This seems like an odd point to make since nobody is complaining that payday lenders have anything to do with the current crisis. And they don't. Not in a cause-and-effect relationship.
But let's ask for a moment, what payday lenders do.
Most of us have a dim view of them -- we think of them as loan sharks with a logo, minus the muscle and pliers.
Commonly, they're called predatory lenders for the way they allegedly treat their customers: poor folks in need of emergency assistance. No doubt, some of that is true. But it's not comprehensively true.
Do yourself a favor in the coming days. While it's true you'll find payday lenders in poor neighborhoods, keep an eye out in the suburbs and middle-class neighborhoods. Because that's where they've been going.
Here's what the Austin Business Journal had to say:
According to Lyndsey Medsker, spokesperson for the Community Financial Services Association of America, which represents about 60 percent of the payday loan industry, those using payday loans are typically young people with an average income of $25,000 to $50,000.
After you're done reading this article and enjoying the rest Examiner.com has to offer, take a look at that article.
WHILE YOU'RE HERE, LET'S SEE WHAT ELSE WE CAN DISCOVER
We now have some idea of the people payday lenders are loaning to. We know that the borrower is giving some guarantee, though not a lot. What about the size of the loan? You hear different averages, but the general range is somewhere between $500 and $1500. Even if you drop it down to $100 and go as high as $2000, you're not really talking about a huge sum of money.
So what are the terms? Those vary, too, but it's really the controversial part. Because when you look at the rates, they're astonishing. Upwards of 3,500% effective annual rate. Sometimes around 17% bi-weekly.
There are two components that go into those rates.
The first is risk. The risk is high. People may simply ignore their debt, move, change jobs, quit... the opportunities for the borrower to default on the payday loan are high, and frankly, they wouldn't appear to have much to lose for doing so.
It should be noted, that the rates are high despite being short term. As anyone who has ever invested or been in finance can tell you, long term risks are generally greater than short term risk. There are a number of reasons for that, including ones you never think about, like inflation risk, but it's a pretty solid principle.
The second component is operation cost. The number of borrowers who need to come in for a payday loan is low, so in order to cover overhead, they need to have a high mark-up. This is true everywhere and in every industry. Grocery stores have very low mark-ups because they get their return on volume. Luxury car makers have very high mark-ups because they get fewer buyers.
HERE'S WHY ALL THIS IS IMPORTANT
Because what it tells us is that payday lenders - a group of lenders absolutely nobody in the universe would call a charity (in other words, they are supposedly the epitome of greed) - lends to low-to-middle-income borrowers with little credit history very small dollar amounts for very short terms (which reduces risk, see above) at extremely high interest rates.
Given that, why on Earth would anybody loan to the same group of borrowers a quarter of a million dollars with little guarantee at low-to-zero percent interest rates for long terms?
Yet that is the argument people must make when they blame Wall Street and greed. And indeed, Wall Street did just that. Why? Because the loans were guaranteed by on-paper assets. But the borrowers didn't own the asset. They didn't even own a piece of the asset because they put no or little money down. Fannie Mae and Freddie Mac owned the asset. Fan and Fred were buying up these assets so that they looked better on the books, which gave their officers huge bonuses (a number of those officers are advisors to Barack Obama).
They were also guaranteeing the virtue of the loan.
Combined with a buying frenzy - which is a result of lowering the bar, precisely what Democrats were trying to do - that actually pushed housing levels well beyond what the market demands (I believe the surplus in housing is something like 18 million units which is somewhere around 10% of households), you have a condition that will drive the asset's value-on-paper up.
And who was getting bought off by Fannie Mae and Freddie Mac? Who protected them, encouraged them and helped them and their allies in organizations like ACORN push more of this stuff to those borrowers?
DEMOCRATS DID IT. GOVERNMENT DID IT.
It can't be said enough. Wall Street screwed up. And so did Main Street. Everybody knows it, though of the four candidates for high office, only Sarah Palin said anything about it. But Wall Street and Main Street did not create the conditions for this to happen out of a desire for anything, least of all Social Engineering. Democrats in Congress did it.
Had the market been left alone, the only way that lenders would have lent to so many of its borrowers (and thereby create the chain of packaging and repackaging on those loans that exposed the market to risk) was if the interest rates were astoundingly high or if borrowers supplied huge down payments in order to protect the value of the asset. Neither of those things happened, because government meddled with the system. The problem was not deregulation, the problem was bad regulation.
Just look at the payday lenders.
Comments
Since when did you become the public relations representative for usury?
I expected better from you, Amos.
You missed the mark on payday lending by a mile. Take a couple of quotes out of context to "fit" into your analogy of the Fannie and Freddie Credit crisis. What else should we expect from the media who are quick to write and slow to research?
For example, ACORN is against payday lending but for sub-prime mortgage lending. If the two lending styles are so similar, why does ACORN of all organizations, see them differently.
The primary reason according to Price Waterhouse that the costs for payday lending are high because the operating costs are fixed (fixed rent, fixed payroll, fixed underwriting expenses, etc.) and because of REGULATIONS (yes, despite your ignorant statement on the lack of regulation on the payday lending industry) the loans are required to be repaid within a few weeks. Lenders must recoup these fix costs (the costs would be the same if the loan was for two weeks or six months) within the two week period.
Get some basic understanding of the payday industry before trying to tie it to the macro sub-prime scene would be greatly appreciated by this free-market conservative.
Tom-
The two lending styles are not similar at all. That would actually be my point.
The argument by Progressives about subprime lenders is that the free market caused the economic crisis. One of the problems with that argument (other than the facts) is that the lenders were not acting in ways that the free market would have promoted.
To look at something closer to the free market, we should try to control for some variables. One of those is to look at a demographic similar to the one that was supposed to have been helped by the programs Progressive legislators put in place and defended. The next step would be to find a control - use another kind of lender who serves the same market. Compare similarities and differences.
Do payday lenders serve a similar market to the one targeted by CFA and other programs tied to this issue, or to lenders looking for new markets? To a fair degree, yes.
Are payday lenders being bailed out by Congress, or showing similar signs of financial weakness? No.
It's irrelevant why their payment horizons are lower. The fact is that shorter term rates are generally lower than longer term rates. Ask your banker. They borrow short term cash (low rates) and invest long term assets (high rates).
Yet, payday lenders lend at a much higher rate than the supposedly free-market lenders of the subprime mortgage markets. Last I checked, legislators try to push down the rates payday lenders charge - not raise them.
(Which is why ACORN opposes payday lenders and favors the subprime lenders of ill-repute. Payday lenders more accurately match prices to risks. When you do that, the prices look usurious.)
Bullet points:
Payday lenders:
Lower + middle-class clients
Sometimes with poor credit
Small loans
Short terms
Low collateral
High default risk, mitigated by short term loan
Mortgage lenders:
Some lower, but mostly middle-class clients
Sometimes with poor credit
Huge loans (100x or more the payday lenders' average)
Long terms
Questionable collateral
Fairly high default risk (which is why banks didn't loan to that segment, which is why Dems passed the CRA).
Yet, the housing lenders (and all the financial institutions up and down the line) didn't charge the rates payday lenders try to charge, despite being on the line for long terms and huge loan amounts.
Are payday lenders regulated? Sure! Yet they still charge what appear to be shockingly high interest rates if you didn't know why they were charging those rates. I suspect that if they weren't regulated, the rates would be even higher. Which only proves my point further.
Some may say their rates are too high. I'm inclined to agree, but if they were as profitable as a consideration of their rates alone would testify, there'd be more payday lenders, correct?
And no, the loans would not be the same cost to the payday lenders if the payment terms were different because default risk goes up with time. Defaults have costs. (Technically you run into increased inflation risk as well, but their time horizons are short enough this isn't really a factor.)
Since they expect their pool to pay back the loans within a well-calculated estimated time frame, they try to set terms and control their costs as best they can to that time horizon and the yield risks that go along with it.
Greed cannot account for the difference in lending styles because greed would likely as anything aimed lenders at the payday style. I chose payday lenders specifically because nobody thinks they aren't greedy (except Thomas Sowell and maybe me.)
It's amazing how much press payday loans have gotten, versus (until recently) how much attention we've paid to the predatory practices of mortgage groups. The amount of attention is inversely proportionate to the amount of damage done by each sector. Job well done! Just like the push to war with Iraq, the press has failed us once again by bringing us an overdose of coverage on a red herring called payday loans.
David Kernell, the 20-year-old son of Democratic Representative Mike Kernell of Tennessee, got popped. According to CNN (“Democratic lawmaker's son indicted in Palin hacking”), he reset the password and gained access to GOP VP candidate Palin's personal E-mail account. It is alleged that he read the contents, took a screenshot of her E-mail directory and obtained other personal information. The information that may have been compromised includes E-mail addresses and pictures of family members, one or more cell phone numbers of family members, family birthdates and more from Palin's address book. Interestingly, after turning himself in, David Kernell pleaded not guilty. He pleaded not guilty despite the fact that he (allegedly) took the information he hacked from Palin's personal account and posted it to a public Web site. Not only that, but he posted the new password he’d created, which would enable others to easily access Palin's E-mail themselves and view any of the contents. As a result, Kernell Junior may be subject to the heat of a five-year prison term, $250,000 fine and three years of supervised release. That’s enough to turn anybody into a fluffy white piece of popcorn. At the maximum of $1,500 per loan, that bail would require about 167 individual payday loans to free that fluffy little popped grain treat from being overcooked by cellmates.
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Yes, please do some research into the payday industry before you write another treatise like this. Borrowed amounts are typically $100-$200, with a $15 fee per $100 borrowed. That amounts to 15% in my book. Where do you get 3500%? Payday customers appreciate the convenience and confidentiality of a short-term loan to meet unexpected expenses. What's that got to do with buying a house you can't afford or writing a mortgage loan with falsified income info that you know the borrower can't repay?
Jaymore - $15 over 1 to 2 weeks. Compound annually.
Lower lending amounts on the part of payday lenders only furthers my argument.
As far as buying a house you can't afford, the same logic applies to taking a payday loan at a usurious rate.
As far as lending to people with falsified income, review the editorial's statements about having high risk and why the lenders would have thought the risk was mitigated.
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