Tormenting the Payday Lender

Of the numerous articles I’ve written these past years, I’ve expressed many a point of view. If I encounter a dispute, I normally favor one side or the other, for it’s seldom when both sides can be equally right or wrong. Simply stated, when it comes to distinguishing between good and bad, or even between not so good and not so bad, I’m rarely ambivalent. I say rarely … though today I’ve arrived at rarely.

The article attracting my attention appeared in the Nov. 6, 2018 edition of the Wall Street Journal, titled “A Regulatory Vendetta Exposed.” The matter is one where an agency of the federal government – with the full support of the prior administration – attempted, through outright intimidation and extralegal methods, to destroy a legal industry. The very first paragraph of the article describes exactly what has been occurring: “[T]he Obama Administration’s vendetta against payday lenders is now emerging into full view in federal court. Government regulators so loathed payday lending that they tried to ruin a legal industry by cutting it off from the banking system. This tactic could be used to destroy any business.”

The techniques employed by the governmental officials in their attempts to close down the operations of perfectly legitimate loan companies can rightfully be described as judicial schizophrenia. Rather than the evenhanded law enforcement we might expect from American officaldom, it’s more like the approach of the early 20th Century Italian Prime Minister Benito Mussolini, who, as Il Duce (“The Leader”), dropped the pretense of democracy and established a dictatorship. As a case in point, in 2012 then-Regional Director of the Atlanta branch of the Federal Deposit Insurance Company (FDIC), Thomas Dujenski, announced: “I literally cannot stand payday lending. They are abusive, fundamentally wrong, hurt people and do not deserve to be in any way associated with banking. Any banks even remotely involved in payday lending should be promptly brought to my attention.”

In 2013, in keeping with what had become the policy of Dujenski, Anthony Lowe, the FDIC regional director in Chicago, issued a letter stating “We have generally found that activities related to payday lending are unacceptable for an insured depository institution … if a bank was found to be involved in payday lending, someone was going to be fired.” And by this time, the hierarchy of FDIC fully supported whatever actions might be taken to deprive the payday loan industry of any banking affiliations, this in an effort to destroy the industry. Although they had previously been advised such a stance violated the Due Process Clause of the Constitution, the regulators took it upon themselves to stigmatize the industry in every way possible and to deprive them of any procedural protections to which they were entitled by law.

This now seems like an appropriate time to describe the payday loan industry for those of you unfamiliar with its operation. I’ve displayed below the official greetings of a few such firms:

Payday Money Centers: “Your Friendly Neighborhood Bank. We’ve been the trusted financial service center for our neighbors throughout Southern California since 1997. We’re right around the corner and our fast-and-friendly services will get you the money you need when you need it.”

Faaast Cash: “Your Trusted Source for Payday Loans & Cash Advances. Are you short a few dollars until your next paycheck? Want a safe, secure and convenient way to quickly get the cash you need? We are here to provide the instant payday loans you need right now.”

CashCall: “Our goal is to provide a simplified process for you to obtain a personal loan. We understand that financial problems can arise at any time and those problems can be out of your control. Thus, we consider all credit types even if you filed for bankruptcy or have bad credit.”

Is there any doubt these presentations appeal to persons desperately in need of money? Most assuredly, if they are as fast and friendly and safe and secure and convenient as they imply, they’ll offer pure delight for those in need of help. With this in mind, we’ll now take a closer look at how these firms actually function.

They’re called payday loans because payday is typically when borrowers can pay them back. They’re offered as small, short-term loans which can tide you over in an emergency. The interest rates, on an annualized basis, can be in the neighborhood of 400 percent – much higher than even the most expensive credit cards. But again, they’re promoted as short-term loans, so you’re not supposed to get anywhere near that abominable rate … unless, of course, you do. You see, if you can’t pay off your payday loan, you must take out another one – a rollover, it’s called. This can get expensive – horribly expensive. At first it seems like easy money, but the average borrower ends up spending about 200 days out of the year in debt.

President Obama spoke about the problem last year at Lawson State Community College in Birmingham, Alabama. He contended payday loans trap borrowers in a cycle of debt. “You take out a $500 loan at the rates they’re charging on these payday loans – some cases 450 percent interest – you wind up paying more than $1,000 in interest and fees on the $500 you borrowed. You don’t need to be a math genius to know that it’s a pretty bad deal if you’re borrowing $500 and you must pay back $1,000 in interest.”

According to a recent Pew survey, some 12 million Americans – roughly 1 in 20 adults – take out a payday loan in a given year. They tend to be relatively young and earn less than $40,000; generally they lack even a high school diploma. The rate of borrowing is highest among minorities. From the data we’ve seen, payday loans are concentrated in those communities and African-American and Latino borrowers are disproportionately represented among the borrowing population.

In summary, the vast majority of payday loan borrowers are using these loans to handle everyday basic expenses that don’t go away in two weeks, like their rent, their utilities and their groceries. Even worse, borrowers are offered no choice but to roll over their loans again and again, which jacks up the fees. In fact, rollovers are an essential part of the industry’s business model. Simply stated, payday loans are structured as a debt trap by design.

We’ll now return to my opening paragraph where I said that when I view a controversy, I’m rarely ambivalent – I can normally distinguish between right and wrong. However, as I hone in on the details of this particular conflict, I cannot bring myself to approve of either the government’s clearly unwarranted actions to destroy a legally operating enterprise, nor the business practices of payday lending, which I firmly believe deserve to be promptly and properly legislated out of existence.

I anticipate payday lending will continue to function in much the same way it presently does. I must presume it’s as profitable for the firms making the loans as it is for the political interests supporting it. Of course it could be easily ended by the simple expedient of eliminating all exceptions to the usury laws … but the likelihood of this ever happening is essentially nil. Unhappily, it’s also true that the fact huge numbers of near-destitute persons are routinely trapped in its insidious mechanism will similarly never cause it to be terminated. I’m sorry to say it will continue to be business as usual, for this is the realistic way the world functions. Ahhhh, how enticing it would be if James Hilton’s mythical sanctuary of Shangri-La existed, but the utopian adventure novel Lost Horizon was merely that – an adventure novel.

Al Jacobs, a professional investor for nearly a half-century, issues weekly financial articles in which he shares his financial knowledge and experience. You may view it on http://www.roadwaytoprosperity.com

al@beachcomber.news