Monday, May 12, 2008

'Not business friendly' - Post #8 - Payday Lending

My last guest on Eye On Toledo was Jamie Frauenberg, Executive Vice President of Checksmart Financial and President of the Ohio Association of Financial Service Centers. (Pod cast should be available here.) We discussed HB 545, a new Ohio law regulating payday lending.

Among the various provisions of the law, which was passed by the House and is under consideration in the Senate, are a limit on Annual Percentage Rate (APR) of 28%, restricting borrowers to no more than four loans per year, and a requirement for borrowers to participate in a state-mandated financial education class prior to a third loan.

Accordingly, in order to keep track of how many loans people take out and whether or not you need to be financially educated, there is a requirement for a state-wide data base to track such activity - and the state must develop and provide such financial education classes.

Opponents of the law have some very valid points:

* APR is only applicable to long-term loans which payday lenders don't offer. If our state legislators are so worried about usury, then maybe they should look at other types of fees that have higher APRs - like bad check fees (as high as 1400% APR) or even the late payment requirements for government utility/water bills (as high as 1200% APR). Both of these costs are equivalent to the $15 fee charged for borrowing $100 - an APR of about 391%.

* In both North Carolina and Georgia, the number of bad checks written went up after payday loans were similarly regulated.

* Using payday lending is a choice. For some people, it is a good financial choice that is cheaper, easier, more convenient and more logical than other options. There are some individuals who abuse the choice, but such individual action should not be the reason to limit the choice for everyone in the state.

Proponents make points which are based upon, imho, emotion and the idea that individuals who make poor choices need to be prevented from doing so and held harmless from any consequences:

* They routinely trot out a small number of individuals who have serious financial difficulties and have not used the option of a payday loan responsibly. They imply that most - if not all - payday loan customers are the same.

* They say that individuals are going into debt and that the state must break the cycle of debt by prohibiting these types of choices that they believe contribute to the cycle of debt. (note: eliminating one option that may contribute to some people's debt does not mean that those individuals change their spending habits nor that they stop borrowing.)

* They claim it is morally wrong to charge so much for a loan and, as a result, such companies are predatory and need to be prohibited from doing so.

Not Business Friendly

The payday lenders say this new law will put them out of business, resulting in the loss of about 6,000 jobs in Ohio. Elected officials (Rs and Ds) say they need to act in order to 'help' the citizens of Ohio and to 'protect' them from making such a financial mistake.

Even the Toledo Blade got into the act with their editorial calling these job providers 'legal loan sharks.' Of course, the editors there truly believe that government needs to take care of us and prevent us from having a choice we could abuse (smoking, mortgages, payday lending) - after all, they certainly know what's good for us, even if we don't.

"Payday industry backers claim the interest-rate cap would put Ohio's 1,600 stores out of business and 6,000 Ohioans out of work. To that we say good riddance. The state, as well as the people suckered into using their services, will be better off."

Yes, you see, The Blade thinks that running companies - employers - out of the state is a good thing!

But that's not the only anti-business comment they make.

"As we noted a year ago, the watchdog groups Policy Matters Ohio and Housing Research and Advocacy Center reported that check-cashing and payday-loan outlets have been growing like a plague in Ohio for a decade..."

This industry is growing - obviously because they are meeting multiple needs of the people who utilize them. And not every customer can be as portrayed by the proponents of the law because, if they were, these companies would be bankrupt themselves.

National Campaign

But note the description of Policy Matters Ohio? It's not described as the liberal, union-backed think tank that it is. (Seven of the 12 board members of Policy Matters Ohio are current or former members of unions - or represent unions in their jobs. State Sen. C.J. Prentiss, D-Cleveland, is a founding member.) It's called a 'watchdog group.' What they don't tell you is that Amy Hanauer, the founding Executive Director of Policy Matters Ohio, is on the board of Demos another liberal think tank whose latest focus/issue is debt.

"Demos is a national, non-partisan (and nonprofit) public policy, research and advocacy organization. Based in New York City, Demos publishes research reports and books, hosts public forums, and works with advocates and policymakers around the country in pursuit of three overarching goals: a more equitable economy; a vibrant and inclusive democracy; and a public sector capable of addressing shared challenges and working for the common good."

(Sounds like the other socialist, anti-capitalistic groups with whom they affiliate.)

They, along with several other organizations, want increased government regulation on credit cards, pawn shops, payday lenders and just about any other company that provides various choices for individuals.

They don't believe that such debt is the consequence of frivolous spending or irresponsible finances, but because there is too much 'inequality' in the world and poor and middle class 'families' (they never use the term 'people') are being preyed upon by such industries.

Accordingly, these national organizations are reaching out to like-minded state groups to promote laws that conform to their opinions of what financial options should be available to citizens. They've even included the National Council of Churches, which is why so many ministers have joined the debate.

Their quiz on their "new thrift" website that claims the 'most valuable current pro-thrift idea' is 'alternatives to payday lenders.'

Of course, if one industry is under attack, it's very likely that another will benefit. So, it should come as no surprise that the credit unions will be the 'vehicle of choice' for the state's new lending programs and that they, too, are intricately involved in the 'new thrift' initiative (through the National Federation of Community Development Credit Unions - a CDCU is a credit union with a specialized mission of serving low- and moderate-income people and communities).

Interestingly, credit unions are not subject to the same truth in lending laws that payday lenders and banks must follow. And credit unions also charge 'fees' which have high APRs - but since they're part of the 'solution,' such issues are being overlooked by the proponents and the legislators.

Political Wrangling

From a state perspective, the Republicans were afraid that the Democrats might own this issue during a critical state/national election cycle. So, despite significant opposition to the proposed regulations, in light of a forced vote on the issue, the GOP leadership decided to lower the targeted APR from 36% to 28% and then get behind the bill. So the bill passed with significant GOP support.

From a national perspective, this is more about controlling the economy and limiting individual choice to 'approved' industries, ones that are community-owned rather than 'for profit.' And Ohio's state-wide groups are more than willing to be a part of the effort.

Bottom Line

Ohio is losing population and businesses. We certainly don't need to pass more laws that force particular industries out of the state.

The goal - of 'saving' citizens from these 'evil predators' so they 'break the cycle of debt' - will not be met. Removing an option that serves many responsible individuals does not mean that irresponsible individuals suddenly change their behavior.

The government should not create a state-wide data base of individuals utilizing a specific lending service. Furthermore, the state should not be mandating financial classes in order to obtain a loan. Nor should the state spend taxpayer dollars to do these things.

It is the height of arrogance to believe that the state can make a better decision than the individual when it comes to what type of loan best serves a person. And with all the criticisms of government tracking coming from the left side of the political spectrum, I find it highly contradictory and hypocritical that these same left-leaning groups are supporting a state-wide data base of people who borrow money.

This is a bad law whose intent is to eliminate payday lending in Ohio and will not accomplish the goal of 'helping' people who are financially irresponsible in the first place. The Senate should reject this and, especially, the emotional appeal being presented by the proponents.

If you agree, you can share your thoughts with our elected officials here.

Other perspectives:

* interest rates reflect risk and by limiting possible returns to a set interest rate, you effectively forbid legal loans to any group of people whose collective risk rate exceeds that rate.

* Testimony to Ohio General Assembly - Senate Finance and Financial Institutions Committee on May 7, 2008, by Tom Lehman, Ph.D., Associate Professor, Economics in Marion, Indiana

* In defense of payday loans


navyvet said...

Thanks Maggie,

Now we know the rest of the story...

Great background info....

Today's Blade editorial is a "barf alert."

I did share my opinion.

Maggie Thurber said...

Of course, the left blogosphere is watching this one and I've already been accused of swalling the industry bait "hook line and sinker" ... as opposed to those who support the proponents of this bill who do not similarly swallow a line of - they have come to the correct conclusion so anyone who disagrees with them must be incapable of thinking on their own and must, therefore, have been deluded into a different opinion...

The worst part about this is that the post

doesn't address any of the points I raise - only that payday lending is equivalent to crack...thus confirming the whole 'addiction and plague' perspective that people are helpless to counter...

This is what passes for intelligent discussion about a new law in Ohio that has consequences beyond those intended...


BizzyBlog said...

My problem is that businesspeople with authentic Judeo-Christian values MIGHT engage in this business to help people out in a pinch on a very occasional basis. And yes, of course they're allowed to make some money while doing so.

But it's very clear that this is not what is at work here. The PDL business is clearly OK churning clients through repeat PDLs, and relies on those repeats for a large portion of their profits -- the clients' welfare be damned.

It's a "perfect storm" because there are so many people who don't understand how expensive what they are doing is.

The comparison to mistake fees (lates, overlims, etc.) is bogus. Payday lending is a specific time-value of money borrowing transaction, so the proper comparison is ONLY to the APRs charged on other loans.

On balance, nobody's clean, but the main lesson is that unethical and usurious business practices that take advantage of the ignorant and that are divorced from Judeo-Christian ethics breed government intervention that I wish wasn't necessary -- and shouldn't have been. But it clearly is. Unfortunately, it also gives anti-capitalists ammunition that ethical businesses would never have made available -- and of course, pubs like the Blade, Demos, etc. will run with it.

What is being proposed is definitely over-the-top in bureaucracy, and I would oppose it on that basis. I would keep only the rate/fee caps. I would encourage credit unions especially to work very hard to come up with affordable alternatives for emergency situations. The churn problem, if it continued, would at least not be so expensive.

Ben said...

Maggie, I agree with you when you say: "Using payday lending is a choice. For some people, it is a good financial choice that is cheaper, easier, more convenient and more logical than other options. There are some individuals who abuse the choice, but such individual action should not be the reason to limit..."

No one is making anyone use one of these services. There is a demand for it. I would never use one, but if someone else wants to, I dont see the big deal.

Publius said...

I wish that I could agree with you on this one, Maggie, but I can't. I have to agree with Bizzy.

I understand, at least I like to think so, the basics of economics and the free market system. I would normally agree that the market ought to dictate what types of products and services are available. But I have my limits. I might compare it to the reasons I cannot be a libertarian. My religious views prohibit it. My religious views prohibit me from tacitly approving of certain behaviors like abortion, gay marriage, etc. Similarly, my religious views prohibit me from tacitly endorsing usurious interest rates.

Where my religion and my politics conflict, my religion wins. This is one of those cases.


Brian said...


Republicans running toward the left to beat out the socialists all to claim the silly populist prize; what kind of policy is this? Quite frankly I had been on the fence for a few years, having experience the same sort of stuff outside military bases, and I had come to a similar opinion voiced by Tom (BizzyBlog). But when I read Husted condescending comments in the Dispatch, I knew I had to get beyond the emotion and straight to the heart of the matter. People for too long have been led by folks like Husted that have no faith in the general population.

Frankly, the General Assembly could have taken action as Tom described, or for that matter any number of limited government measures, but once again they are choosing socialism. I say no more. I will not support the ORP until republican ideals return to Ohio.

Pleas join us at Not One Red Cent and help us turn the ORP away from socialism and toward free markets and limited government.

Maggie Thurber said...

Publius - I understand the perspective you and Bizzy have - and I appreciate the moral standards you set for yourself.

But is it government's role to dictate to everyone? If you don't want to charge such high fees/interest in your business because of your religious teachings, should government be used to force those restrictions on everyone - even those who do not share your religious viewpoint?

If you don't want to be a client of such firms because of your religious beliefs, that's fine too. But should others be prohibited from being a client if they so choose because it's a product that fits their particular needs?

If government can dictate interest rates and how many times a year you can borrow money, what else would it be okay for them do?

Perhaps my questions reflect my Goldwater philosophy. I don't look to see if something is needed before I first determine if it is constitutional or, in this case, part of the proper role of government.

While I don't think I'd ever find myself in the situation of using such a service - for many different reasons, including the costs - I'm not sure that government should be used to eliminate it.

BizzyBlog said...

Maggie, you're missing a key issue, which is preying on the ignorant.

IF we had schools where the graduates could read their diplomas and do simple math, I might be with you. But we don't.

I'm not comfortable watching lambs getting led to financial slaughter and blaming the lambs for it.

Since PDL is a time value of money transaction, where the "fee" is simply disguised interest, it should NEVER have been allowed to get around usury laws, which IIRC tend to cap out at 30% in most states. PDLs are 390% (15% x 26 two-week periods in a year), even before compounding (1.15 to the 26th power is 3786%). These are rates loan sharks can only dream about. We do agree that loan sharking should be kept illegal, right?

I daresay that PDL would not have met with Goldwater's or Reagan's approval, and that they would not have recommended laissez faire treatment. I think they would (properly) have seen PDL as legalized theft that takes undue advantage of the ignorant, committed over the course of 12-14 weeks.

The hangover from this, which I recognize, is that the statists are incentivized to graduate more ignorant people from alleged schools, because the more of them there are, the greater the artificially-created need for government intervention in this and other areas. I'm not happy with that, but we can't use it as an excuse not to do something about the current situation.

Maggie Thurber said...

So, Bizzy, the problem isn't that such a business exists, it's that the populace isn't well enough educated to know that - for some - it's a bad financial choice.

The solution isn't to create a new law to prohibit (or make impossible) such a business, but to educate the public so that such businesses don't thrive in a free market.

Yes, this is a long-term solution. But it is never going to be possible if government keeps making us comfortable in our ignorance - and continues to bail us out when we make such bad decisions.

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