, which was not always the case before.
5. Limitations on the limit fees that are now three per credit card account.
   Unlimited limit fees are very common; many lenders had this practice in place for credit cardholders that exceeded over their credit limit.

The credit card companies do not want you to read the Credit CARD Act of 2009.

There are more provisions in the Credit Card Act of 2009; this is just the tip of the iceberg. Credit card companies could not care less about consumers; they have no trouble raising interest rates, limit fees, and other restrictions that have not even reached the full level of potential in regards to regulation. The thing that is most shocking about these new regulations mentioned above is that banks and credit card companies would not agree to any of these provisions if they were not enforced by the law.

Credit card companies and banks will not stop their unethical practices for the sake of the consumers.

Several banks are still spending large amounts of lobbying money trying to halt this legislation, despite public outrage about the bailout money fiasco several months ago. These banks are attempting to make it easier on the credit card industry by watering down the Credit CARD Act’s provisions. This is an indicator that the credit card companies and the banks have abused their credit card practices and screwing the American people in the process for the past two decades.

For more information about the provisions of the Credit CARD Act of 2009:

http://www.govtrack.us/congress/billtext.xpd?bill=h111-627

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Capping payday loan rates too low will kill competition and hurt consumers – in Brisbane, Queensland or anywhere else.

Legislators from various nations have proposed that control over consumer credit become centralized, i.e. placed under control of the national government rather than continue to reside with states and principalities. Their reasoning is that if they can provide the traditional banking sector with enough incentive to offer small loans like payday loans at competitive rates, the venture would be profitable and consumers would be protected from predatory lending schemes.

Australia appears to think this is a good idea, as upcoming legislation will enact such payday lending control. Lecturer Nicola Howell of the Queensland University of Technology theorizes in her 2009 paper “National Consumer Credit Laws, Financial Exclusion and Interest Rate Caps: the Case for Diversity Within a Centralised Framework” that centralized credit regulation could be a good thing, but doesn’t fail to notice the potential for major problems that throttle consumer choice when it comes to small loan access.

What Will Happen in Australia, Exactly?

Australia will transfer consumer credit control from State and Territory Governments over to the Commonwealth. The goal is for a uniform system to regulate consumer credit and form a “seamless national regime.” The assumption is that the change in regulatory power will result in greater responsiveness to the dynamic market, which was greatly desired after experience with the “slow pace of change in the current State and Territory-based regime.”

But Financial Exclusion is Not Addressed

Some in Australia welcome this change, but Howell argues that the change will not sufficiently address the issue of financial exclusion. Howell defines financial exclusion as “the lack of access by certain consumers to appropriate low cost, fair and safe financial products and services from mainstream providers.” This means small loans and payday loans. Centralized consumer credit regulation, Howell fears, could create interest rates that make it impossible for many payday lenders to operate. This in turn would limit consumer credit options. “There is an absence of any consideration of regulatory initiatives that might encourage the availability of low cost, fair and safe small loan products,” writes Howell.

But Howell Feels a Cap is Necessary

Ample evidence exists that using rate caps as a regulatory tool affects consumers negatively. Here’s one of many examples. Howell admits that “total centralization of consumer regulation does pose some risks for consumers, by way of potentially reduced standards, and reduced opportunities for regulatory experimentation and local responsiveness,” so the potential for danger is recognized. Perhaps that’s why “permitting regulatory diversity on interest rate caps” in case consensus cannot be reached on where to set the rate cap bar is on the author’s mind.

No to Financial Exclusion of Essential Products

The authors states (and is definitely not alone in this regard) that the products consumer credit markets offer for cash emergencies – such as payday loans and other small loans – are as essential to well being as utility services like electricity and water. Thus, efforts should be taken to maintain their availability to the public. Keep payday loans available and affordable; don’t cap them to the point that payday lending businesses have to close their doors, costing communities jobs as well as options for credit.

Promoting Competition?

If designed properly, a rate cap could indeed regulate prices without squelching choice. But the kind of APRs most legislators talk about (whether it is Australia or America) can typically only be swallowed by large institutions, i.e. traditional banks. Thirty to 40 percent APRs work for companies already rich with capital, but not for smaller payday lenders. Consumers go to such lenders because they can’t crack the surface with traditional lenders like banks, frequently because of credit issues. If their main credit option for emergencies and smoothing consumption shocks is taken away, what are consumers left with? That would be loan sharks and similar dangerous options.

In their efforts to stay alive when faced with shortsighted regulation, some payday lending companies have found ways to circumvent unfair rate caps. Since payday loan companies are not raking in excessive profits to begin with and it’s been proven that small loans can’t work under restrictive rate caps, Australia should take notice. Unless they don’t mind hurting their citizens, that is.

Learn from America’s CRA Disaster, Australia

Howell compares Australia’s Commonwealth coaxing banks to enter the payday loan market to what the Community Reinvestment Act (CRA) did for the housing market in the United States. While the CRA was designed to “encourage depository institutions to meet the credit needs of their communities, including the needs of lower-income consumers and neighborhoods,” writes Howell, the reality is that their strong-arming efforts helped produce the subprime mortgage mess that nearly destroyed America’s economy. Along with ACORN, the Community Reinvestment Act (CRA) sought to curb redlining, but what they achieved is that they convinced lenders to relax their lending standards so much that they began lending and granting mortgages to people who couldn’t possible repay. As the Wall Street Journal put it, ACORN and the CRA “laid the foundation for the house of cards built out of subprime loans.”

Will the Commonwealth Sweat Banks Under the Hot Lights?

The CRA “required banks to increase lending in low-income neighborhoods.” Enforcement terms were vague, but in practice it meant that ACORN and the CRA could pressure banks into subprime lending because doing so somehow fought against racism. American lenders that didn’t comply were threatened with me branch expansion, mergers and acquisitions being blocked. ACORN and the CRA could effectively shut a bank down if they didn’t comply. Is that what Australia really wants to do to its banking system and its consumer base? I’m surprised Howell missed this notorious piece of American financial history, being a professional researcher.

Empowering the Consumer

Here’s a more reasonable line of thought that Howell touches upon: “Rather than imposing price regulation,” she writes, “competition between lenders should be encouraged, and consumers should be empowered to choose the most appropriate products for their needs.” Yes, on this we can agree, as well as on the fact that “centralization and uniformity in law is not necessarily always beneficial” for said consumers. Who is to say that uniformity would automatically lead to the greatest standards? Europe can weigh in on this, as Bourgoignie and Trubek state in their 1986 study “Consumer Law, Common Markets and Federalism in Europe and the United States” that

Once again, it must be stressed that uniformity does not necessarily advance consumer interests… There is a possibility that uniformity will be used to cut back consumer rights.

Cut back consumer rights? Is this necessary for Australia? Is it necessary anywhere? Consumers aren’t forced to use payday loans, but they do because of a speed and convenience that traditional banks and credit unions can’t match.

“There Are Potential Risks,” Says Howell

“In the context of interest rate caps,” she writes, “these risks, together with the fact that it is likely to difficult to find a consensus approach, or to conduct a comprehensive analysis of the relative merits of the different approaches within the reform timeframe, suggest that there may be some merit in permitting diversity on interest rate caps to remain, at least for an interim period.” This, Howell postulates, could help minimize financial exclusion. Since the Australian Commonwealth’s current proposal doesn’t address this potential harm to consumers, it is advisable that rash action not be taken to cap interest rates too low. This is where Howell’s diversity comes into play around the APR cap. Australian consumers who are more vulnerable to financial shocks should have the option to use payday loans if the traditional banking system fails them.

Bankruptcy filings from state-to-state have nothing to do with the presence of payday lending and more to do with demographics.

For many individuals and families whose financial troubles have led them to the brink of insolvency, Chapter 7 and Chapter 13 bankruptcy filing options have been major landmarks on the road to credit repair. Even though filing for bankruptcy can be costly (in money and property), have an adverse effect on a consumer’s ability to borrow and potentially come with the baggage of social stigma, it can be a viable option when options are few.

This legal resource to discharge debt has proven to be quite popular; from 1990 to 2003, the rate of bankruptcy filing went up from 8.4 all the way to 15 per 1,000 American households. It is clear that demand has risen, but what is not as clear is why.

Numerous studies suggest that demographics and bankruptcy laws are among the most accurate determiners, and there tends to be agreement in these areas. There are also rather vocal groups who contend that the presence of predatory lending in a state (a banner upon which they attempt to affix the emblem of payday lending and payday loans) contributes mightily to bankruptcy filings in said state. However, in light of the very recent findings of Lars Lefgren and Frank McIntyre of Brigham Young University in their study “Explaining the Puzzle of Cross-State Differences in Bankruptcy Rates,” such claims by critics of payday lending would appear anecdotal at best, PR fabrication at worst.

Why Do Bankruptcy Filing Numbers Vary Greatly Between Similar States?

That is the question. The authors use Census data separated out by zip code in order to examine the correlation between real bankruptcy filings, demographics and bankruptcy laws. “Overall,” they write, “our analysis suggests that cross-state differences in bankruptcy rates primarily reflect differences in garnishment restrictions, non-legislated legal institutions and demographic factors. These factors jointly explain about 70 percent of the variance in cross-state filing rates.” The recently instituted Bankruptcy Abuse Prevention and Consumer Protection Act will change the findings, but the author’s study was completed before the act became law.

Some Demographic Insights

“Family structure, race and education” are among the keys to the state-to-state variance. Occurrences were more frequent with African-American households and less likely with Asian or Hispanic households. Bankruptcy filings were found to be most common in zip codes where the average household income ranged from $30,000 to $60,000. The highest instance of filing by age fell in the late twenties, while the lowest was for those filers between 30 and 49. Urban location, whether or not subjects were divorced, whether the household was led by a male or female and race are all determining factors. Oddly enough, unemployment and the increase in housing prices showed a negative correlation in relation to bankruptcy filing.

Wage Garnishment, Assets Also Factors

Wage garnishment (versus full-scale discharge of debt) is another factor the authors consider. The federal limit of 25 percent of wages per week (so long as those wages exceed 30 times the federal minimum wage) is allowed, although some states raise or lower certain requirements. Understandably, states where garnishments are less desirable that bankruptcies tend to show a greater number of bankruptcies.

Fay, Hurst and White’s 2002 article in American Economic Review entitled “The Household Bankruptcy Decision” found that bankruptcies are “correlated with a household’s financial benefit of filing, which is related to the generosity of financial exemptions.” Most households that filed for bankruptcy did not have assets of such size that they rose to the exemption limit.

Access to Credit Defends Against Bankruptcy

While the forms of available credit may vary greatly by state and the financial situation of the consumer, the authors point out that states where regulated forms of credit like payday lending and title loans are readily available show fewer bankruptcies. This echoes the sentiment of a recent Clemson University study that posits that payday loans do not lead to bankruptcy. There is “little systematic evidence” that payday loans are a factor, state the authors. In fact, small loans in the amount of $100 to $1,500 can be just what a consumer needs in order to avoid default.

Lawyers Getting Paid

The legal culture of a state also has an impact on bankruptcy filings. The “norms of bankruptcy judges, trustees and attorneys” are possible factors, although this is somewhat anecdotal. Jean Braucher’s 1993 American Bankruptcy Law Journal study “Lawyers and Consumer Bankruptcy: One Code, Many Cultures” indicates that those court jurisdictions which allow attorneys to charge their clients higher fees for Chapter 13 filings often feature attorneys who push clients toward this type of filing -  “even if this is at odds with their best financial interests,” write the authors.

Bankruptcy Rates and Payday Lending: No Correlation

In addition to exemptions, rates of government assistance and the legal culture of a state regarding bankruptcy, the authors found that payday lending is “incapable of explaining practically any of the variation in filing rates across states.”

Why do some states boast more filers than others, then? Cross-state bankruptcy studies of this nature, the authors suggest, are “largely meaningless for understanding differences in default behavior or social preferences for default.” Costs and legal practice seem to be the most obvious driving factors for the decision to then file for bankruptcy. There are noted problems with court-mandated repayment plans, but the Bankruptcy Abuse Prevention and Consumer Protection Act is intended to help remedy this problem. The results remain to be seen. It seems safe to rule payday lending and payday loans out of the formula of causation, however.

Consumerism is American. Free market capitalism and payday loans are all part of necessary competition, despite what critics would have you believe. (Photo: flickr.com)

If media and banking industry critics of payday lending are to be believed, payday loan outlets are perched in the reeds, muscles coiled in anticipation of springing upon unsuspecting consumers. “Predatory lending” is the fallback term such misinformed critics use, under the assumption that people who use payday loans are tricked or somehow lured into doing so. Yet ample evidence exists that indicates that payday loan customers are educated and take time to consider their options before choosing the short term loan product.

Understand Who Uses Payday Loans

Edward Lawrence and Gregory Elliehausen studied who uses payday loans and why in their April 2008 Contemporary Economic Policy article “A Comparative Analysis of Payday Loan Customers.” Using a national survey that takes into account numerous payday loan outlets belonging to industry trade association the Community Financial Services Association (CFSA), the authors reach beyond the veil of anecdotal evidence as they interview 427 payday loan customers from the survey. Rather than finding an uneducated, unsophisticated group that is being victimized against their will or better judgment, Lawrence and Elliehausen found that payday loan customers consider their decisions carefully and weigh the cost of payday loans against other costs both monetary and environmental.

Consumers, Consumption and Debt Burden

Consumer credit fills a definite need, particularly for segments of society without a great deal of liquid assets at their easy disposal and a significant debt burden. Building upon Juster and Shay’s 1964 study “Consumer Sensitivity to Finance Rates: An Empirical and Analytical Investigation,” where consumer credit is seen to be used on household durable goods, and multiple studies that suggest that such a method is financially feasible when the rate of return is high, Lawrence and Elliehausen point toward a model where high interest payday lending may be optimal for certain consumers. The conditions under which the authors see this would be the case are “relatively high-return investment opportunities, low current income and strong preferences for current consumption.”

Yes, We Live in a Consumer Culture

Americans see it as their right (and their curse) to “keep up with the Joneses.” When this behavior is left unchecked, personal debt can spiral out of control. Thus, when consumers look to short term loans like payday loans to handle financial shocks, they do so in large part because they do not have the liquid assets available to handle their debt obligations in lump sums. Creditors know this, so they tend to limit the amount of credit they extend so as to protect themselves from default. Unsecured personal loans are available from payday lenders to make up the difference. They are available at a cost that the authors find consumers are more willing to swallow than more expensive or socially taboo alternatives.

The Rise of Rationed Borrowers

The authors refer to the Juster and Shay study in stating that borrowers constrained by their debt loads are “rationed” borrowers. Juster and Shay theorize that rationed borrowers are “in early family life-cycle stages where rates of return on household investments would be high.” Their income would be low to moderate, which would explain the small amount of liquid assets available. Furthermore, their demand for consumer credit would be connected less to interest rates and more to the general lack of standard credit available.

That’s the way Juster and Shay saw it in 1964, 45 years ago. Things have changed a great deal since then. Creditors have a greater technical facility for assessing and pricing risk, say Lawrence and Elliehausen. The requirements for equity have lessened and the time for short term loans to reach maturity have lengthened. Unsecured credit through bank-issued credit cards has also become more readily available. There is a “subprime credit card market” for today’s rationed borrowers, but there are other alternatives that do not deal so heavily in the constant spiral of revolving debt. Payday loans have been a prime alternative for rationed borrowers.

NOT Preying Upon the Elderly

Some critics of payday loans claim the industry preys upon the elderly. However, numerous recent studies indicate that young and middle-aged consumers have contributed to an increasing demand for short term loans. Their drives are somewhat different, as Lawrence and Elliehausen’s findings show. For the young, their demand for payday loans has been predicated on how quickly they can pay off their short term loans (seven to 20 days is standard) and hence regiment their budget, whereas middle-aged  consumers’ demand is more in tune with obtaining better interest rates.

Budgetary Discipline

This sense of maintaining a budget in the face of environmental pressures resonates through various other studies. Katona’s “Psychological Economics” (1975) indicates that consumers “may be reluctant to increase credit card debt because they fear that they will not have the discipline to make payments on the additional debt.”In this case, Lawrence and Elliehausen hypothesize that consumer use of payday loans via a standard contract may be expensive in a traditional sense, but if the alternative is increased vulnerability to higher debt or even an inability to access credit, the short term loans are preferable in the long run.

Survey Says

Payday loan customers surveyed by Lawrence and Elliehausen tend to break many of the stereotypical notions spread by critics of the industry. They are not in fact poor; just over half had family incomes between $25,000 and $49,999. Considering that having an active checking account is a requirement for obtaining a payday loan, unbanked households (generally lower income) are not being exploited by such short term loans. In terms of age, two-thirds were under 45 years old, with more than one-third under 35. Only 10 percent were 55 or older, so clearly the elderly is not being targeted. Family situations indicated more than half were married or living with a partner, and 65 percent of respondents had children under 18 years of age living in the household. These are young families with debt loads who are attempting to deal with financial shocks as best they can. Now that America is in a recession, I’m sure that if Lawrence and Elliehausen conducted their survey today, the numbers would continue to support this idea.

Do They Have Other Options?

The survey indicated that a whopping 91.6 percent of payday loan customers do rely on other types of consumer credit at times. However, considering the finding that payday loan customers are less likely to use revolving credit like credit cards, one would think that they find an advantage in using the more regimented payday loan model. I would offer that it is precisely that budgetary discipline discussed earlier that makes payday loans more appealing for these rationed borrowers.

Of course, having other credit options tends to go hand-in-hand with the potential for a greater debt burden. As such, the authors’ survey found that 73 percent of payday loan customers had been turned down or limited in their ability to secure other types of loans over the past five years. Payday loans become a necessity during financial emergencies if other options are limited. In fact, two-thirds of respondents claimed they used payday loans due to unforeseen financial events.

Making Informed Decisions

Lawrence and Elliehausen found that respondents to the payday loan survey tended to follow cognitive models suggested in other consumer credit studies. Specifically, they go through a process where they recognize need, gather details, consider options, decide and then evaluate how it went in the aftermath. As the majority of consumers in the survey appeared educated (the majority were high school graduates or had college experience), it would stand to reason that payday loan customers tend to display cognitive ability and efficiency. In the case of details like APRs and finance charges, greater education tended to equate to greater awareness (where such factors were considered important in the decision-making process).

Young Families Who Consider Options Carefully

Lawrence and Elliehausen’s findings speak to the financial realities facing many American families. They’re just starting out, their wages are not yet high and they don’t have many liquid assets lying around for a rainy day. Used in a non-habitual fashion, payday loans help absorb financial shocks during times of financial difficulty. They give consumers “a little control over their financial affairs they otherwise would not have,” write the authors. Is it any wonder then that customer attitudes toward payday lending were positive in the survey? There is peace of mind in being able to handle one’s own affairs. Since the majority of those surveyed did not show signs that they were using payday loans beyond the fashion for which they were intended, why is it that the government should be so gung-ho to step in with heavy regulation and taxation? By stymieing competition in a free market economy and restricting payday loan availability, aren’t they harming both consumers in need and their own capitalist system?

Do military loans put personnel on a collision course with financial catastrophe? (Photo: flickr.com)

Payday loans come in a variety of packages for consumers, and that includes those who are active members of the military. They’re called military loans in that instance, and they can be quite useful to military personnel who have had difficulty obtaining loans from banks and credit unions. While a variety of underwriting decisions could factor into such rejection, the fact that many military members who borrow are young and do not have established credit histories would appear to be the most obvious.

Military Loans are Highly Regulated

In October of 2007, the Department of Defense imposed a 36 percent APR cap on military loans to personnel and their family members. Considering that young military families must pick up and move frequently and are often on the lower end of the military pay scale, financial shocks do occur. Spending habits are clearly an important factor in whether a military family faces financial calamity, a factor that can lead to a need for military loans should the family budget fail to stretch between paychecks.

Do Military Loans Hamper Military Readiness?

That’s the question the study “In Harm’s Way? Payday Loan Access and Military Personnel Performance” by Scott Carrell of UC Davis and Jonathan Zinman of Dartmouth College and the Federal Reserve Bank of Philadelphia poses. Their study was conducted before the implementation of the 36 percent APR cap, between 1996 and 2007. U.S. Air Force airmen were the focus, but the authors claim there is no obvious reason to suggest that conditions would be appreciably different for other service men and women.

The authors suggest that the availability of military loans before the 36 percent cap correlated to a decline in military readiness of personnel, but it seems to this reviewer that the number of variables is much too great to affix the blame solely upon military loan businesses. There are so many possible psychological and educational variables in play that the mere presence of legitimate businesses within a military community (or online) couldn’t possibly be the sole cause of financial distress.

Access to High-Interest Debt: “Inconclusive” Affect on Borrower Behavior

Carrell and Zinman preface their work with that admission. So does that mean that we should take their conclusions as mere speculation? I can speculate regarding whether the presence of ice cream in a community contributes to dairy allergies, but that doesn’t mean it is unequivocally true.

In fact, analysis exists which indicates that the presence of military loans and related payday loans has a positive impact upon military personnel and their families.  On average, says Adair Morse in his 2007 study “Payday Lenders: Heroes or Villains?” and Bart Wilson, et al in the 2008 study “An Experimental Analysis of the Demand for Payday Loans,” military loans help personnel handle financial shocks. Dean Karlan and Jonathan Zinman found in 2008 with “Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts” that access to payday loans contributes to job retention. And it should also be noted that the 2008 Federal Reserve Study “Payday Holiday: How Households Fare After Payday Credit Bans” by Donald Morgan and Michael Strain indicates that families (military or otherwise) who experienced financial distress were able to obtain greater budget liquidity to alleviate the distress thanks to military loans and payday loans.

So Where’s the Connection Between Military Loans and Lack of Military Readiness?

Carrell and Zinman claim to have found “significant average declines in overall job performance and retention and significant increases in severely poor readiness,” which they attribute to military loans. Yet they say that “the welfare implications for military members are less clear-cut,” which indicates to me that this is more speculation than solid scientific research.

The study authors reference the Pentagon’s belief that military loans “cause financial distress and related distractions.” At the same time, however, they admit that another possible effect of access to military loans is that personnel and families will experience greater financial liquidity, which in theory enables them to invest in outside areas (greater opportunity in the private sector) that could make re-enlistment less necessary for personnel. That could then be a technically positive factor that skews the results of Carrell and Zinman’s rather negative study.

But Here are Their Findings

The authors suggest that airmen become “significantly” less eligible to re-enlist (by 1.1 percent). They find that military loans also contribute to poor readiness (more unfavorable information files present for personnel in areas where military payday loans are available). But they undercut their findings with the admission (once again) that “our data do not permit sharp tests of the welfare implications for military members.”

It seems likely that the youth and inexperience (as well as the transitory lifestyle) young airmen and their families are forced to live would have a greater effect on the financial burdens they face and their spending habits. Using military loans could simply be a means to an end for dealing with the shocks. As the military provides financial education to their members and their families – particularly since the 36 percent APR cap – using military loans irresponsibly should be a less likely occurrence.

We Aren’t Talking About Large Loans Here

A standard military loan amounts to anywhere from $100 to $300 in the authors’ study. The market rate was $15 per $100 loaned (a common rate found now), so the final cost would range from $115 to $345. Higher rates are charged at some lenders, however. But the more expensive substitute – overdraft protection, according to multiple sources – can prove to be an even greater financial burden. The APR charged can be hundreds of percentage points higher, depending upon the bank.

Military Loans and Being Fat

I found this interesting. One of the factors Carrell and Zinman found could appear on an airman’s profile that indicates lack of military readiness is weight problems. According to the U.S. Air Force, personnel must be physically fit enough to perform their duties. Among their military loan sample, the authors found that as much as 3.3 percent were enrolled in a Weight Management Program (WMP). This varies depending upon the length of service for personnel (first, second or third term; 3.3 percent came from the second term of enlistment).

Does this mean that military loans make airmen unfit because it makes them fat? I find that to be a laughable assertion. Education about diet and exercise correlate greatly to personal weight in every study I’ve seen. Not having access to more money via military loans or otherwise seems an unlikely correlation. Fast food consumption tends to be greatest among those with less money and overall education, which leads me to believe that education would have a similar impact upon one’s financial decisions (both health and money choices can be impulsive, but education lessens this likelihood).

It’s the State of Their Communities

In general, Carrell and Zinman find that Air Force bases in more distressed areas (where unemployment is greater) tend to be more prone toward dependence upon consumer credit like military loans. Areas with more positive employment numbers show a lesser dependence. This could link toward greater financial experience and education in those areas, which seems obvious to consider. Yet the authors tend to gloss over this potentiality.

Military Loans are a Tool. The User is the One Responsible

It’s impossible to get around the fact that Carrell and Zinman admit that “the social welfare implications of our results are less clear-cut.” They claim they support the Pentagon’s findings that military loans and payday loans damage the quality of life for military members and their families, but factors of education, psychology and the rigors of military life itself deserve greater study. Are these factors more accurate determiners of whether military families face financial distress? It seems that more study in these areas is called for.

Destroying the payday loans industry creates problems and solves nothing. Balance is needed in legislation. (Photo: wikipedia.org)

Even if you’ve never been a customer of a payday loan business, you’ve likely seen or heard about the product. You probably also know that payday loan businesses are fairly easy to find in both the brick-and-mortar world and in cyberspace. With such a proliferation, it seems obvious that there is a demand for such consumer loans. Yet for a product that millions of consumers use each year, it’s interesting that the entirely legal payday loan industry has been affixed with such a negative reputation.

Throwing Stones

The most common allegation levied against the payday lending industry is that it constitutes predatory lending, exploiting helpless consumers with high rates and other loan shark tactics. On their behalf, those who offer payday loans assert that the rates charged are appropriate to protect against risk, yet much less damaging than what consumers can encounter in fees if they don’t pay their bills or have their utilities shut off. Unfortunately, there is relatively little objective analysis that looks beyond the rhetoric of both sides of the payday lending issue. Critics adopt what they consider to be a moral high ground where they use “payday loans” and “usury” in the same sentence, while lenders defend their practice by illustrating that customers are made aware of costs before a contract is signed and by claiming that current rates are necessary in light of operating costs.

Let’s Take a Balanced Look at the Stats, Shall We?

That’s exactly what Aaron Gold does in his New York University honors thesis “Payday Lending: Grounding the Policy Debate Through Economic Analysis.” His study compares some key metrics between payday lenders (five of the largest chains, representing 25 percent of U.S. stores) and a sampling of “traditional” lenders such as banks and credit unions. In a nutshell, Gold finds that high operating expense does seem to justify the cost of payday loans. While data supports the notion that payday lenders are more profitable than traditional lenders, their profits in relation to their “break even” point aren’t as outrageous as overheated critics claim.

The Social Forces behind Payday Lending

While people from all walks of life have had the occasion to use payday loan services, averages definitely point in the direction of an upper-middle to lower class demographic. Gold cites the M.S. Barr article “Banking the Poor” in the Yale Journal on Regulation. Barr suggests that an increasing number of Americans are “under-banked” (Barr, 2004, p. 2). “Real or perceived costs and fees of maintaining traditional banking services,” suggests Barr, are simply too much of a hurdle for scores of people to clear. Considering the shenanigans of financial institutions that steered America toward the current recession, such skepticism is no surprise. Douglas McGray writes in an article entitled “Check Cashers, Redeemed” that lower income consumers and (anecdotally) some segments of immigrant communities tend to disdain the system of traditional banking and credit. Furthermore, he alludes to public relations efforts made by payday lenders in their communities (such as employing local, multi-lingual people). Thus, payday loan stores serve as comfortable, convenient one-stop shopping for those in need of quick cash during an emergency.

Payday Loans Are For Consumers with Steady Income

It is simply untrue that payday loan companies prey upon people who don’t have the money to repay. Only those with a verified steady income are eligible, a safety measure for both the consumer and the lender. An analogy Huckstep uses in his important study “Payday Lending: Do Outrageous Prices Necessarily Mean Outrageous Profits?” (See: http://www.checkintocash.com/images/media_center/Fordham-report.pdf) is that payday loans are like a financial taxi: “Expensive for long trips, but perfectly viable for short distances” (Huckstep, 2007, p. 207). Used properly, payday loans can save consumers a great deal of money over more catastrophic alternatives. This is a fact that reputable payday lending businesses stress to consumers through their literature and service counseling.

But Are Payday Loans Too Expensive?

That’s what critics say, and the key defensive position has been that high risk justifies the price. Gold points to the 2005 FDIC study by Flannery and Samolyk “Payday Lending: Do the Costs Justify the Price?” in support of the defense, but Huckstep counters that “while loan losses may be high… that seems to be a trait of the lending industry generally, rather than a unique trait of payday lending institutions” (Huckstep, 2007, p. 230). Looking at said charge-off rates, Gold finds the ratios (dividing yearly charge-offs by the amount of originated loans during that period) between payday lenders and traditional lenders to be rather similar, and very much in keeping with overall Fed averages. In fact, the average for payday loan default is shown in Huckstep’s study to be below those of credit cards. This suggests that consumers are indeed able to handle their payday loans when compared with other kinds of consumer lending.

Do Payday Lenders Reap “Obscene” Profits?

Overall, multiple sources confirm the truth that payday lenders have enjoyed greater profits in recent years than traditional lenders based upon similar products. But Gold would have us understand that from 2006 to 2008, the profit margin above the “break even” point for the major payday loan companies decreased dramatically. There are numerous reasons for this, but Gold intimates that a lack of growth opportunities within the payday lending industry may have something to do with it. Whether this is because the industry has become overgrown and needs pruning or overzealous regulation has hamstrung businesses in too many states is debatable.

From the standpoint of the numbers, loan volume is considered to be the key to payday loan store profitability (rather than exorbitant rates). Growth and competition have a definite impact upon loan volume on a per store basis. Gold believes that consumers are attracted to payday loan locations primarily because of convenience, so expansion of store locations and operating hours are necessary to compete. However, venturing beyond a saturation point may actually decrease profits.

Good Return on Assets and Equity

Payday loan business, according to Gold’s findings, produce a greater return on assets (ROA; the ratio of operating income to average assets), which indicates that they are more efficient at what they do than banks and credit unions that offer similar products. Considering that payday loan companies tend to have a relatively small number of physical assets when compared with big traditional lenders, the payday lenders experience much less loan turnover and require much less operating capital in order to produce positive returns.

Does this mean that shareholders of payday loan companies are making a killing? Relative to traditional lenders, the equity tale of the tape says no. Gold finds that from 2004 through 2006, payday loans originators and traditional lenders were basically dead even. By 2008, however, the subprime mortgage crisis sent traditional lenders plummeting. Payday lenders readily took up the slack of consumer demand and posted a much more positive return on equity.

Scale Down, Payday Lenders?

Gold appears to lean toward the idea that if “store density is a function of price, then a reduction in density would increase loan volume and profit at remaining stores.” In such an instance, payday lenders could conceivably charge less and still collect a decent profit. A reduction in competition would then help consumers.

Payday loans could continue to satisfy consumer demand, provided the constant attack mentality of legislators (who no doubt receive sizable campaign contributions from traditional lenders). Some regulation is beneficial (since there are lenders with room in their profit margins to decrease price), but a 50 to 75 percent reduction in APR will only serve to put legal businesses down and increase unemployment. Cooler heads must prevail. As Gold puts it,

For real progress to be made toward finding an equilibrium that works for all involved in the payday debate, interested parties need to move away from inflammatory rhetoric and legislation that views the industry in binary terms. They must move toward defining acceptable interest rates and profit margins and take cautioned steps to satisfy the credit demand in an economically sustainable way.

Follow the Numbers

In America’s recessionary economy, sustainability is a highly desirable goal. Payday loans are here to stay. When will legislators admit that and work toward economic harmony?

If you could use Payday Loans, please apply here

We are going to share a real life story of a family who avoided additional hardship after being taken advantage of by a bank, thanks to short  term loans online. Of course we have to change the names of the people who benefited from the online short term loans for privacy reasons. Please read the following story of the Joneses and their experience with big banks and installment loans for people with bad credit.

Economic hardships can be prevented with short term loans

The “Jones Family” got more than one short term loan online in order to squeak by in this harsh economy. Mr. Jones was having trouble making sure that he kept track of all the debit card transactions between himself and his wife. Add automatic deductions to the account and internet purchases and Mr. Jones had a receipt for disaster.

Big bank fees cause big shock to the budget

Mr. Jones had no idea that the big bad bank was going to reorder debits and other deductions to the account in a very strange fashion. After planning a trip for his family for several months, everything seemed to be in place. The Jones family had a great time and had not a clue what was about to happen to them financially. Their budget was going to undergo a radical change without their knowledge or permission.

Fun vacation ruined by bank fees

After a great week of vacation, Mr. Jones finally was able to get online and check the family bank account. Shockingly the bank was claiming they were over drafted by almost $1,000 dollars. Mr. Jones had set up automatic overdraft protection with a secured savings account credit card. There should not have been 10 overdraft fees charged to the account. It was going to take more than one short term loan online to get the Jones out of this budget crisis.

Read the bank’s fine print

Upon close examination of the banking record, it was revealed that there should have been enough cash in the secured credit card account to cover the overdrafts. There was approximately 15 debit charges to the account for various vacation expenses. There was the addition of an early debit for auto insurance to the account for approximately $200. This brings us to the scandalous part of the story.

Bank reordered debits to create unnecessary overdrafts

The bank reordered all the small debits for the vacation that were in “pending” status and put the larger insurance debit first ahead of the others. This was strange since the insurance debit actually accrued after all the small debits in the account. Interestingly enough, the bank reordered the debits to create 10 overdrafts instead of just one. So, to borrow about $100 or so, the bank charged Mr. Jones $350. To say the least, the Jones were outraged.

Overdraft protection ignored by bank

It is bad enough when the bank did not take the money out of the overdraft protection account to cover the insurance payment, but to reorder all the debits for the vacation in order to profit to the tune of $350, that is simply highway robbery. The Jones were not only shocked but extremely upset. Being that the bank would not have any mercy on the Jones, they were forced to obtain short term loans online to make ends-meat while they paid off this outrageous debt.

Banks routinely target families

This is a common tragedy in the United States today. Big banks and financial institutions are taking advantage of working families. They pay the media big bucks to villainize short term loans online but they charge people in excess of 30,000% APR and call it a fee. Short term loans online are definitely a far cheaper alternative than overdraft fees.

Learn from the Jones Family mistakes

If you are like the Joneses you may want to keep better track of your online debit transactions and possibly get a short term loan online before you go on your vacation and pay for everything with cash or at least make sure you have extra money in your bank account. That would have saved the Joneses several hundred dollars and prevented massive headache and anxiety.

Get Your Short Term Loan Online Now!

If you don’t need a short term loan online today you may need one in the future. Please save this page in your bookmarks to come back later. If you need a down payment assistance loan to purchase a vehicle, you should check out VehicleMicroFinancing.com.