Friday, March 12, 2010

Looks like I Pissed Someone Off, Again!

A reader wrote this in response to my post about Senator Bob Corker entitled, The Senate Loan Shark.

The reader writes,

Anonymous said...

Dear Mr. Armstrong:
I read this article with great interest, and I have a few questions for you, especially since you have a degree that emphasized economics.

1) Have you ever had a need for short-term credit? What did you do about it?
2) Have you ever set foot inside a payday loan store?
3) What is the sum total of your education regarding payday loans?
4) Have you ever spoken to more than 3 payday loan customers?
5) Have you ever spoken to a payday loan store owner?
6) Why do you call payday loan companies "loan sharks"?
7) What percentage of payday loans are paid off on time, and where does one find that information?
8) Let's say I am in dire need of $300 to fix my car, so I can drive to work. I do not have a credit card. I do not want to ask a friend or relative or employer for a loan because I'm embarrassed to do so. I don't have anything I want to risk losing via a pawn loan. What do you suggest I do to get that $300 (The answer to "budget better" is not an answer. I budget very well. This car repair was unexpected).

I often find that people like you take an elitist stance on the issue of payday loans...because your wife is a dentist and you do just fine, thank you. You've likely never set foot in a store, talked to an owner, talked to more than 3 customers....if you've even talked to one, I'd be shocked.

And by the way, I don't need YOU to tell ME what MY choices of credit should be. There's a reason 9 million people use payday loans each year. Use that economics degree, Chuckles. See if you can guess the reason.

Where do I start? Lets begin with question #1. Yes, when I was young and stupid, of course their were instances when money was needed fast. But to get the kind of loan you are lobbying for was not available back then. Maybe because it is borderline criminal, or maybe nobody thought loan sharking could actually be transformed into a legitimate business plan.

With that being said, since I was young, I probably would either asked a friend, or family member, But one time I did approach my boss for an advance on my pay. Which was granted when I was working my way through college. I remember the sum being something like $70 bucks to pay for the rest of my rent.

Would a Pay Day Loan been a better option then? Of Course not, a pay day loan should be the absolute last option anyone should ever think of.

Lets look at why.

The typical pay day loan is a two-week loan. The fee for such a loan is usually $15 to $25 per $100 borrowed, although I have seen fees as high as $30 per $100, hell Guido the killer pimp down in the city will do it for at least $25. Now remember that is for a lousy two week loan.

An example...

Let's say anonymous needs a $300 loan to fix his car. He or she walks down to the local payday loan company and they agree to give a loan. A check is written by anonymous for $375 and is given to the loan shark, and they give him 300 large. Two weeks later anonymous gets paid and the payday company cashes the check, closing the deal.

What is that? Somewhere close to 650% apr. An Econ degree is not needed to see that this is an awful business decision.

Hell can't you ask somebody for a ride to work, and give him or her gas money? You are saying that throwing away $75 is a viable option, that is financial suicide.

What % of your total weekly income is that $75 you are throwing away? If you think that is a sound financial move, I have a bridge to sell you, or some swamp land in Florida for a great price.

Don't you understand that is exactly how a Loan Shark conducts business?

Lets take a minute and explore others avenues before you make such an idiotic transaction again.

The U.S. Federal Trade Commission recommendation is to avoid payday lenders. They recommend these alternatives.

  • Contact local credit union for small loan.
  • Ask for payday advance from employer.
  • Consider loan from family or friends.
  • Use Credit Card advance. Yes even a credit card advance is smarter.
  • Request additional time to pay bill from creditors instead of payday loan.
  • Look at your options.
  • Look into over draft protection on your bank account so if you don't have enough funds to cover a check you write, the bank will pay the check and you'll avoid insufficient fund fees and returned check fees.
  • Seek credit counseling.
  • Have an emergency fund.

Let's set up the emergency fund so you don't need that payday loan.

Dave Ramsey says an emergency fund is a must. As matter of fact it is the first baby step toward a debt free future.

He writes.

$1,000 Emergency Fund

An emergency fund is for those unexpected events in life that you can’t plan for: the loss of a job, an unexpected pregnancy, a faulty car transmission, and the list goes on and on. It’s not a matter of if these events will happen; it’s simply a matter of when they will happen.

This beginning emergency fund will keep life’s little Murphies from turning into new debt while you work off the old debt. If a real emergency happens, you can handle it with your emergency fund. No more borrowing. It’s time to break the cycle of debt!

Here is another source for building an emergency fund.

I would also like to take a moment and answer questions 4 and 5. The answer is an overwhelming yes. I actually called on Check into Cash in Cleveland Tennessee, it was one of our largest customers, when I was working for a transportation broker. I am very familiar with the workings of not only the branch offices, and have met many of their branch managers throughout Tennessee. But also the efforts from their home office. Shocked?

Of course those questions were trying to paint me as some sort of yahoo who couldn't possibly understand the loan shark business. But I can assure you it is not complicated.

But the fact of the matter is, for the past two decades, credit card companies, mortgage brokers, payday lenders, and basically every Bank and Non-Bank entity has been running wild in a regulator free environment. Where the everyday consumer has been taken advantage of. I am stumping for Consumer Protection, and the regulation to protect the little guy.

Bob Corker and his attempt to exempt payday lenders from the same regulation as other non bank entities such as credit card companies, and the Political process behind it, makes me ill. Yet, you anonymously back the status quo, with claims of "don't tell me what to do" I'm not wiseguy, I'm telling my representatives who try to give special exemptions to an industry that charges 650% apr to be held accountable. Those payday loan scams should have their interest rates capped just like the credit card companies, and if that forces them out of business, then so be it. But they should have to play by the same rules. Because even if 100% of the payday loan crowd paid their loan on time, and we know that not to be true, it is still legalized loan sharking.

In conclusion, I would like to say if stumping for consumer protection is elitist, then fire up the Bentley Muffy, were off to the Hampton's.


  1. Your lack of experience in the real world shows when you start harping on APR. A payday loan customer does not care what the APR of their loan is....because they are not taking the loan out for a year. They take it out for 2 weeks. The price signal they respond to is the flat fee. If you knew any payday customers, that would be readily apparent.

    But since you choose to harp on APR, let's stick with it. Here are other short-term options, with APRs and associated risks.

    A) Borrow from friend/relative/employer
    Cost: Zero

    Risk: Complication of important relationship, embarrassment

    B) Credit Card Cash Advance - 

    Cost: About $1 per hundred every two weeks
 = 26% APR
    Risk: Fail to pay; credit rating is damaged

    C) Pawn something

    Cost: $9.50 per hundred every two weeks
 = 247% APR
    Risk: Fail to pay, you lose the personal item.

    D) Payday Loan

    Cost: Averages $16 per hundred every two weeks
 = 416% APR
    Risk: A collection agent tries to recover what’s owed; no damage to credit rating; no personal item at risk; no personal relationship at stake. 

    E) Online Payday Loan
    Cost: $25 per hundred borrowed every two weeks = 630% APR
    Risk: Same as regular payday loan, but industry is unregulated and identity theft is easier.

    F) Bounce a check

    Cost: Averages $45 per hundred borrowed
 = 1,248% APR
    Risk: As soon as you bounce one check, you risk creating a domino effect, causing other checks to bounce and running those fees even higher.

    G) Actual Loan Shark
    Cost: Anything they want = possibly infinite APR
    Risk: Failure to pay = bodily injury to yourself or loved ones, possibly death.

    Other APR;'s:

    1) Taxi ride from JFK to Manhattan: 394,200% APR
    2) Hotel room: 109,500% APR
    3) ATM withdrawal fee: 1,576,800% APR

    Nobody who uses these products cares about APR.

    Don't you think that maybe the 9 million Americans who chose to use a payday loan looked into all the options, evaluated risk and price, and settled on payday loans for a reason?

    They do not need government telling them what is or is not a good deal. They can do it by themselves, and they do not need a housebound elitist to "protect" them. They do not need you to tell them that a payday loan, or any other credit option, is "financial suicide". If it were, Mr. Armstrong, your economics degree should make it obvious that the payday industry would cannibalize the very clientele it seeks to serve, and would put itself out of business.

    If you read the SEC filings of the public payday companies,you see that 93% of all loans are paid back on time. Hardly the "financial suicide" you claim -- a claim made because, again, you have not bothered to educate yourself on the issue. You reacted emotionally with limited information.

    Payday loans ARE regulated in 37 states. Federal regulation is unnecessary. Payday loans are transparent. All fees are disclosed as required by TILA.

    A payday customer does not need YOU to tell them what is or is not a good deal FOR THEM. Guess what? They are adults. They can make decision all by themselves.

    As for your claim of "consumer protection", I again point to your economics degree. Maybe you can figure out what happens if you legislate payday loans out of business? Do I need to tell you?

    I will. You FORCE people to one of the other options. Demand does not vanish if you remove credit supply. While emergency funds are great ideas in theory, not everyone can afford to create one. Eliminating payday loans will not change behavior.

    But I guess you'd need a political science degree to know that.

  2. Sorry, my post was not placed in its entirety. It leads off with the following:

    Thank you for highlighting my post regarding payday loans. It opens a dialogue that should be had concerning this option.

    In short, your arguments not only muddy the issue, but you approach the issue from a limited set of experiences -- your own. Without intending to offend, a housebound man of a dentist and (adorable) kids has very little credibility with regards to the two-income family that needs short-termm credit.

    Dare I say, in fact, that you have no idea what you are talking about because you have never used a payday loan, don't know anybody who has, have never set foot in a store or talked to an owner, never read the SEC filings of public companies, nor the litany of non-partisan studies that were not paid for by the industry that demonstrate the value of payday loans.

    So let's get to the facts.

    When somebody needs short-term credit, I am not suggesting that they run to a payday loan store. I am merely suggesting that it is an option. Americans are the best bargain hunters you'll find. They compare prices on cartons of milk. Guess what? They do the same for the price of short-term credit.

    IF a cheaper option is available to people, they'll take it. And they should. But your $70 rent example is one instance in your life. It is NOT representative of the 9 million people who FREELY CHOSE payday loans each year. Most don't need just $70. They need $350.

  3. Again Thank You for your comment.

    I would like to clarify a couple of things. Do I know you? you seem to be taking some liberties that frankly you know nothing about. Do you know my work history? or are you trying to stir a reaction because your argument is less then say legit?

    With that said.

    Not really sure I muddied the issue. People are paying $375 in two weeks for a $300 dollar loan. You seem to think that APR means nothing, because 93% of the time, the loan is paid in full.

    Yet your excuse for not using a cash advance, a much cheaper alternative, is based on not paying on-time.

    You also over look over draft protection which is an easy way to raise cash, which is much cheaper then a payday loan, while providing protection from the bounced check death spiral you warn about. Yet why would that be an issue if 93% pay on time?

    You also try to belittle me because I have not used a payday loan service. Well your right, because they are an inefficient way to get short term money. It costs to much. Yes they are on every street corner, but so is 7-11 and I do not grocery shop there. Saying I do not understand the real world because I do not use a system that takes advantage of its customers is weak at best.

    Yet you go on. with federal regulation not being necessary because 37 States have regulation. Thats why every credit card company is based in Delaware. The fact is they are discussing consumer regulation legislation as we speak, and credit card companies and non-banking institutions alike may have limits put on interest rates. payday loans are no different and deserve no special exemptions.

    Now lets talk about those 9 million people who rely on the pay day loan scam. overdraft protection, credit card advances, short term community bank loans, employer payday advances, and good old fashion budgeting, an emergency fund. Will fill the void.

    As for you emergency fund dismissal, if the customer can afford to pay $375 on a $300 loan, there is ample room for the creation of a meager emergency fund.

    Again I would like to say you continue to try to paint me and my family as some sort of elitist for wanting my representative to be consistent with non-banking institutions meaning credit card companies and payday loan companies alike. They should be treated the exact same way. They flourished because of a lacks regulation system that by the way led to the economic environment we currently reside in. If they die by it so be it. But please don't try to lecture me on the economics of not having them around. There are plenty of lower cost options that are not as convenient, but do a much better job at providing short term funds for less.

    Thank you.

  4. 1) People are not paying $375 for a $300 loan. They are paying, on average, $48 in fees for a two-week loan..

    2) "You seem to think that APR means nothing, because 93% of the time, the loan is paid in full."

    No, YOU drew a conclusion I did not make from these two facts APR means nothing.

    "The borrower cares not what the "effective APR" is on the loan. The real price signal to which the borrower responds is the flat fee that is charged"

    3) "Yet your excuse for not using a cash advance, a much cheaper alternative, is based on not paying on-time."

    No, I was pointing out were the relative RISKS involved should someone NOT pay off the loan. The consequence for not repaying a payday loan is far less onerous than other options.

    4) "You also over look over draft protection...which is much cheaper then a payday loan."

    False. There are fees associated with overdraft protection. The average is $34 PER TRANSACTION. The average overdraft transaction was $60. [See: The November 2008 FDIC Study of Bank Overdraft Programs] $34 fee on a $60 loan? You can get a $60 payday loan for $9.

    4) ..."because I do not use a system that takes advantage of its customers ..."

    Overdraft protection is taking advantage of customers -- because they are often signed up for this program WITHOUT FREELY CHOOSING TO OPT IN.

    Furthermore, a service cannot take advantage of anyone. A person makes a choice. They have free will and personal responsibility. If they choose a short term credit option and do not do so responsibly, then THEY have put THEMSELVES in a bad position. Nobody forced them into that choice.

    5) Without usury exemptions rates would not be high enough for payday lenders to stay in business. With a ban, you force consumers to other options they have already rejected....and to their detriment as the NY Federal Reserve has already discussed:

    As did researchers at Georgetown:

  5. 6) "overdraft protection, credit card advances, short term community bank loans, employer payday advances, and good old fashion budgeting, an emergency fund. Will fill the void."

    Mr. Armstrong, you have a degree in ECONOMICS. With all those choices ALREADY AVAILABLE, 9 million people STILL choose payday loans? Why do you think that is? Because the other options you point out ARE REJECTED BY THOSE PEOPLE. They do not like those choices.

    7) " If they die by it so be it"
    You insist that you are helping consumers, but ignore that you force people to other options they have already rejected.

    As for those 'options":
    "overdraft protection" - More expensive than a payday loan
    "credit card advances" - Not everybody has a credit card, the risks of non-payment are greater.
    "Short term community bank loans" - WHy don't you show me just how many of these loans have been made in the past two years? And then explain to me why payday loan customers didn't use them.
    "Employer payday advances" - Employers are not permitted to make formal advances on paychecks and collect interest in any state, without a license. And while you will find the occasional employer willing to advance salary for no interest, you will be hard-pressed to find one who will do so repeatedly.

    8) "don't lecture me on the economics of not having them around. "

    Apparently, I have to. Because you have demonstrated total ignorance on the effect on the short-term credit market as a result, and how it affects real people (see the NY Fed study...again)

    9) "There are plenty of lower cost options that are not as convenient, but do a much better job at providing short term funds for less."

    Convenient for WHO? You insist you know better than people who choose this option by themselves. And you fail to answer the salient question: If the options are cheaper, then why aren't they used more often?

    I find it ironic that you take umbrage at being judged an elitist -- yet you have no problem demeaning the 77,000 hard-working Americans and entrepreneurs who work in the short-term cash advance industry.

    You do not know what you are talking about. You are in over your head with your parochial understanding of the real world, of short-term credit, and of basic economics -- all the while insisting that you know better. Shame on you.

  6. I know I know I don't know the real world.

    $15 -$30 for $100 borrowed. I'm sure you considered the online transactions with your numbers.

    OverDraft protection is cheaper. fact.
    Your $34-$60 stat is great but you know the $34 transaction fee will be the same for values between $300-$500.

    Cash Advance much cheaper with much better terms fact.

    Emergency fund. You have no argument here.

    employer pay day loans happen all the time. I love when you say they can't be done multiple times. that is the goal isn't it. suckering the people in multiple times? Not really for the occasional emergency, we want habits formed don't we?

    Without usury exemptions rates would not be high enough for payday lenders to stay in business. With a ban, you force consumers to other options they have already rejected....$15 to $30 per $100 is robbery. Gov Regulation is needed.

    Tell me the economic principle I missed here Krugman?

    You think the 7-11 nature of the business may have some roots in its success? Predatory?

    Look it is obvious you are the blogger monster when it comes payday loans. But don't act like you have some revolutionary insight to the business. You are spewing the internet talking points to attempt to give credence to a lending model that was developed by Capone.

    If it looks like a Duck and sounds like a Duck...........

  7. Facts:

    1) Online transactions account for 12% of all loans made. The average online transaction is $26.35. Do the math. You'll find all payday transactions average $16 for storefronts and $17.30 including online.

    You've utterly failed to answer the important questions, which I'll present here one last time in an effort to educate what few people actually read this blog.

    2) 9 million people freely chose payday loans every year, despite other options being available. Why?
    3) If you remove payday loans as an option, it unquestionably harms consumers. You didn't bother to respond to the cited studies. Why?
    4) Clearly, you have ceded the APR argument. Why?
    5) You proclaim that payday rates are "robbery". Then why do people make this choice willingly - especially when Americans are well-known to be the savviest price comparers around?
    6) Payday loans ARE regulated in 38 states. You say they are not. Why?
    7) You continue to compare payday loans to criminal activity -- yet failure to pay a loan shark results in bodily injury or death, and their rates are far higher.

    These are very simple questions you cannot, and will not, answer.

    These are not "talking points". They are what we, in the real world. call facts. I know they hard for you to accept because you have chosen to judge somethiing about which you clearly know nothing.

    I challenge you to go down to your local payday loan store, talk to the owner, talk to customers, and then blog again. If you are scared to do, I will arrange a visit for you.

    Or are you too afraid to be proven wrong?

  8. As I have said on numerous occasions I have been in conversation with many payday loan branch managers throughout TN. It was my job because Check into Cash in Cleveland Tn. was one of our largest accounts when I worked for a transportation broker. Maybe that slipped your mind?

    9 million freely choose to make a awful financial decision yearly, this does not mean a valuable service is being provided. From Dave Ramsey, to The Federal Trade Commission , to every single financial adviser on the planet, denounce the worth of a payday loan. Millions also choose to drink and drive and smoke yet it is still as bad decision.

    There are plenty of better options that do not take advantage, as do payday loan companies. This is also recommended by the U.S. federal trade commission and every other creditable financial adviser on the planet and they advise the following instead of payday loans. Credit card advance, over draft protection, even better with a line of credit tied to checking account so those fees do not become a factor, emergency fund, small community bank loan, payday advance from employer. these are all smarter short term options

    What Apr argument? They charge between 325% and up to as high as 1000% with some internet cases.

    Never said they were not regulated, said the federal government needs to regulate or your just going to get them to flock to the state with the least amount of regulation and conduct business there. Like Delaware with credit cards.

    You continue to NOT compare payday loans to criminal activity.

    But you really are trying to put lipstick on a pig when you say their existence is some sort of community treasure, that cannot be lost.

    What a joke.

    This site gives you all the information anyone will ever need about the Payday loan scam.

  9. This comment has been removed by a blog administrator.

  10. A buffoon is the person who believes the payday loan scam is legit and needed.

    I standby the Federal Trade Commission's findings. As well as that of the numerous financial advisers who also believe it is not in the best interest of the borrower. Again just because 9 million people agree to this legal pick pocket yearly doesn't mean it is legit.

    You are simply a three page fold out flyer that you can find at any payday loan store front.

    Again anyone who wants real life examples of the horrors of the payday loan business

  11. If I may enter this conversation. I am a franchisee of an alternative financial services office. We offer payday advance, check cashing, and numerous other services. I must tell the owner of this blog that he has some very valid points, but is also wrong on several points.

    Everyone who can create an emergency fund should do so. Everyone should have a household budget. We endorse that behavior, and we welcome competition. We encourage our customers to do these things.

    Still, the customers come into our store for a reason. They need a loan. They don't want to ask a friend or employer, sir. They do not want to pawn something that is important to them. And they certainly do not have credit cards. They have nowhere else to turn, and we offer a loan for nothing more than the promise to pay it back. We remind them when they take out the loan that they should not take it out unless they know they can pay it back.

    I can tell you for a fact that these people know what they are doing. What you seem to say, sir, is that you want to take this option away from them.

    Well, sir, they did not ask for your help. They did not ask for your opinion.

    Anonymous is otherwise right on every count, I'm afraid. He has raised legitimate arguments which you apparently have no answer for. All you seem to do is say he's wrong, but you have no evidence to back up your point of view.

    This is, sadly, not news. Opponents like yourself rarely want an education. You just think you are right. I do not understand why you put your faith in the Center for Responsible Lending when you do not know who they are, what they do, or who they are funded by.

    Anybody who wants real life examples, with evidence and independent studies to show how and why payday loans work when used responsibly can visit

  12. It is obvious that the payday loan mafia is out to protect its turf.

    But again, I believe what the Federal Trade Commission says about the industry.

    I would encourage everyone to get on the FTC site and look at the laundry list of malpractice committed by this industry.

    And if you are thinking about such a loan, use the FTC site to find a better alternative.

    Again anyone who wants real life examples of the horrors of the payday loan business

  13. to the writer of this blog,

    i am what many people would call a regular working guy. i use payday loans from time to time. sometimes things get tight and i need the extra money.

    i am not a stupid person. i know what it costs and i pay my loan back on time. i think just about everything you say is pretty stupid. you do not know me. you do not know what my situation is. i do not have a credit card and i do not like borrowing money from my boss.

    please do not tell me what is a good deal. i can make that decision myself.

  14. Could this be anymore transparent. I love the lower case i.....brilliant!

    But again, I believe what the Federal Trade Commission says about the industry.

    I would encourage everyone to get on the FTC site and look at the laundry list of malpractice committed by this industry.

    And if you are thinking about such a loan, use the FTC site to find a better alternative.

    Again anyone who wants real life examples of the horrors of the payday loan business

  15. I hereby return your intellectually bankrupt blog to the obscurity it deserves.


    What is the Center for Responsible Lending?
    On Wednesday, we brought you the story of a little report from the Boston Fed and its role in creating the housing bubble. In that piece, we mentioned an organization you probably hadn’t heard of before, the Center for Responsible Lending. It is one of the more influential–in a bad way–organizations you don’t know. Over the coming weeks, we’ll lift the veil on this organization.

    The Center for Responsible Lending is the most influential liberal advocacy group dealing with the financial services industry in the nation’s capital. It is the policy arm of credit unions based in North Carolina and California. Yes, its parent organization has a vested interest in the outcome of CRL’s advocacy.
    The Center performs both public policy research and lobbying. (Lots of lobbying, but that is for another day.) Despite its well known left wing prejudices, the media uncritically accepts the Center’s published papers, giving the group extra heft on Capitol Hill.
    The Center aggressively criticizes lending discrimination and pushes lenders to increase their underwriting to poor neighborhood where borrowers are less likely to be able to pay back mortgages. The Center is keenly interested in the redistribution of wealth and cares little about the financial safety and soundness of the banks it targets.
    Lenders who fail to cooperate with the Center are accused of “redlining,” i.e. illegally discriminating against borrowers in low-income neighborhoods.
    Redlining is a scarlet letter banks are desperate to avoid having pinned on them so they go out of their way to appease the various anti-capitalist shakedown groups including but not limited to National Council of La Raza, ACORN, Neighborhood Assistance Corporation of America (NACA), Greenlining Institute, National Action Network (Al Sharpton), and Rainbow/PUSH Coalition (Jesse Jackson).
    At the same time as the Center scolds banks that supposedly don’t lend enough money in poor communities, it also excoriates lenders it considers to be involved in so-called predatory lending. Of course, the Center defines what it considers “predatory.” Lenders are damned if they do, and damned if they don’t.
    The Center is headed by liberal crusader Martin Eakes. In 2008 Politico referred to Eakes as the “main intellectual engine driving Democratic responses to the housing crisis.”
    The Center’s primary benefactors over the years have been the subprime mortgage speculators Herb and Marion Sandler who have given the nonprofit at least $20 million.
    Unlike higher profile high-dollar liberal donors such as George Soros and insurance tycoon Peter B. Lewis (his company is called Progressive for a reason), the Sandlers have received very little media attention. They shelled out $13 million to left-wing groups in a failed effort to prevent President Bush’s reelection in 2004. This made them the third most generous donors in 2004 behind Soros ($27 million) and Lewis ($23 million).
    The Sandlers have also given sizeable chunks of cash to the highly influential Center for American Progress, the liberal “action” tank run by Obama transition co-chief John Podesta. Incidentally, Podesta’s outfit recently put disgraced former green jobs czar Van Jones on the payroll. Jones is the self-described revolutionary communist forced from office last year when it was discovered that he was a 9/11 truther.
    A longtime champion of the discredited Community Reinvestment Act (CRA), the Center refuses to acknowledge the role the catastrophic legislation played in creating the subprime mortgage bubble the showered the Sandlers with billions of dollars in profits. To the leftist ideologues at the Center, more vigorous enforcement of the CRA could have averted the current financial crisis:
    “Had regulators leveled the playing field through common sense underwriting requirements and more vigorously enforced CRA requirements instead of allowing a race to the bottom, this crisis would have been averted.”


    Here we go again. Yet another uneducated and/or ideologue opposed to payday loans without understanding anything about them, or alternatives if his call for a ban became reality.
    The culprit this time is Errol Louis, a columnist for the New York Daily News and radio talk show host. The allegations are the same as always, but adds words of criticism for politicians who are supporting H.B.1214, Rep. Gutierrez’s payday loan reform bill.
    So, first to the usual debunking of Mr. Louis’ claims. He says, “What sounds like a handy loan for a person caught between paychecks - “15 cents per dollar” is typical - always turns out to be a lousy deal.”
    “Always”? Huh? I wasn’t aware that Mr. Louis has visited with every single consumer out of the millions that use the product annually. How would HE know whether or not it’s a good deal or not? Simply put, the deal has proven to be good for almost all users. The evidence is overwhelming.
    1) 94% of all loans are repaid on time. SEC filings of public payday loan companies bear this out.
2) 154 million transactions occurred in 2008 alone. If it were a “lousy deal”, then there would be no repeat business. And don’t give me the claptrap that consumers have no other options. They do. They choose payday loans as being the best option for them.
3) If the loan is used responsibly and the needs for which it was utilized are fulfilled, how can it be a “lousy deal”? Because Mr. Louis says it is?
    Then comes the usual ridiculous APR statement. We’ve been through this. Every major study has concluded that the price signal the consumer responds to is the flat fee charged, not the APR, which is only provided because TILA requires it.
    “The damage to consumers is vast. An estimated 19 million borrowers - mostly young, from low-income families - take $51 billion from the legal loansharks and cough up nearly $9 billion a year in fees, according to the Consumer Federation of America.”
    Once again, Mr. Louis chooses to buy into the rhetoric of an anti-capitalist organization whose primary spokesman was made to look a fool at the Gutierrez Subcommittee hearing. Mr. Louis seems to consider that someone who needs to pay for a child’s doctor visit, get their car fixed to get to work, get a magician for their kid’s birthday party, or pay a utility bill is “damaged” because they chose to borrow money.
    Mr. Louis is out of touch. This isn’t damage. It’s life. It’s reality. It’s paying for things that need to be paid for when credit options are limited.
    His facts are also wrong. Users of payday loans are neither “mostly young”. In truth 68% are under 45 years old. I would hardly call 45 years old “young” (alas). As for most being from “low-income families”, the majority earn between $25,000 and $50,000. Mr. Louis not only doesn’t define “Low-income”, but — DUH — if you are earning six figures you likely don’t have a NEED for a short-term loan.
    “The lenders typically let the borrower roll over the total to the next paycheck (and the next, and the next).” False. 94% of loans are paid back on time.
    Mr. Louis supports the lunatic concept of a 36% rate cap, which as I’ve pointed out may times, bans the product, and forces consumers to MORE expensive options. Mr. Louis — are you really that ignorant regarding economics?

  18. The Center for Responsible Lending (CRL) has a history of distorting the truth concerning payday loans (PDLs), used by 6 million Americans to meet short-term credit needs. However, the CRL is merely a front for the Self-Help Foundation, a credit union in direct competition with payday lenders, whose founders were principal purveyors of destructive subprime mortgages as evidenced in recent exposés by 60 Minutes and The New York Times.
    This time, they’ve cooked up a “report” claiming PDL stores “are most heavily concentrated in African-American and Latino communities in California”. But what is the methodology behind this “research”? We don’t know, because unlike legitimate, independent studies, their methodology is not revealed. Nor does the report’s “senior researcher”, Leslie Parrish, have any discernible background in statistics, economics, public policy, government or business.
    This is another scurrilous attempt to bamboozle the media, politicians, and the public with an inflammatory headline. The only problem, besides the CRL’s reprehensible and cynical disingenuousness, is that their “report” reveals an undercurrent of racism.
    We shouldn’t be surprised. They tried this in 2006 with a report entitled “Race Matters” which Dr. Thomas Lehman, an Indiana Wesleyan University economics professor, said “contains severe weaknesses and presents conclusions that are overstated at best, and misleading at worst…perhaps motivated by an ideological bias against the PDL industry”.
    The primary assertion of the CRL’s new “report” is that “Payday lenders are nearly eight times as concentrated in neighborhoods with the largest shares of African Americans and Latinos as compared to white neighborhoods, draining nearly $247 million in fees per year from these communities. ”
    Oh, really?
    Payday loans are used by those in need of short-term credit and earning $25,000 - $50,000. So, naturally payday loan stores will cluster in neighborhoods with lower incomes, just as gas stations cluster at freeway exits, and retail businesses cluster in shopping malls. It has nothing to do with race, other than by coincidence.
    Furthermore, $247 million in fees were not “drained” from anywhere. The language infers that this money was taken without its owner’s consent or without them getting anything in return. Baloney. What consumers get when they take out a payday loan is short-term credit they can’t get anywhere else. They use that credit to make ends meet, and SEC filings of PDL companies show a 94% payback rate.
    This brings us to the most egregious example of the CRL’s sordid tactics — the outright claim that payday lenders cluster where they do purely because of racism. This claim is not only patently false, but exposes the CRL as both race-baiters and racists themselves.
    The idea that a business would deliberately establish a operational policy driven by racist policy is ludicrous in the extreme. Where a payday loan store, or a store of any kind, is located depends on dozens of variables. The idea that practical operational considerations would somehow be trumped by the neighborhood’s ethnicity shows the despicable lengths to which the CRL will go to further their agenda.
    That’s the race-baiting portion.
    A ban forces consumers to their only other short-term credit option – bouncing checks. The December 2008 FDIC Study on Overdraft Programs and NSF fees proves that this method of short-term credit is four times more expensive than a payday loan, and can snowball into even higher fees.
    The CRL’s call for this rate cap is an effort to rob minorities of their freedom of choice, and strip them of more of their hard-earned money than is necessary. Why? The CRL doesn’t like freedom. It doesn’t like people to do as they choose with their own credit. The CRL wants minority consumers to be their economic slaves, by making them dependent on their own credit unions’ overdraft protection plans and oppressive lending terms.

  19. Over at The Consumerist Blog, attorney Sam Glover made the kind of post that demonstrates the ignorance of those who have never had the need for short-term credit. And he should be ashamed and embarrassed by his elitist, nonsensical stance on credit in general.

    His first sentence should give readers a clue how clueless Mr. Glover is. “For about 30 years, there has been effectively no limit on the interest rates lenders can charge.” False. Almost every state has a general usury law; commercial lending usury law; and legislation capping the fees payday lenders may charge.

    He also perpetuates the long-debunked myth that short-term loans — payday loans, tax refund anticipation loans, auto title loans — should be compared on an APR basis to more traditional long-term credit such as mortgages.

    Mr. Glover — EDUCATE THYSELF. As numerous studies have pointed out, including one by Dr. Thomas Lehmann of Claremont-McKenna college, payday loans are two-week loans, not year-long. Furthermore, the consumer doesn’t give a hoot about APR’s. They just want to know how much in real dollar terms their credit will cost. And, GASP, 6 million Americans CHOOSE to use that credit.

    But Mr. Glover’s intellectual laziness doesn’t stop there. He claims “We all know how we got here. Lenders made stupid loans and charged exorbitant fees to consumers who had no chance of paying them back. ” WRONG. Lenders made stupid MORTGAGE loans to irresponsible borrowers who decided that — future be damned — they’ll put zero down and take that variable rate mortgage without THEMSELVES considering that they couldn’t pay it back. That’s right, Mr. Glover, the borrowers actually have responsibility for our economic crisis, too.

    We’re not done. ”A 36% rate would not interfere with most lending.” WRONG. Mr. Glover is too busy to actually spend time visiting with payday loan operators or even reading the public SEC filings of the public PDL companies. If he actually bothered to educate himself before spewing his verbal diarrhea, he would learn that the average default rate on payday loans is 6% and average monthly overhead for a PDL store is $8000. With those numbers it is IMPOSSIBLE for payday lenders to stay in business without charging at least $15 per hundred borrowed. And, yes, I have all the data Mr. Glover needs to back up that assertion — if he’s at all concerned with correcting his irresponsible statements, such as, “In order to continue doing business, short-term lenders would have to do a real risk assessment of borrowers and charge accordingly, instead of using aggregate risk data to treat everyone to the same, extremely high interest rate.”

    “Some loans are just too risky to allow,” he claims. Yes, as we’ve learned from the mortgage implosion, six-figure loans made by irresponsible lenders to irresponsible borrowers, which are then repackaged multiple times into CDO’’s and ABS’s, are too risky.But not payday loans. They’ve been around for twenty years and over 6 million Americans willingly choose to use them every year. Why are 25,000 stores available to serve customers? Because there is a need for short-term credit. As usual, self-proclaimed saviors like Mr. Glover, who purport to understand how debt works, forget the second part of every debt equation. The price of credit is RELATIVE TO RISK. My God, that’s the FIRST lesson of Debt 101!

    Consumers can take care of themselves, Mr. Glover. You seem to be in favor of the kind of paternalistic government that prevents customers from making their own choices. Of course, when pressed to address the more serious issues — such as selling alcohol to alcoholics and permitting obese people to eat McDonald’s as much as they like, the hypocrisy of arrogant and misinformed blowhards like Mr. Glover becomes all too apparent.

    But again, does anyone think Mr. Glover has been in need of short-term credit?

  20. You have personally shown the creditability of the payday loan industry, with your made up consumer reply on this thread.

    But again, I believe what the Federal Trade Commission says about the industry.

    I would encourage everyone to get on the FTC site and look at the laundry list of malpractice committed by this industry.

    And if you are thinking about such a loan, use the FTC site to find a better alternative.

    Again anyone who wants real life examples of the horrors of the payday loan business

  21. I think it would be helpful for legislators and policy makers if they got a glimpse into the real world of how a payday loan business runs, so this rate cap argument can be removed from abstraction.

    Half the stores in America are owned by mom and pops. They are entrepreneurs. They’ve scraped together $25,000 to open a single store. On top of that, they’ve likely taken most of their life savings and borrowed from family, friends, and a bank. They’ll use that money to fund the $8000 monthly store overhead they have, to fund the loans they make, and to pay themselves just enough each week to feed their family.

    That $8000 in overhead is lean for a store. It covers rent, utilities, maybe an employee, signage, advertising, payroll taxes, etc

    Now they don’t just fling open their doors and start making $120,000 in loans each month. It takes about 18 months to reach that level – which is average for a payday loan store. That means they are not generating any profit during that first year and a half. They’ve gambled all they have on their business. Along the way, every two weeks, 6% of their loans won’t get paid back. That cuts into their revenues.

    If they manage to build to a $60,000 loan portfolio at the end of their first year, they will break even in month 15.

    But industry opponents never mention this, do they?

    Now, let’s look at our operator once he’s managed to break even. This operator will now extend about $1.5 million in loans to customers per year. Let’s say he’s in a state that permits a fee of $15 per hundred borrowed.

    Opponents ignore the fact that, on average, 6% of these loans will never be repaid despite collections efforts. That means $90,000 of that $1.5 million loaned is never returned. Thus, the lender will only earn money on $1.5 million of loans.

    $1.5 million x 15% = $225,000 in total fees

    An average store will cost about $8,000 a month to run. That includes paying employees, utilities, insurance, rent, and so on. Thus, total store costs for a year will be $96,000.

    $225,000 total fees - $96,000 expenses = $129,000 in store profit.

    But remember, that operator had to borrow from a lot of people to fund his losses for a year and to have money to lend out. That requires about $150,000 in total capital. Maybe they got lucky and got these loans before the credit crisis and are averaging a 10% APR interest rate, of $15,000 in interest payments.

    $129,000 store profit - $15,000 interest = $114,000 in net profit

    Say this owner will contribute $14,000 to his 401 (k) for retirement.

    $114,000 net profit - $14,000 retirement = $100,000 in taxable income

    Now he must pay federal and state income taxes. If this operator has a 4-person family to support, their federal and state taxes will be $16,000.

    $100,000 taxable income - $16,000 = $84,000 in take home pay

    In the final tally, $84,000 for a small business owner of one payday advance store is a very nice annual income, but hardly the level of wealth opponents claim that payday lenders achieve each year.

    By the way, the owner probably won’t even take all that pay home. He’ll start saving it to open another store.

    And what happens if a 36% rate cap goes into effect? That $15 per hundred fee becomes $1.38 per hundred borrowed. That’s a 91% revenue cut! So that $225,000 in total fees is now $20,000, not enough to cover defaults and overhead for even two months.

    The results:

    1) The lender is out of business.

    2) The lender must declare bankruptcy

    3) The lender’s investors have lost all their money.

    4) The lender’s customers are forced to undesirable forms of credit

    a. Bank overdraft and NSF fees – Three times more expensive

    b. Internet payday loans – 70% to 100% more expensive and unregulated

    c. Pawn something – Equally expensive, with risk of losing something of value if loan not repaid

    I hope policy makers will take a long look at the consequences of passing what sounds like a good idea. The truth is, it will harm the very people they think they are helping.

  22. Your continued attempt to try to be three people is entertaining, but tiresome. Your Sybil like behavior shines a light on how easy it is for an owner of a payday loan store to lie and willfully mislead.

    Please just send in your flier and I will post it under Mis-information.

    But again, I believe what the Federal Trade Commission says about the industry.

    I would encourage everyone to get on the FTC site and look at the laundry list of malpractice committed by this industry.

    And if you are thinking about such a loan, use the FTC site to find a better alternative.

    Again anyone who wants real life examples of the horrors of the payday loan business

  23. Comments are closed.

    Thanks for your comments, especially the one from the "every man" using the lower case i's......and you call me elitist.

    What a clown!