The burden of proof can be a mighty weight, can't it, Mr. Eskow? (Photo: Flickr)

Richard Eskow, a private-sector consultant who works for corporations and organizations that include the World Bank, is rather miffed about what Lawrence Meyers had to say regarding Eskow’s anti-payday loans argument. While Meyers is something less than professional in the manner in which he addresses Eskow (referring to him as a “simple child”), the exchange does raise some very real questions about some of the claims Mr. Eskow makes in his recent Huffington Post article “Usurious Payday Loans: Myths, Flawed Studies, and Solutions.” Much of Eskow’s criticism of the payday loans industry seems to center on how the industry allegedly targets and exploits the poor and minorities. As we’ll see, however, one who lives in a glass house should not throw stones.

Richard Eskow and the World Bank

Keep this in mind: Richard Eskow is closely allied with the World Bank. And according to the World Bank’s Articles of Agreement, its aim is to “assist in the reconstruction and development of territories of members by facilitating the investment of capital for productive purposes.” Yet, as the Bretton Woods Project, the World Bank imposes conditions on countries that borrow based on what is called the “Washington Consensus,” as opposed to the specific needs of the borrowing country.

Loans originated by the World Bank have been criticized for being rather unethical; for instance, Bretton Woods cites an example in which hydroelectric dams were funded and constructed even though doing so displaced indigenous people who lived in the area. Partnering with the private sector, as the World Bank does, has also raised concerns of undermining the role of individual states to provide essential goods and services, which Bretton Woods claims has caused shortages of such services in “countries badly in need of them.”

This is what Richard Eskow supports?

It’s strange that Eskow supports this, because by the end of his Huffington Post rant, he seems to think it’s actually a good idea to allow states to make their own decisions regarding payday loans. But only moments before, he proposes that Congress form its own agency to regulate payday loans out of business.  It seems there’s some conflict in Eskow’s mindset over payday loans and other financial matters, if not out-and-out hypocrisy. However, let’s view the meat of his argument against payday loans, which is of primary interest.

Payday loans ‘exploit helpless people,’ claims Eskow

This is an argument that the pro-big bank establishment has used for years. Those with a religious bent go so far as to connect payday loans with usury, which is far from correct. Usury amounts to excessive and unlawful charging of interest. Payday loans do not qualify on either of those counts, and hence do not connect so neatly to Eskow’s concept of usury. Eskow cites anti-payday loans studies funded by such anti-payday loans industry groups as the Center for Responsible Lending as support for his arguments. He also pokes at pro-payday loans studies by saying that they’re often funded (at least in part) by pro-payday loans groups.

At worst, these two things could cancel each other out. That would still leave Eskow on the grounds of the legal logic where the burden of proof rests upon the accuser. But the Center for Responsible Lending was founded by Herb and Marion Sandler (mavens of the subprime mortgage crisis) and is backed by Martin Eakes of Self-Help Credit Union/Self-Help Inc. A great deal of doubt exists as to whether any of those sources are reputable when it comes to financial responsibility. Thus, Eskow’s anti-payday loans material could easily be viewed as the weaker of the two sides.

READ ON to see whether Eskow is right in claiming that payday loans exploit the powerless…

(Photo Credit: http://www.flickr.com/photos/lightmatter/ / CC BY 2.0)

Sen. Kay Hagan (NC-D) - Have John Paulson and the CRL done anything for YOU lately?

The Center for Responsible Lending recently worked hand-in-hand with North Carolina Senator Kay Hagan (D) to “help craft” the Payday Lending Limitation Act of 2010, reports the Payday Loan Industry Blog. The major purpose of this new bill, it would seem, is to change the parameters of the Truth in Lending Act (TILA). While the specifics of the bill text will not be available to the general public until it is presented to the Senate in the upcoming weeks, it appears that the Payday Lending Limitation Act of 2010 is ostensibly another attempt to blame America’s financial crisis on the payday loans industry. The bill would empower the federal government to replace state-by-state consumer lending regulation with their own highly stringent rules.

Payday Lending Limitation Act of 2010: Another CRL manifesto

The Center for Responsible Lending (CRL) is allegedly responsible for the thrust of the Payday Lending Limitation Act of 2010. For those unfamiliar, the CRL plays consumer advocacy group before the cameras and bright lights, but when it’s time to wipe of the grease paint, their truth hurts. Not only were they founded largely by Herb and Marion Sandler, who made a fortune in the sub-prime mortgage market that was largely responsible for bringing America’s economy to the brink of destruction, but there are other damning ties. Numerous connections exist between the Sandlers, the CRL, Self-Help, Inc. and affiliate Self-Help Credit Union (the latter two founded by Martin Eakes, who is also the chairman of the CRL).

In essence, affirmative action initiatives were used to strong-arm banks into writing adjustable-rate mortgages for people who were unlikely to be able to afford them. At the same time, groups like Goldman Sachs were contributing to the mortgage mess, claiming those sub-prime mortgages were a good investment to fool investors while betting against the success of those investments behind the scenes. And guess what? Hedge fund billionaire John Paulson, who is intimately involved in the recent mortgage investment scandal, was a major financial contributor to Goldman Sachs AND was one of the major founders of the Center for Responsible Lending! How credible are the Center for Responsible Lending’s claims that they want to protect the little man, in light of those heavy connections?

Skip the Payday Lending Limitation Act of 2010, Congress

Instead, investigate the Center for Responsible Lending at the same time that you go after Paulson, Goldman Sachs and everyone else associated with this greedy mortgage investment game. There is at a bare minimum suspicion by association, and there is a documented money trail. Payday lending, when used properly, is a useful venture for short-term consumer funding. Adjustable rate mortgages and unscrupulous investment companies that are betting on deceived investors to fill their coffers have no proper place in a legal, functional economy. Their avarice is a blight, and Sen. Hagan would have been better-served if she’d asked Scrooge McDuck to write the Payday Lending Limitation Act of 2010. He has more heart and care for the common man.

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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.