“Protect America’s Consumers” is actually a trade group trying to protect the payday lending industry from regulation. The main complaints seem to be that the regulators themselves are well paid and they have office space in downtown Washington DC that is very expensive. Now it is true, if some government officials were enforcing a regulation that I did not like, I would probably think that any amount of my tax dollars being spent to support them would be an outrageous waste of money.
But as a practical matter they are being paid the same as other professionals in the federal government.
So let’s look at the more interesting question: Should the payday lending industry be regulated (more than it already is)?
What is the Payday lending industry? Let’s look at Advance America as an example lender (this is the lender featured in the recent Freakonomics podcast). Say you want to borrow a typical payday loan of $100.00 for 2 weeks. They have a nice website that says “Get the money you need fast. And power on.” So far so good right? If you read the fine print, they are in the business of arranging loans, they do not actually lend money, so you are really dealing with two separate organizations.
But still – If you have a problem that can be solved by having five twenty dollar bills for a week, it’s a great deal, right?
In Virginia, your amount due on a $100 payday loan for 14 days would be $26.40. And while $26.40 for 14 days works might not seem like a lot of money, keep in mind, these services are traditionally used by individuals who are already struggling to get through the week. And that $26.40 gamed out is an annual percentage rate (APR) of over 688%. That means that if you could not pay back the loan, and had to renew it and eventually paid it off a year later, you would have to pay back the original $100 plus $688, for a total of $788.
That sounds like (and is) a lot.
Recently, President Obama said that payday lenders:
Trap families in an abusive and expensive cycle of debt and fees
Eighty percent of payday loans are rolled over or followed by another loan within 14 days
the average borrower stays in debt for about 200 days out of the year
The payday lending industry responds:
Is the government supposed to be interfering with an agreement between two consenting adults? Customers know what they are getting into.
You are not supposed to get one of these deals for year, most of that money is the service fee for arranging a two week loan. Think of comparing the cost of renting a car for two weeks to buying a car at the two-week rental costs – then the two week rental looks pretty outrageous.
This business isn’t that profitable. An investment banking deal that makes a fraction of one percent on hundreds of millions of dollars make a lot more money than they guys who make 664% on a hundred bucks.
Getting a payday loan can be a lot better than the alternatives (eviction, losing telephone service, automobile being repossessed, etc.)
The reality is that there really are some people who have some calamity and they are very happy to pay a $25 fee to borrow one hundred dollars for a week, and then pay their loan off when they get paid at the end of the week. They will have no trouble trotting out some happy customers who knew exactly what they were getting into. The CFPB will have no trouble showing up with some people who borrowed a few hundred dollars and ended up thousands of dollars in debt a couple of years later because of interest and fees etc.
The CFPB proposal is to regulate payday lenders by requiring the lenders to determine that the borrowers have the capacity to repay their loans, and not allow lenders to make a series of short term loans to the same borrower.
One could argue about this or that detail of the proposal. I want to argue the big question: Should (A) the government be regulating this behavior or should (B) people have the freedom to engage in whatever financial transactions they feel is best for them?
The a number of people argue strongly that option (A) is fascist, un-American, and takes away the very freedoms that their forefathers fought and died for. They favor option B.
However, we are all better off under option B…well, maybe not the people own payday lending companies.
Most Americans are not experts in making financial decisions and those who are traditionally do not need payday loans. When people borrow from these companies, many of them end up in a cycle of debt that they can never get out of.
When people end up in a cycle of poverty, it will affect them and their families permanently, preventing them from being able to become full actors of the economic life of our nation. It is in the best interest of all of our people and our government to ensure that our fellow Americans do not fall into the detrimental cycle of poverty when they need a hand up, but that we create an economy that works for everyone.