War on the Poor Update: the Attack on Payday Lending

debra_grant

Debra Grant. Photo credit: Virginian-Pilot

by James A. Bacon

Once again the war drums are pounding as do-gooders unleash a wave of publicity against payday lending. A local case in point is a guest column in the Virginian-Pilot under the name of Debra Grant, who told her personal story. This is how it started:

I had a relative who needed to borrow $150, so I took out a payday loan to help. Every month, I would have to roll the loan over until the next month, for a $37 fee.

It took great sacrifice, but I was eventually able to pay off the loan. Soon after, another relative needed my help again, and I took out a loan of $300, plus an $87 fee every time I rolled that one over.

I was finally able to pay that one off — and then another family member needed help. Seeing no other alternatives, some of my relatives took out a car title loan, missed a payment and lost their car. Without a car, our whole family suffered. As a single mother and breadwinner for my family, I thought I had no other choice.

Any person of limited means who extends so much help to her relatives deserves kudos for her caring and generosity, and nothing I say here is meant to disparage Ms. Grant personally. But I have to question her logic.

Drawing upon her personal experience and her association with Virginia Organizing and the Virginia Poverty Law Center, Grant advocates two things: (1) support for the Bank On program, which teaches financial responsibility and runs a matched savings incentive program, and (2) support for a Consumer Financial Protection Bureau initiative to institute new underwriting rules that would reduce payday lending. The first expands options available to poor people, and is to be lauded. The second narrows the options available to the poor, and should be condemned.

Let’s parse what happened to Grant. She took out a payday loan on behalf of a relative. No one held a gun to her head and made her take out the loan. She could have availed herself of any number of available alternatives.

Er, she did have alternatives, didn’t she? What are you telling me — she didn’t? She couldn’t take out a bank loan? Perhaps that has something to do with the fact that over-regulated banks operating in a near-zero interest rate environment can’t make money on small personal loans and have largely gotten out of the business. How about credit cards? Grant doesn’t tell us, but it seems likely that she either didn’t have any credit cards or had maxed out her credit.

How about taking out a car title loan? Grant’s relatives did take out a car loan, and look what happened — they missed a payment and had the car repossessed. That didn’t turn out so well.

The fact is, there are no attractive borrowing alternatives for poor people (and people with bad credit). That dismal reality reflects the country’s super low interest rate environment, the high cost of government regulation, the high cost of administering small uncollateralized loans, and the high risk of default by people with poor credit. Rather than address the underlying causes, do-gooders respond by blaming one of the few groups willing to extend credit to the poor by excoriating them and removing one of the few options, as bad as it is, available to the poor.

According to Grant, research by the Pew Charitable Trust shows that if payday loans weren’t available, 81% of borrowers would cut expenses. Insofar as cutting expenses is possible for poor people, that sounds like something they should do whether they have access to payday lenders or not!

Grant also cites the work of the Matched Savings Incentive Program, in which consumers deposit money in a savings account and community-funded grants match the deposit to double the savings. “This helps create a cushion for low-income people to use instead of payday loans in an emergency,” she writes. “Instead of trying to pay off-high interest loans, Bank On customers can save money and even earn a little interest of their own.”

Ah, teaching personal thrift and responsibility. What a great idea. Instead of spending time and energy shutting down payday lenders, maybe consumer advocates should focus less on putting payday lenders out of business by regulatory fiat and more on out-competing them by providing better terms and superior service. That’s a revolutionary idea!

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11 responses to “War on the Poor Update: the Attack on Payday Lending

  1. I join in all of your comments.
    Payday lenders are not perfect, but they actually provide money (not just platitudes and promises) for people to live on. Much of the criticism revolves around a business making a profit from lending money; making a profit is a dirty word in some circles.
    Forcing people to rely upon the government for all of their living needs seems to be the primary goal of those who attack payday lenders. By eliminating the competition, the people have nowhere else to turn but to the government.

  2. Jim, you write that part of the problem with the poor getting a loan is “the country’s super low interest rate environment.” This has nothing to do with it. Zero. Zip. The implication is that banks are somehow short of cash for lending because of the low interest rates, and this is why they don’t lend to the poor (you also mention regulations). But banks are awash in cash. The low interest rate environment reflect the supply conditions of abundant savings (a savings glut). This potentially makes loans to the poor more profitable for banks, since their markup would be higher (low cost of funds).

    As for helping the deserving poor get credit, it surprises me that America does not have widespread access to Grameen Bank type loans that use social reputation as a form of collateral, and thereby enable non-traditional but for-profit financial institutions to make lower rate loans to the poor. These are abundant in other parts of the world.

  3. Jon, Here is a chart showing the U.S. savings rate:

    Where’s the savings glut?

    Good question about Grameen Bank-type loans. Why don’t they exist in the United States? Could it be that the cost of banking regulations makes such loans prohibitively expensive, hence uneconomic?

    • It’s not the U.S. savings rate that’s relevant. It is the global savings rate. The For past 20 years U.S. has been taking in huge amounts of foreign savings. Why? Because we have more transparent capital markets, better property rights, more stable politics, etc. etc. Some people from abroad are thrilled with zero nominal return, as long as their money is not confiscated by government or unduly threatened by inflation. That is why we are awash in savings and have low cost for use of those savings.

      • OK, that’s a clearer explanation of what you mean. You’re really saying that we’re awash in “capital,” not savings.

        In theory, abundant capital ought to lead to more lending, including to poor people. While there is lending for mortgages and for car loans, which can be repackaged and sold to secondary market, there is no increased lending for small personal loans. We are experiencing an institutional failure. Otherwise, the payday lenders would not exist!

        • Jim wrote: “In theory, abundant capital ought to lead to more lending, including to poor people. While there is lending for mortgages and for car loans, which can be repackaged and sold to secondary market, there is no increased lending for small personal loans. We are experiencing an institutional failure. Otherwise, the payday lenders would not exist!”

          Well said. And early you speculated that regulations may be prohibiting Grameen type banks here, which could certainly be an issue.

  4. yeah – lots of folks feel like they got ripped off and go running to the govt for help, eh?

    ” About two months ago I received a letter from my insurer, New York Life Insurance Company, informing me that my long-term care policy, which had remained stable ten years, was scheduled to increase 20%, costing me, in rough numbers, an extra $300 per year after a three-year phase-in. Three hundred bucks won’t bust the Bacon bank, but I was miffed — it was the principle of the thing. I had not been led to understand that my insurance rate would go up. And I bet there were other policy holders for whom $300 per year would cause real hardship.

    Well, a look at my insurance policy indicated that, sure enough, New York Life was entitled to raise my fees. My bad. I should have read the fine print. Even so, any rate increase had to be approved by Virginia’s Bureau of Insurance, and I wondered — as I suppose an estimated 80,000 other long-term care insurance policy holders are wondering — what is the justification for jacking up our rates?”

    but see – when you’re poor and financially illiterate – it’s on you….

    • Wrong as usual, Lar’. So wrong.

      (A) I didn’t go “running to the government for help.” I didn’t read the fine print in my contract, so I accept the consequences.

      (B) I haven’t advocated “remedies” designed to put the insurance companies out of business.

  5. “… Even so, any rate increase had to be approved by Virginia’s Bureau of Insurance,”

    you want the govt to “approve” your rates?

    but screw the poor’s “rates”?

    really?

  6. re: “…. we’re awash in “capital,” not savings”

    where do you think “capital” comes from Jim?

    ” In theory, abundant capital ought to lead to more lending, including to poor people.”

    that’s the problem – the “theory” that you subscribe to – supply-side is not what actually happens in reality.

    People do not invest capital if they do not believe they’ll get a good return on it – or as JW points out – will lose it all together – so they hold onto it even if it “earns” almost nothing.

    that’s why – around the world – people are willing to buy US Treasury notes for virtually no interest… it’s SAFE…. safer than the alternatives.

    countries are not paying NEGATIVE interest rates to try to get capital/savings to flow into investments…

    none of this has anything what-so-ever to do with predatory financial practices against people who are vulnerable financially and lack financial knowledge to make decisions in their own best interests.

    And as I pointed out -even folks like you ALSO LACK that knowledge or else why would you have not read the fine print and make a more informed decision yourself?

    you guys on the right don’t “get” how the financial world works apparently because you keep talking about theories eve when the theories are totally not describing the current financial world!

    additionally – you have a haughty and arrogant attitude towards those of a lower station in life -thinking – almost coming right out and saying that if they are ignorant then they deserve what happens to them – even as you want the govt to protect you from similar faults.

    1. – more money won’t translate into more investment if the folks with the money are afraid they’ll not get a good return of their invest or even lose it.

    that’s a theory also – and it’s also a reality

    2. – people at all demographics levels deserve equitable treatment from the govt with respect to protection from predatory scum.

    just because you are middle class does not entitle you to “better” protection.

  7. I have to go back and repeat the things that Jim had to say about increases in rates for Long Term Care Insurance.

    you folks decide for yourself if Jim has a biases in favor of his own interests and against others who also are dealing with that good old “free market”:

    “We now expect twice as many people to be alive at age 90 compared to what was assumed when the product was priced,” says Wolcott. “Longer life expectancies generally result in additional claims because more people utilize long-term care services at older ages.”

    The explanation made sense. I didn’t like it, but it made sense. New York Life blew two of its key assumptions (though not as badly as many other insurers did) and low interest rates depressed investment turns. Accordingly, to maintain the actuarial viability of the policies, the company had to jack up rates.”

    notice how the idea of the company providing a necessary service for a profit – has gone out the window and now they are “jacking up the price”.

    “But the explanation raises a new set of questions. If policy holders sign a contract with an insurance carrier to provide a certain set of benefits for a certain price, why isn’t the carrier obligated to eat the difference when they make bad decisions?”

    are you freaking kidding me? what part of the signed contract clause do you not get? ever hear of the free market guy?

    “I’ve never heard of carriers filing to reduce premiums if their assumptions turn out to be too optimistic. Maybe it happens, but I haven’t heard of it. No, they keep the profit. Given the way the incentives are structured, aren’t insurance companies encouraged to low ball premiums, knowing that they can come back later and jack up rates?”

    good grief! YES – it’s call PROFIT and you DEFEND it when it’s at issue with payday loans!

    “So, Where Was the SCC?

    approved_rate_increasesWhere was Virginia’s State Corporation Commission in all this?”

    wait – wait – where is the part where you and V N castigate “do gooders” for interfering with the private sector providing a needed service?

    “New York Life is hardly the only insurance carrier to ask for higher rates. The Bureau of Insurance has approved 22 rate increases by 12 different companies affecting nearly 16,000 policy holders. Another 35 requests affecting 65,000 policy holders are pending. Two companies are asking for 121% rate increases — more than double!”

    poor baby – now what did you say about the victims of payday loans? where is your outrage on that?

    “There would be no easy regulatory solution to this problem,” the report concluded, “and … any changes to the regulatory framework would require balancing multiple interests, including consumer protection and insurer solvency.”

    Now this clearly sounds like a bunch of left wing socialists discussing , right?

    “Comments from 171 Virginia residents emphasized the “frustration and hardship felt by many long-term insurance policyholders… as well as their fears about the possibility of experiencing further rate increases in the future.” Policy holders felt it unfair that they would have to bear the burden of pricing errors made by the insurers, and they complained about the lack of transparency surrounding the rate increases and rate filings.”

    good lord o’mighty… my heart is beating hard and loud just reading this!

    “About thirty years ago, at the behest of the General Assembly, the Bureau of Insurance had adopted the National Association of Insurance Commissioners model legislation governing long-term care insurance. In 2000, Virginia adopted “rate stabilization” revisions to the rules that resulted in higher initial premiums and lower and less frequent subsequent rate increases.”

    did they do something similar with the Pay Day Loan folks?

    “The SCC’s 2015 order increases the consumer protections even more. Says SCC spokesman Ken Schrad: “At least 80 cents of each dollar in premium increase must be paid out in claims on an individual policy and 75 cents of each dollar in premium increase must be paid out in claims on a group policy.”

    Wrote the SCC in that order: “While the Bureau’s proposed amendments to the Rules will not eliminate long-term care insurance premium rate increases, such proposed amendments adopt a more conservative approach for the initial pricing of long-term care policies, require insurers to take a more active role in managing long-term care insurance rates, and provide additional and necessary protections to long-term care insurance policyholders in Virginia.”

    Bacon’s Bottom Line

    I have no doubt that there is a delicate balancing act between protecting policy holders and ensuring insurers’ solvency. If you’re worried about policy holders getting the shaft, nothing could be worse than allowing a carrier to slip into insolvency unable to make good on any of its promises. I also recognize that regulators had no more experience than the carriers did when launching a brand new insurance product, so it was difficult to second-guess industry decisions. So, I’m mildly sympathetic to the position of the regulators, who have made appropriate adjustments over time.

    However, it strikes me that something was severely askew with rules that resulted in insurance carriers in Virginia under-pricing 57 long-term care policies and, judging by the lack of any filing to lower rates, for zero to over-price them. I can assure you that the insurance agents selling these policies did not inform policy holders, “Gee, we’re really not very experienced at setting rates, and our assumptions could prove invalid, and if they do, we have the right to jack up your rights as much as we need to.”

    The state of Virginia provides state tax credits for long-term care insurance premiums. The idea is to encourage Virginians to protect their retirement assets rather than fall back upon Medicaid to pay for their care. Some 80,000 Virginians went along, playing by the rules and doing the right thing. In the end, the insurance companies were protected from their mistakes, the federal government got rock-bottom interest rates that allowed it to continue running huge deficits while depressing insurance company portfolio returns, and thousands of Virginians got stuck with higher premiums. Their choice: either drop out and lose the money they have paid in, or suck it up and eat the new rate. Is there any wonder that Americans believe the system is rigged in favor of the powerful against the little guy?”

    but WAIT – there’s MORE:

    ” Ah, teaching personal thrift and responsibility. What a great idea. Instead of spending time and energy shutting down payday lenders, maybe consumer advocates should focus less on putting payday lenders out of business by regulatory fiat and more on out-competing them by providing better terms and superior service. That’s a revolutionary idea!”

    Jim Bacon – can you say “Uncle”?

    this is pretty blatant guy.

    clearly your bleeding heart beats more for some than others, eh?

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