How Will Payday Lenders Be Affected by New Bill in Congress? 27 comments
-
Font Size:
-
Print
- TweetThis
Part 1 in the series.
Senator Richard Durbin has a curious new bill he's flogging around Washington. The deceptively titled S. 500, "Protecting Consumers from Unreasonable Rates of Credit Act", only serves Sen. Durbin and his big banking contributors. Why? Because it seeks to effectively eliminate all forms of short-term credit except one – bounced check fees from banks.
I've already covered the outrageous scam being perpetrated on consumers by the banks, and I didn't even discuss how these banks automatically opt consumers into their ODP programs. Now it seems the banks have a friend in Senator Durbin.
Families in need of short-term credit – generally used to help make ends meet, to pay a car mechanic so they can get to work, to help pay a utility bill – are able to turn to any number of alternative financial services. Payday loans, of which I am a common sense advocate, are one such service. As I've explained many times, payday loans are a reasonably priced product used 154 million times in 2008 by millions of Americans. They use these loans of their own free will, all fees and terms are clearly disclosed, and 94% of customers pay the loan back on time (contrary to the myths you read in the media).
Due to the 6% default rate and average monthly store overhead of $8000, these lenders cannot make a profit unless they are able to charge about $15 per hundred borrowed.
Consumers facing a necessary expense and caught short between paydays must often choose between costly and undesirable options: pay the bill now and face bounced check or overdraft protection fees; pay the bill late and incur late payment penalties; borrow from a payday or title lender to cover the bill; or go over-the-limit on their credit card.
Sen. Durbin's bill would create a federal rate cap of 36% on all forms of short term credit.
Sen. Durbin claims this is "good for the consumer", but he ignores the litany of non-partisan, non-biased studies proving that consumers fare worse when such credit is restricted, as has happened in numerous states recently. He also ignores that fact that almost 100,000 people will be put out of work! Think about that. Here we are in a recession, and Durbin is deliberately proposing to put one hundred thousand people on the unemployment line. SHAME ON YOU, Senator.
And yet, how interesting that the one form of credit – bouncing checks – is mysteriously exempt from this new bill. That would create a monopoly in this space for the banks – the same institutions that have shown their altruistic caring for America by utterly destroying its economy in pursuit of subprime mortgages. Oops!
Bretton Woods, a strategic analysis company, and Bankrate.com provide these 2008 estimates for the amount of revenue generated by each form of short-term credit:
- Bank ODP/NSF fees: $37 billion
- Credit Card over-limit fees: $19 billion
- Payday lenders: $6.8 bilion
If Durbin's bill passes, banks will pull in another $25 billion abandoned by its competitors. However, since they'll now control a monopoly in short-term credit, you can bet the average NSF/ODP fee of $28.95 will skyrocket, adding to their ill-gotten gains.
Not only can bounced check/NSF fees be the most expensive product available in this market (based on term and amount of credit provided), they offer the least consumer protections and result in the most damage to a consumer’s credit score. Bouncing a check also poses a legal risk to the consumer, as it is illegal to knowingly write a bad check.
So what, exactly, is Sen. Durbin up to? Opensecrets.org, which tracks political contributions, shows that Durbin received $65,000 from Citigroup (C). What soft-money contributions has he received from the banks? What is his agenda? There must be something more going on here than political grandstanding. Has Sen. Durbin cut a deal with the banks we don't know about? It wouldn't be surprising. Since the Democrats took over complete control of the government, would-be appointees have been exposed as tax cheats and Sen. Dodd is embroiled in the AIG scandal.
Could there be back-room dealings going on between Sen. Durbin and the banks?
For investors, stocks that would be affected by his bill include First Cash Financial Services (FCFS), EZCorp (EZPW), Cash America (CSH), QC Holdings (QCCO), Dollar Financial (DLLR), Advance America (AEA), Citigroup (C), Wells Fargo (WFC), Bank of America (BAC), JP Morgan Chase (JPM), Bank of New York (BNY), and every other publicly traded bank. So watch what happens.
Full Disclosure: At the time of writing, Lawrence Meyers was long shares of EZCORP, and held April call options on Advance America and EZCORP.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
TraderMark
-
2
Don Dion
-
3
Cliff Wachtel
-
4
Mike Havrilla
-
5
James Quinn
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 27 comments:
That said, I have used one, but oddly, only once. So it must have been a one time situation where I needed help. Once.
Let's examine your friend's situation and your comments.
"They are such a predatory industry"
The New York Federal Reserve Report defines "predatory" and finds that payday loans do not fit that definition.
www.newyorkfed.org/res...
Next, you place the blame entirely on the lender, but let's ask first: Why did your friend take out a loan she could not afford to pay back? Where is her responsibility in this unfortunate scenario?
Next, when she learned she couldn't pay off the loan in full, why didn't she ask for a payment plan? All members of the CFSA are required under their Best Practices policy to offer one when asked. Again, where is her responsibility?
TILA does require the fee to be reported as APR, but these loans are neither intended to be annual loans (or even 10 months).
These are two week loans. Like ANY OTHER PRODUCT, they must be used RESPONSIBLY. While I feel sorry for your friend, she used the product in an irresponsible manner and, unfortunately, experienced the consequences.
Not all payday lenders are check-cashers, and not all check-cashers are payday lenders. So, that's the first myth to clear up.
Second, many people choose not to work with a bank for many reasons. It is their choice to use a check casher if they wish.
As to reporting under TIL why loans less than 10 months not be reported and an amendment to this Law be brought by Senator.
He has looked at this from the viewpoint of a Bankers/Lenders lobby not from the viewpoint of marginal borrowers/his sense of social justice to indigent.
Hope people in Obama administration should look into these loans as a form of microlending with establishment of a Credit Guarrantee Corporation to mitigate their subprime status. They should also look into the possibility of resurrecting Old Usuary Laws that were in existence into most of the States to reduce possibility of Criminal elements being so present in this area as of now.
(2) "almost 100,000 people will be put out of work!"
(3) They use these loans of their own free will, all fees and terms are clearly disclosed
36% is still too high, higher than usury laws imposed prior to that moron Paul Volcker.
England had to address bounced check fees. They were lowered. The same would happen here
drug addicts use drugs on their own free will as well knowing the consquences of their actions
you should work on the illegal immigrants problem which displaces millions of U.S. workers
people like you should find anthor country to live in. you as are most others, completely ignorant of the circumstances upon which these lower income borrowers ask for money, borrowed money that leaves them much worse off financially
There is no basis in any fact why PDL options should be legislated away out of hand. None. It is an option for people, and passing a law to outlaw it is nothing more than an intellectual farse and political theater.
On Mar 26 08:15 AM john in madison wrote:
> Are you out of your mind? You are an advocate of Payday Loans? They
> are such a predatory industry. I personally know of people who's
> lives have been crushed by these companies. A very close friend of
> mine, too embarased at the time to ask for help, went to a payday
> loan company in Illinois for a $1500 loan because she needed to pre-pay
> her doctor/lab for a serious bone infection (her insurance had a
> $500 anual deductable and a 20% co payment meaning she had to come
> up with $1500 up front to be treated). Every 2 weeks that they were
> not able to come in and pay off the loan in total the loan automatically
> reset and were charged the handling fee of a little over $200 (withdrawn
> directly from their checking account). After 10 months of paying
> $450 a month to reset the loan (over $4500 on a $1500 loan) they
> still technically owed $1500. You have the nerve to call this a "reasonably
> priced product"? You also fail to recognize your own statisticts.
> You claim these companies need to make $15 per $100 loaned, that
> is 15%. Truth in lending requires this 15% to be reported as a massive
> APR since it is 15% in 2 weeks and the loan forms have to calculate
> the interest as a daily rate then multiplied out in to what that
> daily rate would be as an anual rate. The industry seems to think
> that this then means they can actually get a 5000% return on the
> loan. Your argument only makes sense if the 15% fee is charged up
> front and then if the loan is not paid ON THE NEXT PAYDAY, then it
> either goes to collection or becomes an installment loan at the APR
> allowed by state law for installment loans.
PDL loans are a product, like butter, that if used improperly can cause damage. If used well they work fine.
Instead of outlawing PDL, how about getting to root of problem you describe: education, job creation, and poverty initiatives, and leaves actual good deeds to compete with PDLs instead of outlawing a product outright. Even a government subsidized short term loan program that tax payers would take a bath on, perhaps I could accept for competition...
Funny, people always look for a short sighted explanations for problems...do you feel outlawing PDLs will actually benefit people in financial distress or just benefit rich politicians and 'feel good' white wine sipping folks like yourself?
On Mar 26 02:05 PM flow5 wrote:
> (1) "Sen. Durbin's bill would create a federal rate cap of 36% on
> all forms of short term credit"
> (2) "almost 100,000 people will be put out of work!"
> (3) They use these loans of their own free will, all fees and terms
> are clearly disclosed
>
> 36% is still too high, higher than usury laws imposed prior to that
> moron Paul Volcker.
>
> England had to address bounced check fees. They were lowered. The
> same would happen here
>
> drug addicts use drugs on their own free will as well knowing the
> consquences of their actions
>
> you should work on the illegal immigrants problem which displaces
> millions of U.S. workers
>
> people like you should find anthor country to live in. you as are
> most others, completely ignorant of the circumstances upon which
> these lower income borrowers ask for money, borrowed money that leaves
> them much worse off financially
"36% is still too high, higher than usury laws imposed prior to that moron Paul Volcker."
Due to the 6% default rate and average store monthly overhead of $8000, lenders cannot make any profit at all at 36%.
"drug addicts use drugs on their own free will as well knowing the consquences of their actions"
Drugs provide no benefit to the user and harm society as a whole.
Payday loans provide benefit to the user and help society by providing a source of short term credit to those in need.
Predatory practices should be harshly punished: certainly all of the blame in the story presented by "john in madison" can't be placed on the borrower... alternate payment options should have been presented. Keep in mind that many of the people who require these services have even less financial education than the average American--that's saying a lot!
Please note that that applies to banks as well as PDL services... banks are every bit as guilty of charging excessive fees, they just spread them out over a larger population.
Just my 2c.
So if cards can charge 10-15% APR and profit from 5-7% default rate, the PDL industry is either overcharging for its default rates (so called 6%), so the author is totally off regarding the 6%. Please cite a reputable study to back up your 6% claim (And by reputable I exclude all studies created by lobbyists or PDL trade groups).
Another funny thing is how the author claims people would purposely choose PDL over regular banking. One would think only those with poor credit and have no choice before resorting to PDL as a last resort.
PDL advocates are like subprime mortgage advocates - pretending their predatory lending is beneficial when compared to "restricting access to credit." And it's usually a vicious spiral - the weak financial situation of the person leads to poor credit history which leads to high risk premium (fees, interests, PDLs) which leads back to even worse financial situation.
Hey Larry, if you love PDLs so much, why don't you go take one out yourself and come back and tell us how well it went !
Your post is an admirable attempt to open discussion, so let's address these issues you raise.
Let's begin with the annual default rate. No study is necessary. This information is readily available in the quarterly reports of every public PDL company. You can do that research for yourself, but here is a link from Advance America, the largest PDL in the US.
investors.advanceameri...
Click on "10-K", and go to the top of Page 24.
Your argument has no merit because the profitibility of credit cards companies and PDLs are in no way related to each other. THey have totally different business models. It's very much apples and oranges.
I did not claim people choose PDL over regular banking. In fact, you cannot get a PDL without a bank account. What I said was "Families in need of short-term credit....are able to turn to any number of alternative financial services." So you are creating words I never wrote.
Now we get to your most egregiously false statements.
"PDL advocates are like subprime mortgage advocates - pretending their predatory lending is beneficial when compared to "restricting access to credit."
The NY Federal Reserve, in a study not commissioned by anyone, clearly determined that payday loans are not predatory.
www.newyorkfed.org/res...
154 million PDL transactions were conducted in 2008. If these loans did not benefit people, then why did they take them out, and repay them at a 94% rate.
Please educate yourself by reading the Thomas Lehman testimony in my previous post. He has no connection to the industry and clearly explains why you are wrong.
"And it's usually a vicious spiral - the weak financial situation of the person leads to poor credit history which leads to high risk premium (fees, interests, PDLs) which leads back to even worse financial situation."
You are correct. But whose fault is that? The person's. Each individual has responsibility for their own actions. If they have a weak financial situation, then they must make the best of it. Do you expect lenders to loan money at low rates to people who are high risk?
You final sentence is totally irrelevant, just an ad hominem attack that demonstrates that you are uneducated.
Let me suggest this. Next time you are in need of short term credit, examine your options. I'm going to bet that you choose the best option FOR YOU.
So let everyone else chose the options that THEY DECIDE are best FOR THEM.
Please explain your agenda.
You have 3 total comments, so I took a look at them.
Interesting that of your 2 previous comments, one was all about defending credit cards and their high interest rates due to the high risk nature of credit card loans, while advocating personal responsibility...yet you come to this article and argue the opposite.
The following are YOUR words....
(POSTED BY mogando668 ON MARCH 27)
1. Few cards charge over 20% upon account opening unless you're already a subprime borrower to start with. Most cards with 20%+ rates are those who had been delinquent.
2. People keep forgetting cards, unlike mortgages or auto-loans, are unsecured loans (e.g. without collateral). Of course the risk premium is higher than your 5% mortgage. Mortgage defaults and they take your house. Auto-loan defaults and they take your car. Bond/debt defaults and they seize residual value of your corporation in liquidation. Card defaults and the bank can't seize jack.
3. User55065 keeps complaining about "greed." Card companies are private entities existing for generating profits for the corporation and returns for shareholders. Why would anyone even issue you a card if it only breaks-even or even a loss-leader? According to your definition, any company that generates a profit or anyone who works for more than minimum wage = "greed overtakes".
4. One pays interests on their cards only if they can't pay in full each month. Is it the card company's fault that you're not spending within your means?
5. User55065, if you dislike cards so much, why not cut up all your cards and use debit and cash from now on? No point of being a drug addict and complaining about its harm.
If your choice is to take a high interest loan, or not eat for a week, what would you do? How about face eviction? Legislation that will reduce available credit for these situations will only hurt the people that it is supposedly designed to help.
Personally, I'd prefer to see people using services like prosper.com, as well as some more transparent industry codes of conduct. But the legislation is still a bad idea.
The author and his supporters are not in touch with their own humanity, and obviously worship the god of greed above all else. But they are hypocrites, because they would never recommend to family members or loved ones what they proclaim to be right for others exercising what must be their "free will."
These are the kind of people and the kind of thinking that brought us the current meltdown.
I wonder how much longer the rest of us will allow their thinking and behavior to run things?
The rates that are charged are those that enable profit, nothing more nothing less. The economics dictate the rates. I think that is something that we can agree upon...
So by your logic, we should lose money lending or do not lend at all. That is a logical fail in a business sense, but perhaps you have a non business agenda...
And by your other comment, I would absolutely recommend a family member take out a PDL loan if there was ay chance of credit damage by any default or late payment. 7 years of a negative credit report with mortgage, cars, business loans, calculated as an APR would be thousands, literally 1000% APR.
I have not heard one cogent argument against payday loans...please offer one up!
On Mar 27 10:41 PM You're Kidding wrote:
> This article, through its ridiculous logic, tries to justify the
> behavior of one group of human beings with motive and ability, in
> their attempts to take advantage of another group of less intelligent
> and needy people, in order to suck as much money as possible out
> of the pockets of the borrowers, and into their own.
>
> The author and his supporters are not in touch with their own humanity,
> and obviously worship the god of greed above all else. But they are
> hypocrites, because they would never recommend to family members
> or loved ones what they proclaim to be right for others exercising
> what must be their "free will."
>
> These are the kind of people and the kind of thinking that brought
> us the current meltdown.
>
> I wonder how much longer the rest of us will allow their thinking
> and behavior to run things?
By shutting down these places, this group of people will only be sent into the arms of loan sharks and other unregulated and unsavory sources.
It went on for years and a court recently declared that the utility had to pay this money back to the customer. However the problem here is that there are too many companies out there charging you and I exorbitant fees and there needs to be a reasonable cap. Banks and utilities are one of the biggest violators. In addition those especially older people on fixed incomes are generally one of the largest targets along with those who are required to live week by week from payday to payday. Not only should there be an interest cap but there should be extra compensation granted to those who are required to bring court proceedings into play because that company refused to comply with the interest cap. The ordinary person doesn't have the funds available to initiate a court proceeding against these big companies who always hide behind their lawyers. Amen to Senator Durbin.
I absolutely disagree that their should be a lending cap on **AT WILL** loans. Your solution is to completely shut down the only legitatment and available short term credit for people with poor credit...crazy! Who will lend to these people? Who will help build there credit (payday loan companies can report positive credit reports, BTW), who will actually work with these borrowers?
How hard is it to comprehend??? Poverty, education, finacial counseling is the way to compete with payday loans...my god even a subsidized program that your kids are going to have to pay for as it would lose tax payer money, but outlawing payday loans makes no sense at all.
I challenge just one of you to make a cogent and substantive argument for outlawing payday loans outright that has not religous sentiments...
On Mar 29 11:16 AM ed233 wrote:
> LENDING AT AN EXORBITANT RATE OF INTEREST IS USURY. Every society
> needs a cap in the rate of interest that can charge to its customers.
> Recently one of the largest utility providers in Canada was cited
> in court for usury practices because they charged exorbitant late
> payment fees to their customers.
> It went on for years and a court recently declared that the utility
> had to pay this money back to the customer. However the problem here
> is that there are too many companies out there charging you and I
> exorbitant fees and there needs to be a reasonable cap. Banks and
> utilities are one of the biggest violators. In addition those especially
> older people on fixed incomes are generally one of the largest targets
> along with those who are required to live week by week from payday
> to payday. Not only should there be an interest cap but there should
> be extra compensation granted to those who are required to bring
> court proceedings into play because that company refused to comply
> with the interest cap. The ordinary person doesn't have the funds
> available to initiate a court proceeding against these big companies
> who always hide behind their lawyers. Amen to Senator Durbin.
You speak from a place of ignorance. I can't even begin to argue your position because it is built solely on emotion. You first need to educate yourself, then return and argue the factual points. Please visit paydayloanfacts.org and then return.
We are quite in touch with our own humanity. Simply put, unless you have an option for people who need short-term credit, then you have no basis to make your ridiculous statements.
User 267997: You also lack basic knowledge of short-term credit. Loan sharks charge far more for loans and there is a real possibility of being harmed if you do not pay. Payday loans are far less expensive, are regulated, and the worst that happens if you don't pay up is that you get a call from the collections department. Please educate yourself at the above named website, then return for a realistic discourse.
ed233: You said, "LENDING AT AN EXORBITANT RATE OF INTEREST IS USURY. "
Yes, it is. However, payday loans are not usury, as I point out in this article. www.bloggernews.net/12...
"Every society needs a cap in the rate of interest that can charge to its customers."
What if that cap makes it impossible for an entity to stay in business? Then what do you propose? As the article here makes clear, if you rate cap to a point where payday loans are forced out of business, you harm the very people you purport to help by forcing them into the hands of the banks and the ODP fees.
"However the problem here is that there are too many companies out there charging you and I exorbitant fees and there needs to be a reasonable cap."
What do YOU consider a "reasonable cap"? Go read the link I just gave you. The definition of "reasonable" is defined. How do you define it?
"Amen to Senator Durbin."
So let's see, you advocate rate caps to a point where PDLs are put of business, forcing people to pay much higher NSF and ODP fees. Why would you say "Amen" to a bill that is harming the very people you claim to want to help?
Really, you must put your thinking caps on and not react out of emotion.
How much profit should the PDL's be allowed to make? Should they be limited or should they be able to charge as much as they want? When does their rate cross into the "usury" definition? Because they have an average of $8,000 per month overhead should they be allowed to rake in say, $30,000 per month and keep $22,000 per month? No, they should not be allowed to charge rates that allow them to ridiculously exceed their expenses. You conveniently left out any limits on profits for the lenders and focus on their expenses. Sure, they have to make a profit to make the business worthwhile, but they shouldn't be given free reign to rip off
desperate people in financial hardship.
From your weblink Larry, newyorkfed.org/res...
'Staff Reports
Defining and Detecting Predatory Lending
January 2007 Number 273
JEL classification: G18, G21, D14, D18, D82
Author: Donald P. Morgan
We define predatory lending as a welfare-reducing provision of credit. Using a textbook model, we show that lenders profit if they can tempt households into "debt traps," that is, overborrowing and delinquency.'
Larry, that definition of predatory is beneficial to lenders. Because a borrower pays back a loan, that does not mean that the loan was reasonable. That just means that the borrower paid off his debt, ridiculously usurious though it may have been. That is, it may have been a complete rip off but he paid it off to preserve his credit, integrity, etc.
Hopefully, Congress will pass legislation limiting rates for every last lender. Surely, we all know by now that lenders are quite incapable of "policing themselves".
You asked:
> How much profit should the PDL's be allowed to make?
This is America. In this country, why should any company be limited in its profit? Who are you or anyone else, much less politicians, be allowed to limit profit? And when you limit the profit of one industry, then why not limit all industries? Why should tobacco or liquor companies be allowed to profit at all, when their products contribute nothing whatsoever to society?
<Should they be limited or should they be able to charge as much as they want?
As a Libertarian, I believe they should be able to charge as much as they want. In states where there is no usury cap, or where no usury cap existed such as Oregon, the market settled in at about $20 per hundred. And guess what happened? Customers used the service at that price and lenders made a profit at that price. If the price had been too high, no customer would use it. If it was too low, no lender would offer it. GASP.
> When does their rate cross into the "usury" definition?
Great question. The market should decide it. I write about the definition of usury right here:
www.bloggernews.net/12...
<Because they have an average of $8,000 per month overhead should they be allowed to rake in say, $30,000 per month and keep $22,000 per month? No, they should not be allowed to charge rates that allow them to ridiculously exceed their expenses.
Ah, I see! You are a Paternalist and Socialist. You believe that government should decide how much each and every company in the USA should be allowed to profit! And what amount, exactly, will you set for each company? How will you come to that amount? Who are you to say how much anyone can make?
There's this funny thing in business: it's called "risk-adjusted returns". The reward for risking capital should be high returns.
The moment you limit the returns one can make, then all kinds of businesses will vanish. Demand will vastly exceed supply and you'll have infinitely priced goods and a black market.
<You conveniently left out any limits on profits for the lenders and focus on their expenses. Sure, they have to make a profit to make the business worthwhile, but they shouldn't be given free reign to rip off desperate people in financial hardship.
All of these concerns have been answered above. In addition, you have obviously never been to a payday loan store, talked to any customers or owners, or ever used the product. If you did, you would realize that the myth that people who use it are 1) desperate and 2) being ripped off are both false.
There are other options available for short-term credit. These include borrowing from a friend/relative/employer, credit card cash advance, pawning something, or bouncing a check.
People CHOOSE the payday loan out of all these options because it is the one they think is best FOR THEM. They don't need you to tell them what to do.
<Because a borrower pays back a loan, that does not mean that the loan was reasonable. That just means that the borrower paid off his debt,ridiculously usurious though it may have been.
False. The loan was reasonable if it was entered into by the free will of both parties, with all proper disclosures provided. YOU may not consider it "reasonable", but who are YOU to decide FOR THEM what is and isn't reasonable? I've already told you there are other options, and as 154 million transactions occurred in 2008, it demonstrates that consumers voted with their feet as to which option THEY thought was best FOR THEMSELVES.
And again, the loan is not usurious, under any secular or religious definition.
<That is, it may have been a complete rip off but he paid it off to preserve his credit, integrity, etc.
You demonstrate your ignorance. Failing to repay a payday loan does not harm one's credit, whereas failing to do with a credit card or bouncing a check does. And again, YOU consider it a rip off.
<Hopefully, Congress will pass legislation limiting rates for every
last lender. Surely, we all know by now that lenders are quite incapable of "policing themselves".
And what do you think will be the outcome of limit all rates for all lenders? Did you even think that through?
Why don't you share with us exactly what you think will happen if rates are limited to 36% APR for all lenders, while answering all the other counter-arguments I've provided?
If you dare.