The Politics of Payday Loans

by Henry on August 4, 2013

Via “Michael Froomkin”:http://www.discourse.net/2013/08/democracy-in-action-missouri-edition/, this “Pro Publica piece”:https://www.propublica.org/article/how-high-cost-lenders-fight-to-stay-legal is well worth reading.

bq. As the Rev. Susan McCann stood outside a public library in Springfield, Mo., last year, she did her best to persuade passers-by to sign an initiative to ban high-cost payday loans. But it was difficult to keep her composure, she remembers. A man was shouting in her face. He and several others had been paid to try to prevent people from signing. “Every time I tried to speak to somebody,” she recalls, “they would scream, ‘Liar! Liar! Liar! Don’t listen to her!’” Such confrontations, repeated across the state, exposed something that rarely comes into view so vividly: the high-cost lending industry’s ferocious effort to stay legal and stay in business.

{ 75 comments }

1

Scott Supak 08.04.13 at 4:07 pm

As a former union member and war protester, I’m quite familiar with these kinds of people. This is why we often had a small team of my mercenary stagehand friends, or other assorted biker types, nearby at all times to stand between those being assaulted and those doing the assaulting until the authorities arrived. At 6′ 1″ and 210, I was often part of that team, and was physically assaulted many times.

Every one of them was well worth it.

2

Katherine 08.04.13 at 4:30 pm

This is definitely one of my “wtf, America?” moments. How does this happen and not become a huge scandal about the violent and intimidating tactics of the companies in question?

Also, when I try to click the Pro Publica link my browser screams and flashes red at me about it being a untrustworthy site. Is it being paranoid?

3

fuubar 08.04.13 at 4:53 pm

I got onto BART yesterday and there was some right-wing stooge handing out anti-union propaganda, mostly crab-bucket stuff, attempting to make riders jealous of the union’s benefits. I never understood how people could be so petty. Why not instead organize everyone so we can all have those benefits? Seems silly to try to pull others down instead of pulling ourselves up.

4

nick s 08.04.13 at 5:30 pm

Katherine:

The problem was the legislature. During the 2010 election cycle alone, payday lenders contributed $371,000 to lawmakers and political committees, according to a report by the nonpartisan and nonprofit Public Campaign, which focuses on campaign reform. The lenders hired high-profile lobbyists, and Still became accustomed to their visits. But they hardly needed to worry about the House Financial Institutions Committee, through which a reform bill would need to pass. One of the lawmakers leading the committee, Don Wells, owned a payday loan store, Kwik Kash. He could not be reached for comment.

State politics in the US is perhaps an even greater cesspool than federal politics, because the legislators are either in the pocket of these people or are these people, and voter accountability is shot. That’s why ALEC has concentrated on state legislatures: a few donations and a cushy expenses-paid conference is all you need to buy them off.

This Harper’s piece on payday loans in Tennessee tells the same tale.

5

Hob 08.04.13 at 6:41 pm

@2 Katherine: Hmm, I’m not having any such trouble with that link in any browser. Those warnings usually mean the site was flagged by Google SafeBrowsing (or one of several similar services, if you’ve installed a browser plugin for them, like Web of Trust)… but as far as I can see, none of those are currently reporting any problem with it. That might mean that someone had snuck a bad script onto the site at some point which has since been found and scrubbed.

6

Brett 08.04.13 at 6:57 pm

The Harper’s Piece mentioned above is very interesting. It mentions that the typical customers generally fall into the “lower middle class” category: young, earning about $30-32,000 a year, and have bank accounts (since you need one to get a payday).

One of my questions was whether these people were unable to get credit cards, since those generally have lower interest rates than payday loans even if they’re quite high, and my experience with banks is that they generally try to throw the applications at you over and over to get you to get one. Or are they people who have already maxed out credit cards?

7

Brett 08.04.13 at 6:58 pm

Sorry, “. . . to get a payday loan

8

casino implosion 08.04.13 at 7:35 pm

Ah, the American Dream—getting rich via some dodgy scheme. Land speculation, pyramid scheme, loan sharking, or any other method of fleecing the rubes. There’s easy money to be made there, and no wonder the hucksters go mental when their gravy train is threatened.

9

Layman 08.04.13 at 7:36 pm

The payday loan business is basically non-violent loan sharking. Give poor working people loans you know they can’t repay, and trap them into paying the vig forever. You don’t even have to break their legs.

10

Brett 08.04.13 at 7:57 pm

They’re even worse than going to a pawn shop, since at least if you fail to repay the loan on time, it just -ends- with the pawn shop keeping your collateral. They can’t keep on going after you until the loan is paid off.

11

Mao Cheng Ji 08.04.13 at 9:19 pm

Interesting piece. Kind of casts a shadow over the whole venerated concept of ‘liberal democracy’, don’t it.

12

Meredith 08.04.13 at 9:43 pm

Brett @6: I can only speak from personal experience on the issue of credit cards. Banks aren’t throwing credit cards at people earning $30,000 a year unless someone with secure credit has his or her name on the card, too. Same with getting an apartment, at least in cities like NY and Boston. Not to mention education loans. We are so liable for our young-adult children’s debt at this point that, if (god forbid) both of them couldn’t pay their credit card bills (minimum monthly, at least), rent, and education loans, we’d lose much of our retirement savings.
But, we’re the lucky ones. We the parents have stable incomes, good credit, and retirement savings, so we can help our children in these ways. Most parents in the US cannot.

13

Michael Sullivan 08.04.13 at 9:50 pm

Brett, presumably these are people who have maxed out credit cards (if they have any) and poor enough credit (or high enough debt service relative to income) that they can’t get more.

Or young people with no credit history, and no family/friends with solid enough history to co-sign or give them a personal loan.

I’m somewhat ambivalent about payday lenders and their legality. On the one hand, the tactics described here are execrable and should be illegal. Further, the industry should clearly be regulated to limit their ability to make one bad decision an albatross around a client’s neck for years or until they declare bankruptcy.

OTOH, there’s clearly a demand for these services, and the risk level is such that they cannot be provided profitably at normal rates of interest. One big question I have is whether most of the people who patronize payday lenders actually have any other options for small amounts of credit, and whether they actually need credit just to live/keep their commitments.

If the answers are no and yes, I’m not sure shutting down payday lenders entirely would be good for poor people on balance.

14

Collin Street 08.04.13 at 10:56 pm

We could, I don’t know, recapitalise the poor, or something.

15

Omega Centauri 08.04.13 at 10:59 pm

I don’t know if standard operating proceedure is to hook folks on a single loan they can’t repay. They make out like bandits even when the customer pays up as soon as possible. Often they take something like a check with a future valid date, as collateral, so the lender is gonna get paid on time, but the mark has paid a steep rate to get the money a few days early. My vision of the typical customer is the guy who comes in every two weeks (month?) three days before he gets his paycheck and is willing to cough up a substantial fee to get at his money early. Then next month he is further behind on his bills (partly as a result of last months payday fee), and is prepared to do it all over again. All this time he probably thinks of his payday lender as his good buddy getting him out of a jam.

Even more than having lobbyist’s, this industry has media. Payday lender adds are a pretty significant part of broadcast add revenue. And they have several media celebrities doing the adds.

In old time religion, this would have been outlawed as usury. But, we only keep the traditions that help business, not those that help the little guy.

16

Katherine 08.04.13 at 11:03 pm

One big question I have is whether most of the people who patronize payday lenders actually have any other options for small amounts of credit, and whether they actually need credit just to live/keep their commitments.

There were fairly big headlines in the UK recently when the Archbishop of Canterbury was reported to have said to the head of the biggest payday loan company here that they (the C of E) were going to kill the payday loan companies with competition – by developing/redeveloping credit unions.

I have no idea how successful they’ll be.

As for the cesspit of state politics – yeah, it stinks that the politicians have been bought off, but where the hell is the media?

17

idonthaveacoolname 08.04.13 at 11:26 pm

re: “where the hell is the media?”

You mean the corporate media that airs commercials for pay day loans?

And, not to be flippant, but taxing poor people’s poverty seems to be the easiest way to keep them in line. We wouldn’t want poor people to better themselves too quickly, they might actually compete with the lazy sloths already occupying the rickety middle shelf.

18

Brett 08.04.13 at 11:33 pm

@Meredith

Brett @6: I can only speak from personal experience on the issue of credit cards. Banks aren’t throwing credit cards at people earning $30,000 a year unless someone with secure credit has his or her name on the card, too.

You’d have to have a fairly bad credit score to go along with that, though. I got card offers all the time from the solo account I had at Wells Fargo, and that was when I was a student living on campus working about 15 hours a week. Granted, I couldn’t get that extended until I started working full-time (I earn about $26,000 a year), but it was still there.

My mom went through the whole payday lending experience, though. What happened was that she had a drop in income for a period of time, but with no drop in fixed expenses unless she sold/lost her house in a buyers market. After maxing out some credit cards, she did the whole “borrow money from one pay-day lender to pay off another”, with ultimate relief only coming when she got into a federal program to reduce the cost of her mortgage payment plus getting a job that paid marginally better.

@Michael Sullivan

Brett, presumably these are people who have maxed out credit cards (if they have any) and poor enough credit (or high enough debt service relative to income) that they can’t get more.

That’s my guess as well, although the Harpers article never mentions it. Short of just subsidizing people’s credit or savings*, there’s not a lot you can do that won’t result in people just being denied access to credit if that’s the case, and that has some consequences. I mentioned my mom above – if that money just wasn’t available before she got the mortgage reduction thing, then she would have lost her house.

If you just want to minimize the damage, then capping the number of times that people can renew the loan on a monthly basis would help. The lenders would be more cautious about rolling the loans, particularly as it got closer to the deadline.

* I like the idea of some subsidization of savings, like a matching funds program up to a certain amount if it’s in a FDIC-covered savings plan.

19

SamChevre 08.05.13 at 12:38 am

From what I hear[1], payday loans aren’t substituting for credit cards; they are substituting for cash. Rent can’t be paid with a credit card; most babysitters can’t be paid with a credit card; court-order payments (child support or fines) can’t be paid with a credit card. Those things–which have to be paid in cash–seem to drive a lot of the payday borrowing.

1) I ride the bus to work when I can’t bike; most of this is from fellow riders.

20

Layman 08.05.13 at 12:54 am

Omega @ 15

“My vision of the typical customer is the guy who comes in every two weeks (month?) three days before he gets his paycheck and is willing to cough up a substantial fee to get at his money early. Then next month he is further behind on his bills (partly as a result of last months payday fee), and is prepared to do it all over again. All this time he probably thinks of his payday lender as his good buddy getting him out of a jam.”

Yes, precisely; but the reason he’s further behind on bills is the vig on the first loan, so he has to take one again. Once he’s taken the first loan, he’s in the cycle forever.

I’ve been poor, and I’ve had to use pawn shops for cash advances. Eventually you can’t get out, and you lose your assets. That’s why pawn shops are full of people’s stuff. The difference with payday loans is, eventually they’re coming after your car, or whatever else they can find. It’s simple predation.

21

Oxbird 08.05.13 at 2:35 am

The incident described is of course terrible and payday loans are generally an abomination. In recent years a number of states and federal agencies have taken steps to limit their activities. Payday lending continues to exist for two reasons: In some instances people who may be confused and desperate sign onto arrangements that make no sense. In other instances it may be the only alternative, or the best available alternative available, as bad as it is. That this may be so is an indictment of our financial system but many cannot obtain credit from banks and sometimes those that do get caught by the system with fees and charges that can be as oppressive as payday loans. Righteous indignation aside, what is needed is not simply action against payday lenders but the creation of financial alternatives that the working poor can in fact access at reasonable cost. I see little sign that that is in the works.

22

Patrick 08.05.13 at 4:19 am

“That this may be so is an indictment of our financial system but many cannot obtain credit from banks and sometimes those that do get caught by the system with fees and charges that can be as oppressive as payday loans.”

An inability to obtain credit when you have little ability to repay a loan is not an indictment of our financial system. Likewise, being assessed fees and charges when you do not repay a loan is not an indictment of our financial system. Remember that as someone’s ability to repay a loan approaches zero, the interest rate necessary to justify extending the loan approaches infinity.

However, the fact that we expect poor people to fix the problem of “little and/or no income” by borrowing money which they will then have to repay later by earning money over time even though we just established earlier in this sentence that they don’t have income? That’s certainly an indictment of something.

23

JW Mason 08.05.13 at 4:42 am

there’s clearly a demand for these services

Well ok then.

24

Mao Cheng Ji 08.05.13 at 5:57 am

“From what I hear[1], payday loans aren’t substituting for credit cards; they are substituting for cash.”

Credit cards give cash advances.

25

Substance McGravitas 08.05.13 at 7:17 am

Credit cards give cash advances.

Not maxed out they don’t.

26

Tim Worstall 08.05.13 at 9:10 am

“OTOH, there’s clearly a demand for these services, and the risk level is such that they cannot be provided profitably at normal rates of interest.”

A few years back Goodwill tried out a scheme. Non-profit, short-term loans to compete with the payday lenders. 130% APR. Which is better than some of the Wonga rates for example but still pretty steep.

It’s just very expensive to lend small amounts of money for short periods of time. Expensive in relation to the amounts being lent that is.

27

ajay 08.05.13 at 9:25 am

It’s just very expensive to lend small amounts of money for short periods of time. Expensive in relation to the amounts being lent that is.

Unfortunately this is true – not even so much because of the risk, but because of the administrative overhead. dsquared had a back-of-the-envelope example last time this came up, if I remember: even if you lend out money at zero interest and only ask for a small flat administrative fee to cover the office costs, it still works out as a massive APR if the loan and term are short enough.

28

Jonathan Mayhew 08.05.13 at 9:42 am

It’s not just payday loans, but also car-title loans, employers who pay in pre-loaded debit cards with high fees, rent-to-own rackets where people buy appliances for several times what they are worth, but get them repossessed if they fall behind in payments… There are many ways in which being poor is more expensive than being middle-class.

29

Metatone 08.05.13 at 11:05 am

It’s funny to me how when someone cites admin costs in the NHS, it’s Baumol, it’s the root of all evil, it’s our money being wasted by socialist government, etc. etc.

But when someone says that the admin costs make payday loans expensive, that’s just the order of the universe…

30

Metatone 08.05.13 at 11:08 am

That said, a Basic Income, or failing that a higher minimum wage and higher benefits seem like the obvious approach to this problem.

There will still be people that get in trouble, but at least then it will be for other reasons, rather than simply the deck being stacked against them…

31

Britta 08.05.13 at 11:21 am

It’s all the rage in do-gooding these days (or it was a few years ago) to tout micro-credit programs in third world countries. Why couldn’t a non-profit or NGO run the same sort of program in the US or the UK? Is it simply overlooked due to prejudice?

32

Patrick 08.05.13 at 12:12 pm

ajay and Metatone- instead of guessing, just go to the linked article. It has a calculator. Leave the loan at $100, set renewals to zero because they don’t affect APR, then slide the fee slider left from $15 until the APR is at the 31% the statute advises. Then ask if you could run a business on the resulting numbers. I don’t think I could. Loans that get renewed would earn more gross, but not a lot, and collection costs are an issue as renewals increase.

I don’t care if payday lenders are forced out of business. And maybe it’s politically difficult to admit that this is the goal. But it is.

33

Michael Sullivan 08.05.13 at 12:13 pm

Another big thing that’s worse than payday loans, because it affects anyone who can’t get a bank account, is the new habit of large companies to pay only by direct deposit or money network cards. But of course, there are fees associated with using the money network cards.

Note, I’m not actually suggesting that payday lending services are a good thing. The fact that they exist and can help *anyone* is a huge indictment of our social service system. The fix belongs in the social service system. Basic income, or some kind of automatic credit available against future wages or basic income would make any need for these services moot. My point is only that shutting down payday lenders and doing nothing else probably won’t fix the problem, and could arguably make things worse for some people.

Most poor people are not actually stupid, and use these services only when it’s actually better than some terrible alternative.

34

Collin Street 08.05.13 at 1:07 pm

I don’t care if payday lenders are forced out of business. And maybe it’s politically difficult to admit that this is the goal. But it is.

But it’s not just the payday lenders, is it? The credit-card providers are doing the exact same thing. If the poor and the middle class were better capitalised they’d only need finance for big-ticket capital expenditures like housing and cars.

35

JW Mason 08.05.13 at 1:31 pm

Like Collin, I’m puzzled by the suggestion that problem for poor people is a lack of credit, rather than a lack of income. Consumption finance is not a thing that should exist.

shutting down payday lenders and doing nothing else probably won’t fix the problem

Along the same lines, prohibiting poor Irish families from selling their babies for stew-meat and doing nothing else probably didn’t fix the problem of poverty there, either.

36

SamChevre 08.05.13 at 1:33 pm

Mao Cheng Ji @ 24

Credit cards give cash advances, but they are expensive. (generally, a 4% or 5% upfront fee, and 20% interest.) That’s not that much cheaper than a payday loan, and a payday loan doesn’t have the punitive overlimit fees of a credit card.

37

ajay 08.05.13 at 1:35 pm

It’s funny to me how when someone cites admin costs in the NHS, it’s Baumol, it’s the root of all evil, it’s our money being wasted by socialist government, etc. etc.
But when someone says that the admin costs make payday loans expensive, that’s just the order of the universe…

Whoa, hey, steady on with that strawman there. I said nothing of the kind. (And you’re misusing Baumol. Baumol isn’t “why are NHS costs so high” it’s “why are they getting higher”.)

32: for payday lenders, as indeed for credit cards, the business model rather depends on people rolling over loans – the ideal customer is someone who pays the minimum every week, not someone who takes on debt and promptly pays it off.

38

ajay 08.05.13 at 1:37 pm

The thought occurs that, based on 32 and others, the way forward might not be to just cap APR, but to cap fees and interest rates separately…

39

Mao Cheng Ji 08.05.13 at 2:57 pm

SamChevre 36, there are fees yes, but 20-30% APR credit cards charge is nowhere near 3-400% of these paycheck loans. Or am I missing something?

40

SamChevre 08.05.13 at 2:59 pm

“Or am I missing something?”

What you are missing is the 5% upfront fee. If you pay the money back the next week, that is an APR of about 250%.

41

Mao Cheng Ji 08.05.13 at 3:04 pm

True, but there is no pressure to pay it off next week. Or maybe it’s a bad thing, psychologically, what do I know.

42

mpowell 08.05.13 at 5:00 pm

Whether pay day loans ought to be banned depends on two factors: 1) what would be the negative consequences for people who currently use them (ie, what would be thing that they lose, is it childcare, heating in the home, job loss because you can’t get your car fixed to get to your job, etc – these could be pretty terrible outcomes) and 2) how much would the lack of pay day loans push people to avoid financial circumstances where they would want to use the pay day loan if available. Those are both pretty tough questions to answer and I haven’t seen anyone attempt a systematic study of the issue. If you found that many people really do need those pay day loans to prevent worse outcomes, then it is tougher to justify banning them. Alternatively, many people may be using pay day loans without realizing that doing so is worse than the alternative. It’s just not obvious which will be the case on balance.

There are obviously a lot of things you could do to mediate the problems the poor face. Increased minimum wage, guaranteed health care, more child care support – but in such a consumer oriented society people with no credit will always get themselves in stuck financial situations (though the numbers and level of desparation will change depending on how well you’ve done on the other policy issues). The best plan I can think of is a government subsidy of the administrative costs of the program with short term loan rates at 30% APR or so. That might work as a low/moderate cost program that is not simply a give-away but replaces the pay day loan system with one that provides the right incentives without being punitive.

43

Michael Sullivan 08.05.13 at 5:36 pm

Mao, the fee of a payday loan is generally a fixed sum that is a moderate to large percentage of the loan, somewhere between 8 and 20%. So you get $100, but must pay back $108-120 within 1-3 weeks. The APRs are gigantic because the loan is expected to be paid off very quickly if one is to avoid more fees (and there is no way to roll an unpaid loan into a 20-30% APR the way it would happen on a credit card advance).

A standard credit card advance fee of 3-5%, with the amount paid off in a month or less (to avoid further 20%+ interest charges) would also result in a very large APR, although still quite a bit less than a standard payday loan, if there are no other fees (such as over limit or late fees) involved.

Also, Mpowell is making my own argument better than I am. It’s certainly plausible that an empirical case can be made that payday lending is far more often used to sucker people who have other options into poor choices, than to provide a legitimate service to people who are intelligently choosing the least of evils in a bad situation, in which case simply banning it would make sense.

Such a case may even have already been made by someone somewhere, but I haven’t seen it. I usually see it just assumed that it should *obviously* be banned. And well, so it should under a sane regime, where these problems are solved by some combination of reasonable minimum wage, welfare provision and social service availability. But that is not the regime we live under.

Note also, I am not accusing anyone of hypocrisy. I’m aware that pretty much everyone who wants to shutdown payday lending would also vote for the social safety net improvements needed to make that a good idea if it isn’t already.

44

Patrick 08.05.13 at 5:42 pm

For those responding to post 32 by pointing out that payday loans are renewed, please run the numbers as I requested so that you understand the actual figures involved. Once you have, then we can talk.

45

Dr. Hilarius 08.05.13 at 6:07 pm

College students are offered credit cards because the companies are interested in their probable future income. A marginally employed worker of the same age is not viewed in the same way.

You don’t need a checking account for a payday loan. If you have a checking account it’s easier, you might even be able to get your loan online. If you don’t have a checking account you have to bring in pay stubs to show employment. You might have to put up your car title as collateral for larger loan amounts.

The working poor use payday loan businesses for more than loans. These businesses act like banks; they cash checks and sell money orders. Some will arrange to pay bills (utility, telephone, rent). Renters who have ever bounced a rent check are sometimes required to make future payments in cash or by money order. This is the all cash economy for people with no credit history.

Why don’t their customers get banks accounts? Partly, it’s cultural. There is (in the US, I have no experience anywhere else) a whole social strata without experience with mainstream banking. They aren’t aware of the availability of low or no fee accounts. Psychological factors come into play. Banks are seen as unfriendly, formal, and likely to be a place of humiliation. Fear of rejection is a huge factor. Payday loan businesses know this and work at being customer friendly and understanding. Their advertising is all about “we know you’re a good person fallen on hard times.” Banks are not enthusiastic about small deposits and customers who require basic financial education.

Related to payday loans are used car dealers who specialize in poor to no-credit customers. Here in Seattle there is Pierre Money Mart. If you watch one of their TV ads (and they blanket late-night local programming) you might not realize they sell cars. The ads sound more like testimonials for a self-help program. Customers gush about how well they were treated, how the salespeople understood their problems, how PMM helped them rebuild their lives and self esteem. This business has tapped into the insecurities of the poor and apparently does very well. Whether the terms of their sales are fair I can’t say but they clearly understand how to market to this population.

Payday loan businesses also buy bad debt. Bounced checks are purchased for pennies on the dollar. Aggressive collectors, who work on commission, go after the debtor even when the debt is too old to be legally collectible any longer. Abusive collection practices are common. I can only speculate about harassed debtors taking out payday loans to make abusive collectors go away. A grand business model.

46

maidhc 08.06.13 at 10:43 am

Putting your money into a bank account is a bad idea. When you’re living on the edge, you need to be able to control your money. Paying your rent and buying food would be high priorities. Then whatever can be spared for other obligations.

When you keep your money in a bank, any random creditor can go to court and grab the lot. Then how are you going to pay your rent? You and your family will be out on the street living in your car.

The cash economy is a hard place to live because everyone is skimming something off you, but generally there is something left over to live on. Trying to enter the banking/credit economy you risk losing everything.

Years ago it used to be that you could write someone a check on your Bank of America account (for example) and they could take it down to a Bank of America branch and get the cash. It does not work like that any more. We tried doing something like that recently and it took four or five phone calls before we could get the credit union to release the money. And that’s with a credit union, imagine how it would work with a bank where they don’t even answer the phone.

Dr. Hilarius mentioned car dealers. Any car dealer that advertises “Buy here, pay here” is basically a scam. They sell cars to people who can’t afford them, then collect two or three months of payments. When the people can’t pay any more, they repossess the car and sell it to someone else. There are also companies selling furniture along the same lines.

47

Tim Wilkinson 08.06.13 at 11:25 am

maidhc – Putting your money into a bank account is a bad idea. When you’re living on the edge, you need to be able to control your money.

Yes. Speaking only of the situation in the UK, payday lenders use the highly ‘creditor’-friendly way in which bank accounts now operate to bypass the account holder’s control over what they pay out:

http://www.parliament.uk/Templates/BriefingPapers/Pages/BPPdfDownload.aspx?bp-id=SN06253

Payday loans are usually secured on the borrower‟s next pay cheque. The loan maturity date coincides with the next pay day (on average 30 days). On this day the lender debit‟s the borrower‟s account (or presents a post-dated cheque), and receives the loan principal amount, plus the accrued interest (which varies as between lender).
Direct debit facilities are used by some payday lenders to give them greater control over the repayment of the short-term loan. This means that if a borrower defaults on the loan, the lender can make multiple attempts to take money from the borrower‟s account without agreeing specific amounts or dates with the consumer. The OFT has criticised some payday lenders for using this „continuous authority‟ as a way to bypass proper checks on a borrower‟s ability to repay. Indeed, on 14 February 2011, the OFT warned payday lenders that they must not misuse direct debit facilities to vary the amount or date of a loan repayment.

1. This is just one way in which banks (who aren’t blamed for this at all) bypass their responsibilities as agents and thus fiduciaries (under English common law at least, as declared in the 20s IIRC) with respect to payments out of accounts. Another is by unilaterally extracting charges from their own customer’s accounts without any mandate, giving such payments priority – see below).

2. These mechanisms are automated, and the model requires no credit checking or human intervention. I suspect that the supposedly high variable costs (as well as the ratio of overheads to revenue) are being grossly exaggerated to justify huge profits and parasitism (also cf. below) not that limiting profits to some notional ‘market’ rate equal, say, to interest rates, would make the practice acceptable.

3. Plaintive ‘warnings’ from the OFT (office of fair trading) are not the kind of thing to worry large businesses much (and again see below).

The high street banks offer something very similar to payday loans by means of ‘unarranged’ overdrafts. These were previously called ‘unauthorised’ because back in the day of the cheque guarantee they actually often were, and because subsequently this gave additional moral leverage to justify big fees – penalties – for anyone who might have been inclined to challenge them. The people paying the charges, and at one point hugely inflated interest rates too, were led to believe they’d got away with something. The criminal law having been brought into play to protect the cheque guarantee in a couple of highly-publicised cases in the early 80s also helped to keep people furtive and guilty even as their meagre pay packets were milked by these parasites.

The fees for these ‘unarranged’ overdrafts – which are not always even entered into intentionally – provide a huge net income for the banks (subsidising ‘free’ banking for everyone else) and they even had the audacity to argue on that basis when they were challenged in court. because they got so much money from them, they must be a core part of the contract, and not penalties or similar.

That was after they had previously argued that the fees charged were merely cost-covering: a claim which was absurd on its face to anyone who knows how these things actually work, since in fact the banks credit-check all account holders and derive an overdraft limit by means of computerised systems (at one point the banks were arguing as though some Bob Cratchit figure was involved in painstakingly ‘assessing’ whether to extend overdrafts). This limit is then discounted by a certain amount to render a ‘notified’ limit – i.e. the one they tell you about – while the actual ‘non-notified’ limit, and indeed its existence, is kept secret from the customer. Anything that falls between these two is subject to swingeing fees.

The banks ran rings around the OFT in court – the latter put up a miserably inadequate fight, due I suspect not only to the gross disparity in spending power for legal services but also to a lack of real enthusiasm (to put it mildly).

And yes, as others suggest, the ‘voluntary’ nature of payday loans is based on the usual neoliberal economist’s conception, which not only ignores the background conditions in which a certain course of action becomes the least bad option but also studiedly overlooks the psychological methods of ‘marketing’, which run the gamut from euphemism to outright misrepresentation and take in bait-and-switch, engineered dependency and all the other techniques available to a single-mindedly profit-seeking entity whose only real constraint is the criminal law – or more specifically, avoiding the prosecution of senior execs, which is laughably easy.

A payday loan is a stopgap and in the vast majority of cases works as the name suggests – by postponing financial problems and payingf for the privilege. This is no doubt irresistibly tempting when one’s living from hand to mouth and can’t make ends meet. It may even be rational given a sufficiently high level of uncertainty about the future (I haven’t tried to model how this would work). But that’s largely beside the point. Rather than adopting some neoclassical/rationalist/Laddite conception of the rational agent and the incorrigibility of first-person judgements of self-interest, one needs to take a lead from the parasites themselves, whose business model is based on a more realistic understanding of human beings as manipulable, only very boundedly rational animals – especially when in extremis.

48

Trader Joe 08.06.13 at 11:48 am

If a state was so concerned that payday lenders were harming people they could readily set up their own ‘kinder gentler’ state run program. Even the great state of California has refused to do so because they understand that the economics of running a lender demand the high APRs that these shops routinely charge and no politician created wants to face the media on that. Likewise they understand that without payday lenders there would be some amount of incremental demand placed on government programs such as food stamps, rent support, energy credits etc. and that this would add to existing budget woes.

The calculus of governments allowing payday lenders ultimately views a little bit of financial carnage among the working poor as a plausible price relative to further burdening existing aid systems or having the political will to fix the root problems (as others have mentioned).

49

Adam Bradley 08.06.13 at 11:53 am

Michael Sullivan @43:

A standard credit card advance fee of 3-5%, with the amount paid off in a month or less (to avoid further 20%+ interest charges) would also result in a very large APR, although still quite a bit less than a standard payday loan, if there are no other fees (such as over limit or late fees) involved.

Minor quibble: Most credit cardholder agreements I’ve seen specify that there is no grace period for cash advances, so even if you pay off the card in less than a month, you’re paying interest (often at a higher-than-usual rate) on top of the 3-5% advance fee.

Dr. Hilarius @45:

There is (in the US, I have no experience anywhere else) a whole social strata without experience with mainstream banking. They aren’t aware of the availability of low or no fee accounts.

“No-fee” doesn’t include “Not Sufficient Funds” charges. If you’re living paycheck to paycheck and have limited experience with the banking system, it’s probably pretty hard to avoid bouncing a check once in a while. With fees that seem to hover around $25-$35 per transaction, you don’t need to screw up that many times before Bank of America is taking more of your money than Friendly Moe’s Money Mart would’ve. Plus you’ve got your landlord angry at you because your rent check didn’t clear.

50

JW Mason 08.06.13 at 1:00 pm

When you keep your money in a bank, any random creditor can go to court and grab the lot.

This seems like an important point.

In general, I’d be really interested to know how much these institutions are functioning as an alternative payments system for the poor, as opposed to a source of credit, as various people here have suggested.

That turns the question of what could replace them in a more productive direction. Nonprofit microcredit programs have a pretty terrible track record and arguably exacerbate poverty. But a public payments system is absolutely something the state can and should provide. It’s puzzled me for a while, actually, that governments have abandoned their traditional role as providers of means of payment, without any real debate or resistance.

51

Tim Wilkinson 08.06.13 at 1:25 pm

In the UK at least, that’s why the (pretty tightly cartelised) high street banking sector introduced ‘free’ banking. Free to those who can afford it, very expensive to those who can’t, to quote Withnail (see above and CT comments passim.). Lobbying for bankerisation of the building societies (US: mutuals?) helped too, of course. Just another privatisation of what should be a public utility, in other words. Another quote, from Walter White in Breaking Bad: ‘corner the market, then raise the price – that’s simple economics’.

52

MPAVictoria 08.06.13 at 1:39 pm

Ignorant foreigner here but doesn’t the UK have post office banks aimed at the working poor? Don’t they provide low cost bank accounts and cheque cashing services?

53

ajay 08.06.13 at 2:27 pm

52: yes, the UK does have Post Office banking which provides basically all the benefits of a normal bank account ( it’s actually whitelabelled from the Bank of Ireland). Don’t think it does cheque cashing.

54

Tim Wilkinson 08.06.13 at 3:36 pm

It is basically a normal bank ac, but with not many cashpoints. Like the other banks they provide a basic account which doesn’t permit overdrafts (I’m guessing that the cheque/offline debit guarantee is unavailable on these acco0unts, if it still exists at all).

Interestingly, the Bank of Ireland still uses the old wording, stating that the account ‘must’ not be overdrawn without/beyond an arranged (in their language, ‘notified’) overdraft limit. This kind of wording was abolished from all standard contract terms by the British Banking association cartel members in anticipation of the court challenge to their overdraft fees (the courts were happy to consider only the revised terms and extrapolate backwards, partly for technical reasons concerned with the basis of the OFT’s case – this wasn’t a class action on behalf of actual customers with an actual lis – and partly just out of deference to the banks on their and – esp. – the OFT’s part). Concomitantly, the BoI don’t charge overdraft fees nor a penal rate for the supposedly unarranged overdrafts – i.e. the non-notified limit is just there to allow people to enter into more debt than they’ve actually ‘requested’. The idea that arranged overdraft limits are requested is not true anyway – my bank used to increase my overdraft limit without my requesting they do so, and indeed when I phoned asking them to reduce the limit, they said they would but simply didn’t. Go figure.

55

Tim Wilkinson 08.06.13 at 3:39 pm

(the BoI don’t charge overdraft fees nor a penal rate for the supposedly unarranged overdrafts – the standard rate that they do charge is 15% EAR though, I should add.)

56

Oxbird 08.06.13 at 4:10 pm

Patrick:

“An inability to obtain credit when you have little ability to repay a loan is not an indictment of our financial system. Likewise, being assessed fees and charges when you do not repay a loan is not an indictment of our financial system. Remember that as someone’s ability to repay a loan approaches zero, the interest rate necessary to justify extending the loan approaches infinity.”

Of course true in some instances and perhaps an overstatement. But there are so many exceptions: From credit reports that are incorrect and cannot be corrected without great effort and expense; from fees that are grossly excessive, such as by imposing substantial charges when going over a credit limit by 5 cents. Spending some time reviewing enforcement actions of the banking agencies for abusive lending practices, or reviewing the degree to which “minor” fees that are substantially in excess of the costs incurred account for for bank profits will, I believe, establish that there is in fact a system problem notwithstanding that in principle banks should not lend to those who cannot repay.

57

MPAVictoria 08.06.13 at 4:28 pm

Thanks to both ajay and Tim.

58

Marc 08.06.13 at 4:31 pm

Payday loans have complicated terms designed to be confusing and expensive. Their customers are desperate and not financially sophisticated. This is a major reason why the deregulation game is such a con in practice. Whether it’s utilities, credit cards, or borrowing money from a bank it always ends up being a class-based fee system that soaks the poor the worst. If you have a stack of money sitting in your bank account you get a system that works just fine for people like you. If you don’t…..well, someone else gets to profit. This is why payday loans are such an abomination and why they’ve been successfully banned from a lot of states in the US (including ones like Ohio that are hardly socialist.)

59

Marc 08.06.13 at 4:39 pm

I’d also add that most payday loan customers in the US lack checking accounts or credit cards, and have to either pay to cash their pay check or get fee-laden debit cards.

60

Norwegian Guy 08.06.13 at 5:34 pm

I’m constantly amazed by the number of people in the US without bank accounts. There are countries in Europe were it is close to impossible to live a legal life without one.

61

Trader Joe 08.06.13 at 5:37 pm

@50
“In general, I’d be really interested to know how much these institutions are functioning as an alternative payments system for the poor, as opposed to a source of credit, as various people here have suggested. ”

Most all of them offer some services to facilitate paying utility type bills like cell-phone, power etc. But that’s not really the bread and butter business. Its really just another couple of bucks they can nick while they have the customer in the store and arguably its a convenience for the customer who doesn’t then have to pay such bills in person or buy a money order to send it in since they likely don’t have a checking account.

The loan business as thoroughly discussed is the backbone of the whole thing and where the best total returns are.

Selling prepaid cards and check to card services is #2 by volume. In these cases a guy comes in with say, his $200 paycheck from a job. For one fee, they will hand the guy cash, for a different, smaller fee, they will hand the guy a prepaid card visa card that’s preloaded with the net amount – say $195. Basically they earn $5 for making your check usable to you and earn fees from visa/mc/amex for issuing prepaid cards on which they can earn interchange fees.

The #1 by per transaction profitability is tax services. Most Americans get a tax refund – so you walk into the payday lender with your tax return, or even just your W-2 (annual pay stmt) they charge you to prepare the return first and then they advance you the refund less a discount. So if the person is due $300, they might get $195 (on a prepaid card as above) which includes $75 for the tax prep and a $30 for the the discount. The shop then e-files the return and gets the refund directly in about 7-10 days, so $30 10% discount is a massive APR for a money that is 100% good money coming from a state or federal return. Others might charge $100 for the prep (in this example) and “take no discount” but it amounts to the same thing.

In my observation of this, the customer walks out of the shop “happy” about having $195 and their taxes done and doesn’t really realize that they’ve just been dunned at about a 2000% APR .

62

Dr. Hilarius 08.06.13 at 6:44 pm

Adam at 49: you are correct about the risks and costs of bounced checks. There is nothing, however, keeping a low-income bank customer from buying a money order at their bank rather than a payday loan outfit. They would still avoid the cost of cashing their pay check.

maidhc@46: it’s not quite right that any creditor can grab your bank funds. In order to do that the creditor needs to have obtained a court judgement and then obtain a writ of garnishment. To avoid garnishment just move to another bank. Garnishment writs are specific to a particular bank branch. And never do business with Bank of America. They are unpleasant, inefficient and stupid. It was my great pleasure to kick their ass when they tried to intimidate a Korean student over an error made by BOA involving an international wire transfer. They even tried to threaten my client with deportation! Total assholes.

63

SamChevre 08.06.13 at 7:19 pm

Dr Hilarius @ 62

There is nothing, however, keeping a low-income bank customer from buying a money order at their bank rather than a payday loan outfit.

My bank (one of the more reputable ones) charges $8 to cash a check drawn on them if you do not have an account with them. Walmart is cheaper.

And I disagree strongly with Marc @ 58. Payday loans are expensive, but the terms are very clear; that’s a key selling point for the users. “I had a bank account/credit card, but they screwed me over, charged me fees that I couldn’t figure out…” is a common complaint; I’ve never heard it about payday loans.

64

Tim Wilkinson 08.06.13 at 9:50 pm

In order to do that the creditor needs to have obtained a court judgement and then obtain a writ of garnishment

Unless of course you have been unwise enough to sign a direct debit mandate or have previously given your card details without then ‘losing’ and replacing the card, in which cases they are likely to grab the money and leave you to try and persuade your bank to reverse the transaction (or failing that, sue for restitution). A lot of funny business goes on with payments, and one is at the mercy of whatever strage and arcane arrangements are currently in place, at least in the short term, which when one is living hand to mouth can spell disaster. I imagine that a lack of knowledge, confidence, articulacy etc may well make it more difficult to get the bank to reverse this kind of ‘pay first and wait for complaints’ arrangement.

In the UK at least, there are also bank charges, which are taken by the bank with notice but without any actual mandate – regardless of knock-on effects which may include an ‘unarranged’ overdraft and more charges. This amounts to self-dealing by a fiduciary agent, but any concern about that went out with the bowler hat.

65

MPAVictoria 08.07.13 at 1:25 am

“I’ve never heard it about payday loans.”
Really? I have heard many complaints about the behaviour of these legal loan sharks!

66

Marc 08.07.13 at 3:27 am

There were so many abuses in Ohio that they got banned. People got stuck in the treadmill of taking out snowballing loans and had hundreds of dollars of initial costs turn into many thousands.

67

maidhc 08.07.13 at 4:34 am

Dr. Hilarius @62: Having a bank account is significantly less convenient if you have to keep moving it around all the time. Plus banks usually make it difficult to open an account with a low balance. There tend to be lots of fees involved.

No argument about BofA, though. A.P. Giannini would be horrified.

68

John Quiggin 08.07.13 at 7:11 am

Some info from Australia. Payday loans in the strict sense (term of less than 16 days are banned). Small loans are subject to a number of restrictions

https://www.moneysmart.gov.au/borrowing-and-credit/small-amount-loans

Also, virtually everyone, has a bank account and banks are required to offer zero-fee accounts to recipients of government benefits

http://www.westpac.com.au/personal-banking/bank-accounts/transaction/basic/

The only substantial “unbanked” group is in remote Aboriginal communities. A bit of a family link here – my cousin is in charge of the ASIC Indigenous outreach program which tries to help with financial advice and similar

https://www.moneysmart.gov.au/life-events-and-you/indigenous/indigenous-outreach-program

The situation is far from perfect, but it seems a lot better than in the US, and the interventions required aren’t that extensive.

69

SamChevre 08.07.13 at 12:51 pm

Marc and MPAVictoria

I did not say and did not mean that the terms weren’t abusive; I think that they are far clearer than the terms on a traditional bank account or credit card, and have the anecdata to support it. (Clear and clearly abusive is a possibility.)

John Quiggin @ 68

Australian small loans seem as expensive as American ones (20% setup fee and 4% per month, default fees up to 100% of loan amount.) The key difference I see is the restriction related to “responsible lending”; do you have any idea how that works in practice?

70

Hawkins 08.07.13 at 1:04 pm

I found this in the spam filter. It doesn’t take long for the spammers to find us – I deleted their email JQ

My name Hawkins, i am from California USA, married, i have been searching for a genuine loan company for the past 3 years and all i got was bunch of scams who made me to trust them and at the end of the day, the took all my money and left me moneyless, all my hope was lost, i got confused and frustrated, i lost my job and find it very difficult to feed my family, i never wanted to do anything will loan companies on net anymore, so went to borrow some money from a friend, i told him all that happened and he said he can help me, that he knows a loan company that can help me, that he just got a loan from them, he directed me on how to apply for the loan, i did as he told me, i applied, i never believed but i tried and to my surprise i got the loan in 24 hours, i could not believe my eyes, i am happy and rich today and i am thanking God that such loan companies like this still exist upon this fraud stars all over the places, please i advise everyone out there who are in need of loan to go *** email deleted *** , they will never fails, your life shall change as mine did.

71

Tim Wilkinson 08.07.13 at 3:13 pm

JQ wow, that account really does seem to be fee free. I wonder if they get any subsidy, or have they actually been forced to make do with the wider spread they derive from paying no interest?

The equivalent account terms in the UK – all the banks have much the same terms, in the dynamic, entrepreneurial spirit of cutthroat competition – will allow the bank to charge £10 for rejecting payments (over £10), despite the fact that this has just about 0 marginal cost, and (also AFAICT – these things are kept very obscure, with contract terms distributed among various ‘guides’ and brochures) the bank retains the right to permit a customer to go into ‘unarranged’ overdraft – attempting to make the payment is deemed always to be an overdraft request – at which point a Byzantine regime of charges kicks in. (Excuse the long sentence, as the judge didn’t say to the banker.)

There is also at least one deterrent measure attached to basic accounts in the UK, besides the standard practice of colour coding bank cards solely for status display purposes (cf. gold, black etc credit cards). The ability to use cashpoints from other banks is withheld from basic account holders, even though the only marginal benefit to the bank is presumably the saving in ink or electrons that comes from having slightly smaller figures in whatever inter-bank settling-up process goes on.

A technical question for econ/accounting types – overdrafts in the UK are repayable on demand; supposedly ‘unarranged’ overdrafts are due immediately. Do either of these features mean they can be kept off the balance sheet, or otherwise provide some benefit over normal instalment loans? I’m thinking that they may not be counted for the purposes of reserve ratios, or something.

72

Tim Wilkinson 08.07.13 at 3:17 pm

What on earth has put that into moderation, I wonder? Forced, cutthroat, kicks and/or colour, black?

73

John Quiggin 08.08.13 at 6:20 am

@SamChevre
The ASIC page says

All credit providers are required by law to lend you money responsibly. This means they must not lend you money if they think the credit is unsuitable for you.

For example, it would NOT be responsible for the credit provider to:

Give you many small amount loans over a short period of time as your debts could get unmanageable
Give you credit when you are spending all of your money each pay and are unable to meet your other expenses

74

John Quiggin 08.08.13 at 6:22 am

@Tim I don’t think the banks offered these accounts voluntarily. The government forced them to do it. The payoff is that virtually all government payments are made by direct deposit, including wages and salaries, so the banks get a lot of business they missed in the days of cash pay (which I remember fondly).

75

SamChevre 08.08.13 at 12:51 pm

@ John Quiggin

I saw the information on the ASIC page; my curiosity had to do with how well it seemed to work in practice–is it enforced such that irresponsible loans are rare, or is it one of those “every payday lender knows an audit will find that 10% of their loans are irresponsible and the penalties are just a cost of doing business”?

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