02
Apr
I can think of some very bad decisions a person might make. Right up there on the list, somewhere between drinking a 32 oz. bottle of bleach and telling your mother-in-law what you really think of her is taking out a payday loan.
Those mega-interest short-term loans are a Faustian bargain for people who have their backs against the wall. In order to secure a few portraits of Ben Franklin to meet some kind of emergency expense, borrowers often end up creating even tougher circumstances when the balance comes due. The only way out? Extending the loan (which costs a bundle) or taking out another one.
Look, I understand why people take out those loans in some circumstances. When the only thing standing between you and a jail sentence, the repossession of your only means of transportation or having empty shelves and hungry kids is shaking hands with a shark, taking out a payday loan makes a twisted kind of sense. You know it’s a horrible deal, but it’s a little less horrible than receiving a massive immediate butt-kicking.
My remaining libertarian instincts leave me a little bit cold on the issue of regulating payday lenders out of business. I believe that people should have as much freedom as possible–even when that opens the door to stupidity. There’s no law against telling your mother-in-law off, and I can tell you for a fact that isn’t the best course of action. Who thinks it’s a good idea to serve cocktails at a Thanksgiving dinner, anyway?
In any case, recent events in the state of West Virginia provide a great object lesson in the motivations others have in trying rein in the practice of payday lending. Whether you think it’s sticking up for the little guy and protecting his interests or an example of the worst kind of state paternalism, the arguments being leveled by the West Virginia Attorney General’s office perfectly encapsulate the “let’s regulate it to death” perspective.
Here’s the scoop. Payday loans are illegal in West Virginia. You won’t find those storefront lenders anywhere in West Virginia. That should give you a good idea of how the state government feels about the practice. It also makes me wonder what kind of businesses are operating in those little strip mall spaces between the discount cigarette joints and the “car insurance for people with a history of DUI convictions” places. What goes into those spots when payday lenders are illegal?
Desperate souls in the state pulled an end-around on the law. Instead of walking up to a storefront lender, they’ve gone straight to the Internet, securing online payday loans. Those Internet operations, which aren’t located within WV, extended credit to the least creditworthy among us. The state is a little irate over that.
They’re so irate, in fact, that the AG is going after 12 online lenders. They maintain that it’s illegal to make the loans to West Virginians or to market them within the state. Following non-compliance on the part of the lenders to investigative subpoenas, the AG is asking for a court order to force the companies to pony up the information about their potentially illegal activities.
This series of events has led to some interesting comments from West Virginia officials.
“It’s a very very shadowy industry, and it operates very much off the grid. The only answer to payday lending is to ban it,” said Assistant AG Norman Googel. In a nice overview of the situation in the The Times, a WV paper, you can get a clear picture of how the government feels about these loans.
They see people making bad decisions with serious repercussions. They don’t like the fact that people suffer as a result of their own poor decisions and they want to protect them accordingly. They’re willing to tear up the notes on these loans, allowing the borrowers to walk away from their agreements without owing a dime. They’re actually encouraging people who’ve agreed to pay back money to lenders to report to the AG’s office so that they can escape their poor decisions.
I’m no fan of payday loans and I don’t question the good intentions of those who’d like to ban them. I do question the wisdom of that. Can we really protect ourselves at every turn? And even if we can, wouldn’t it make a lot more sense of the government of the fine state of West Virginia to focus on ways to improve the economy so that people might be able to afford to make ends meet without feeling like usury is a way out?
I don’t think this is necessarily a situation that requires babysitting. It calls more for a look at why the economy makes these bad deals so attractive. It justifies consideration of why people are willing to make these lousy bargains in the first place.
Then again, it might be time for the legislature of West Virgina to consider a bill banning critical comments to mothers-in-law. Let’s put a rider on there to punish the Clorox every time someone downs a cool glass of bleach, too.
I understand where you are coming from but sometimes when something produces so much misery, has no real value and is very disruptive to our society, it must be banned. In addition, this so-called industry has a long history of deception and fraud. For example, the payday lenders repeatedly say publicly that this is a short-term loan and no one should pay attention to the APR (annual percentage rate). Not only is this contrary to the Truth in Lending Act but can you imagine what they must be telling borrowers in private if this is how they publicly try to deceive us? On top of that, the loan is designed to trap borrowers into a long-term loan and in fact for almost all borrowers, it is.
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What happened to us being responsible for ourselves? There was a time not too long ago that we borrowed $300 from cashloancity.com and had it paid back in a month without any problems. Heck, our credit cards charged us $40 for being a day late and charged us another $40 because that put us over our limit. Why isn’t that being talked about?
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Payday Loans Really effect my budget, This was not a good experiment in my case
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Jay- You’re absolutely right and I should’ve made my position re: payday loans a little more clear. I lean toward personal responsibility instead of government protection but NOT when lenders are engaged in intentionally misleading, fraudulent or deceptive practices. In other words, I sort of think you have the right to make a horrible decision, but I don’t think anyone has the right to deceptively con people into making a bad call.
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Ray-You make a good point. People go into a tizzy about the payday lenders but they don’t bat an eye when the respected and established banking interests in the credit card biz screw people over on a regular basis. Interesting, isn’t it?
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The payday lenders make so much money they can afford to hire people to write posts on all these blogs (see some of the previous posts).
The real question is whatever happened to businesses exercising some responsibility? We can’t just let businesses put out defective, dangerous, deceptive products and then say Oh well, the public shouldn’t have bought into those products (schemes).
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David R. Lampsen reply on April 24th, 2009:
Jay-I can tell you that I haven’t received a penny from a payday lender. If I was on the take, I doubt I’d compare the wisdom of taking out a payday loan with that of drunkenly insulting one’s mother-in-law. I think the decision to take out one of these loans is probably on page 3 of “The Big Book of Bad Ideas”.
I’m also in favor of businesses acting responsibly. I also echoed your sentiments regarding fraudulent and deceptive lending practices.
So, the real question is “whatever happened to businesses exercising some responsibility?” We all want to see that. The question is whether it’s better to regulate stupidity out of existence or to discourage it via outreach, education, and the use of the marketplace of ideas to express our distaste for the ugly stuff. There’s also the attractive potential of building an economy that doesn’t create the circumstances that often encourage people to seek out payday loans.
When one casts this issue in “it’s bad so we gotta ban it–and if you don’t agree with me you’re either a shill or you just don’t care”, that’s disingenuous. There is more than one way to skin a cat and pretending otherwise tends to alienate more than it does to persuade.
If people used their noggins, they’d never pull up to a payday lender. If people used their noggins, however, they wouldn’t run up massive credit card bills. They wouldn’t drive drunk. They wouldn’t leave a permanent butt-prints on the chairs at casino blackjack tables. They wouldn’t watch lousy sit-coms and they wouldn’t wear plaid with stripes.
I’d like to admonish them all to do otherwise. I’d like to get the word out that there are 1,938,499 better things you can do in a pinch than hit up a payday lender. I’d like to tell them to sheath the plastic, get a designated driver, avoid the tables, turn off the sit-coms and exercise better fashion sense. If enough people do those things, the market for the crap dries up. And we get to that point without utilizing paternalistic government interventions. We embrace the marketplace of idea and put faith in both the quality of our arguments and in the rationality of our fellow human beings.
Jay, I bet I could follow you around for a few days and come up with a big list of things you do that I think are stupid and/or that encourage negative societal consequences. It’s that way with everyone. Would you be happy to see the “Let’s Stop Jay from Doing Things We Don’t Like Omnibus Bill of 2009″ shoved through Congress the next day? Of course not.
The payday lenders should be accountable for deceptive and/or fraudulent activities. There should be full, clear disclosure of terms. Those who convince people to take out a loan by lying should be squashed. Beyond that, however, I’m okay with a little caveat emptor. I’ve given up on nanny legislation and would prefer to work on the demand side instead of the supply side of these problems.
To a better-educated population and the kind of economy that can reduce payday loan demand,
David
I actually don’t want to ban payday loans, just limit them to 36% APR. The payday lenders always say this is an effective ban so I slipped into their lingo.
I also agree that we try to ban too much bad behavior–is anyone not wondering about our drug laws these days?
Our society has recognized for hundreds (if not thousands) of years that when you allow lenders to ask any amount of interest for loans, borrowers who are desperate for cash will pay whatever is demanded and it is never a fair bargain. Disclosures are useful but will not help with this problem. This is why we have had usury laws for many years and there is no reason to throw away those laws as we have been doing the last 10 years.
Regulation is not an all or nothing thing. It has always been a question of degree. Most people would agree that 36% interest is excessive and no borrower should pay that much. More than 36% is usury and a reasonable place to draw the line.
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Jay-
Just out of curiosity, is there any evidence to suggest that the payday lenders can continue to function if they’re capped at 36% APR?
Obviously, making the payday lenders happy isn’t probably your #1 concern, but I’d be uncomfortable with the idea of “legislating something out of existence” via the end-around of creating regs that wouldn’t allow them to function.
I don’t know the numbers. You might. But these loans, by and large, make standard sub-primes look like gold-plated locks. Many of the people out there taking the loans are such poor credit risks that a 36% cap might make it untenable to strike a deal.
In understand your position re: usury, but I’m still have an issue with the idea of protecting people against their own poor decision making if they’re informed of the risks of their behavior.
The fact that we’ve had laws against usury doesn’t necessarily mean that their good ideas, on-balance.
I do appreciate your perspective, though, and it’s nice to see someone who disagrees with me advocating something short of “ban ‘em all.”
Thanks for the comments!
David.
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Jay Speer reply on April 30th, 2009:
The payday lenders will always say they can’t make it at 36% but the North Carolina state employee’s credit union says they make small loans at 18% APR and it is profitable. Maybe it is the definition of profitability and maybe the payday lenders have a bad business model. In any event, as you point out, it is not our duty to keep them profitable according to their definition of profitability.
Advocating for no government regulation of any industry would be just as silly as excessively protecting people from themselves. We are always drawing lines. At what point is a business something that people need or is it just a scam that is no good to anyone? Certainly the level of deception used to “sell” the product is relevant. What about marketing a product as a short-term loan when your entire business model is built upon keeping borrowers trapped for the long-term?
We also legitimately use regulation to level the playing field when one party to a transaction is unable to bargain or protect himself due to the circumstances. That’s why we have rules that protect workers from unsafe working conditions. With lending, we have long recognized that those that have money can exploit those that are desperate for it and exert great power over the borrower that is disruptive to our society and our economy. Remember share-cropping?
Here is a quote from a 1941 Virginia Supreme Court decision: “The debtor often belongs to a class which needs protection and his needs are sometimes so urgent as to extort from him any conditions which the creditor seeks to impose.”
Jay-
My guess is that the North Carolina State Employee’s Credit Union is dealing with a lower-risk demographic than your average payday lender, don’t you think.
I understand your rationale for regulation and, again, I think it’s just a matter of deciding where to draw lines.
I think the quotation from the VA SC decision is important… Not just as a justification for considering the poor a protected class in legal terms, but as a reminder that the best way to stop predatory lending and other enterprises that tend to whack those on the lower rungs of the socioeconomic ladder is the need to create a more vibrant and prosperous overall economy.
I’m willing to wager that we’d both agree on that one.
Thanks for all of your contributions on this topic.
DRL
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