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Thursday, 01 April 2010 06:00

Payday Lenders Say They're on Main Street's Side, But Really They're on the Shady Side of Wall Street

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by Meg White

National Public Radio's economic show Marketplace is often host to conservative commentators arguing against consumer protection or payday loan elucidating the evils of Keynesian theory. But I've never heard them kowtow so low to Wall Street as they did Wednesday evening.

In a commentary titled, "Don't Subject Payday Lenders to Reform," Darrin Andersen -- president of QC Holdings, one of the biggest payday lenders in the country -- insists that "Main Street's search for short-term credit, like payday loans, played no part in the economic meltdown."

Whether or not that's true is hard to know, because the "Main Street" that utilizes the *ahem* "services" of payday lenders is not a Main Street that most public radio listeners would recognize.

Let's take BuzzFlash's backyard for example. In some Chicago neighborhoods, the only businesses you'll see are payday lenders and liquor and convenience stores. Those concerned with healthy eating habits call these places "food deserts." But they're also financial deserts. You'd be lucky to find a working ATM in some of these areas, much less an actual bank.

So it may be that the people living on such "Main Streets" didn't blink when the market crashed to the floor, but it's because they were already there. Now they're suffering from the trickle-down effects of a down market, as the few businesses that would venture into such neighborhoods disappear. The nonprofits that service such areas are stretched thinner than usual, as the entire city needs their help. And the triple whammy of foreclosures hits these fragile areas the hardest, with higher concentrations of subprime mortgages and low property values.

Yet the Cash N Run Payday Advance shop is still open...

Whether or not the $42 billion-a-year industry had a part in the economic downturn, the financial instruments that do have a direct link to the recession come from the exact same ethos as short-term lending: predation.

The payday loan industry is a product of the same thinking that gave us subprime loans. Under the cloak of giving poor people a chance, these lenders gouge their customers. And it's not necessarily because they have bad credit or because it would cripple lenders if they lost the $100 they're lending. They charge upwards of 400-600 percent interest because they can.

Andersen objects that the interest rate comparison isn't fair:

...the interest rates we print in the documents consumers sign are compounded over the course of a year. But our loans are paid back in two weeks, not 30 years.

Just as you wouldn't take a taxicab across the country, or permanently rent a hotel room, you would not take a payday loan out for an entire year.

While it's true that an annual interest rate is not the best way to determine the fairness of a two-week loan, there are other inequities built into this short-term system that aren't accounted for by mere interest rates. From U.S. News and World Report:

One of the most common charges levied against the payday lending industry is that it is designed to trap workers in a vicious cycle. The Center for Responsible Lending, for example, says that the industry derives 90 percent of its revenue from repeat borrowers. "Most people don't actually default until they've repaid payday loans several times," says Leslie Parrish, a senior researcher at the CRL. "Because your payday loan is timed to your payday, you have the money that day. You don't have enough money for your other needs for the rest of the pay period, but you'll have the money that day."

 "People get paid, they run down to the payday loan store, and they pay off their loan," says Fox. "And then a lot of them immediately take out a new loan because they do not have enough money in their pocket to make it through the end of the next pay period."

Or to use Andersen's analogies: Some people who need to get across the country may only have access to a cab, and they'll take it as far as they can until they're out of money. Some people have no housing options other than a hotel. So they'll pay every day until they get thrown into the streets. Just because people are forced to do so does not make it acceptable to fleece them.

Going back to the notion of a financial desert, there are some people for whom it is literally not feasible to open a bank account in which to deposit their paychecks. So they go to these short-term lenders to cash checks. They don't need a loan. They need a check card.

Payday lenders come back with the argument that a bounced check or insufficient funds fee would come out to an annual interest rate of up to three times the amount they're charging.

But that obscures the issue. Not only are checks (and increasingly, non-sufficient funds fees) a thing of the past, but there are other ways to negotiate payment than handing over one's bank account to a payday lender or writing a bad check. During this downturn especially, those who are owed money are more willing to work out direct payment plans than ever.

Andersen then argues that his magnanimous industry is "already highly regulated at the state level." But even if that were so, it may not be for long.

Payday lenders are already pouring millions into local elections in order to change or prevent that supposed reality (a practice that will no doubt increase with the recent Supreme Court decision on campaign spending by corporations, combined with the huge profits these businesses have reaped throughout the recession).

But in the few states where there are reasonable limits on payday loans, these companies are getting around regulations by shifting their operations to Native American reservations or the Internet. Furthermore, state laws often have significant loopholes around rate caps or consecutive lending.

Local legislation alone is not going to fix this problem, even in states where uncorrupted politicians favor a crackdown.

One of the saddest things about this latest push against reform is that the payday loan industry has already won a huge national victory. The financial reform legislation passed by the House once had restrictions against repeatedly lending to the same customer and caps on the interest rates of payday loans. But, according to the Huffington Post's Investigative Fund, those measures were stripped out by lawmakers who received industry donations.

Now that the reform legislation is in the hands of retiring Senate Banking Committee Chairman Chris Dodd, the industry has nothing to fear. One industry spokesman told Huffington Post, "We were worried... But we worked it hard. We have lobbyists, and they made their point."

Indeed, with the amount of leeway Dodd seems prepared to grant banks, Wall Street and Republicans, I don't think payday lenders have much to worry about anymore. So what are they afraid of? And who else would take on the risk of lending to low-income individuals?

Such services may well fall into the domain of the public good. That is, the availability of short-term micro-credit may be an item too large and universal to be privately profitable on the scale upon which it is necessary, like a public park. But it's something that without which, our society would not be the same.

Presumably, that is what pushed San Francisco Mayor Gavin Newsom to pursue the program known as Payday Plus SF, a city-run short-term lending service with interest rates capped at 18 percent.

While they were the first to put together a plan such as this, some 70 cities have followed their lead, and Newsom said he's talking to Treasury Department officials about replicating the program on a national scale:

We may be the first city to do this, but I know we will not be the last. Predatory payday lenders are a national problem. But with no cost to taxpayers, Payday Plus SF shows what can happen when elected leaders, neighborhoods and the financial community come together to help low-income families in dire, but temporary, financial straits.

Yeah, I could see where such a proposition would scare Andersen and his pals. If they were to have competition in those Main Streets that are truly in "dire straights," they might have to actually charge reasonable interest rates and fees.

That'd be so unfair.


Image courtesy of taberandrew's photostream on Flickr.