The Real War on the Poor

by James A. Bacon

Beware the meddlers and the do-gooders. With friends like them, poor people don’t need enemies. Two data points from today’s newspapers…

First, the Chesterfield County Planning Commission has asked staff to explore options for keeping payday lenders out of the county, on the grounds that they “prey” on the poor. This action comes at the request of a handful of vocal county residents who don’t want payday lenders anywhere in the county, according to Jeremy Slayton’s article in the Times-Dispatch.

“It is very troublesome … that they are charging exorbitant interest rates,” said Commission Chairman Russell J. Gulley. “Once you borrow from them, they’ll never get out of that cycle. We consider these to be predators on the poor.”

That’s a very noble sentiment, and there is no question that the fees and interest rates on small, short-duration loans can be very expensive when calculated on an annual basis. But, then, small, short-duration loans are inherently expensive to make, and borrowers are high credit risks. No one else wants to make these loans.

As Adam Tanoukhi, a manager with Community Loans of America put it, “I’ve seen hundreds of customers … that have come in with personal stories, being told ‘no’ everywhere they’ve gone.”

What alternatives do poor people have in the absence of payday lenders? Loan sharks… assuming they even exist in Virginia? Lenders operating outside the scope of the law will likely charge even higher interest rates than payday lenders and their collection methods are more likely to entail the use of baseball bats and brass knuckles. Thanks for nothing.

Second, the poor are being assaulted on another front by do-gooder regulators of the nation’s financial industry. Federal restrictions on debit cards and overdraft policies are costing the banking industry $10 billion a year in revenue. It now costs a bank $250 to $300 per year to maintain a basic checking account, reports the Wall Street Journal. Meanwhile, the zero-interest policy of the Federal Reserve Board reduces the interest that banks earn on deposits.

Responding like any other business with an unprofitable product line, banks are restructuring the service — charging more, even at the expense of losing unprofitable accounts. For the most part, those accounts belong to poor people who cannot afford the large checking account balances and pay the fees. Thus, do-gooder policies at the federal level are leading to the de-banking of the poor.

In sum, inspired by the purest of intentions, goo-goos are chasing poor people out of the banks and doing their best to shut down the alternative to banks, the payday lenders. The save-the-worlders get to feel smug and self-satisfied about all the good they’re accomplishing and self-righteous about the inequities of capitalism. But no one follows up to see what happens when poor people lose access to capital. Are they better off, or worse? If the poor understood what was happening to them, and why, I suspect many would curse their real oppressors — those who mean to save them.

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  1. yep.. looks like the have a problem right now with returning servicemen being preyed upon for their education benefits:

    ” At Georgia’s Fort Stewart on Friday, President Obama signed an executive order to help protect military families and veterans from aggressive and deceptive recruiting by higher education institutions — especially for-profit colleges — seeking their military benefits.”

    so if we know that returning servicemen are preyed upon and we take steps to protect them does that mean the govt is doing “feel good” things?

  2. Let’s let the free market rule the banking business – again!! Free the bankers! Free their CEOs! Variable mortgage rates depending upon what you can get from whom. No obligation to disclose (you didn’t ask!). Tiny tiny fine print. Buyer beware!

    1. I believe that argument can be classified as a “reductio ad absurdum.”

      1. Fancy Latin for “I’d rather not deal with petty details.”

      2. My first response to your response was made because you can be really snotty and annoying. But in thinking about it I think you’re saying that you’re not against consumer protections in banking, only restrictions on payday lending and on regulations that increase costs for the banks such that it is unprofitable to provide inexpensive checking services (unless you have a lot of money in which case it’s all “free”). There is some truth to that, but it’s also true that payday lenders can be predatory, and that banks shouldn’t have to rely on bounced check and bogus fees to make a profit.

  3. Back in law school, many years ago, I learned about the economic incidence of a tax, which often differs from the legal incidence of a tax. A taxpayer may have the ability to pass along the costs of a tax to others with less economic power or fewer abilities to avoid the tax. A higher sales tax, for example, often falls the landowners in the taxing jurisdiction. Taxes on an employer can often be passed along to employees in the form of lower or no raises. I think the same holds true for the costs of regulation.

    I am not arguing against business taxes or progressive taxation per se. But if the morons in D.C. understood this, we’d all be better off.

  4. Jim sort of comes across as opposing consumer protections for the poor. Consumer protections for servicemen and the non-poor consumers are not usually the subject of the attacks on consumer protections for the poor. just sounds bad.

  5. I’m not against consumer protections for the poor. I believe in prosecuting anyone who lies, cheats or otherwise commits fraud. But I also recognize that some “consumer protection” measures have consequences that can be worse than the problems they were designed to protect against.

    Yes, some poor people do get caught in a debt treadmill. That’s a real problem. But many people regard payday loans as a lifeline and use them responsibly. Even if you help some avoid the debt trap with payday lenders, what’s stopping them from experiencing a debt trap with loan sharks operating outside the law?

  6. we have all kinds of consumer protections for people who are not poor. I gave an example of how the Feds are now protecting serviceman from losing their education benefits to for-profit education providers.

    Would you also take the same position for the servicemen?

    or would you take away many of the consumer protections in general regardless of whether the poor were involved?

    it just seems like on one side – we have consumer protection for people that are probably not financially literate and vulnerable and we are advocating stripping away such protections.. just for the poor.

    or to put this maybe another way – what is the real difference between a loan shark and a payday lender that allows one to be legal and the other not?

    1. If career schools induce servicemen to enroll upon fraudulent prextexts, they should be charged with fraud.

      But sanctioning career schools as a category is absurd. Find the bad apples and punish them.

  7. Could it also be that Obama is trying to protect his friends in the traditional higher education industry? I’m not arguing there are no problems with for-profit higher education, but aren’t they a threat to those employed by our public and private colleges and universities?

  8. re: fraud

    just as with payday lending, the for-profit schools know just where the legal boundaries are and operate accordingly.

    Payday lending , and up in our area, loans for the car title, and check cashing (for a price) are all blossoming businesses that seem to be oriented to folks that are less well off and more vulnerable.

    I still point out that we seem to have stronger regulations and protections for others – for instance – mortgages – which used to be a little like the payday lending industry but now are heavily regulated.

    All I’m really asking here is – are we treating everyone the same in terms of consumer protections?

    re: Obama – it’s not just him. He has been asked to do something by people in the military and by serviceman that have been essentially scammed but legally.

    It’s pretty bad when Obama does something to help people that it gets twisted into him doing political favors…. by those who oppose him.

    I think if you look at the polls – that a good number of people are no longer buying that narrative. They know it’s unfair and untrue and are rejecting it.

  9. For payday loans: there is an alternative in the Richmond area: GoodChoice. It’s a collaborative effort between Goodwill, Virginia Credit Union, and St. James’s Episcopal Church. It offers lower interest rates with a longer payback period, and they offer free money management classes. Many areas around the country have similar models, all within the nonprofit sector. The value of the nonprofit sector offering these alternatives is that they are held to higher accountability and transparency standards than for profit businesses.

    1. Excellent! That’s doing something positive — creating options for poor people, not taking them away.

  10. I agree and I was going to suggest Credit Unions as alternatives but this is SUPER! Now watch the payday businesses try to get it outlawed.

  11. I understand the point you are making but it is based upon a faulty premise: that payday and car title lenders provide a needed service. They claim that is what they provide but what they are selling and what you get are two different things. They claim to be selling a short-term loan for an emergency expense but their business model is designed to trap you into long-term hell and it usually isn’t used for an emergency expense but just those expenses you don’t have income to cover. This thorough report based upon extensive surveys describes how the business really works and what borrowers will do if it isn’t available (hint: they will not go to violent loan sharks):

  12. Jay, thanks for the Pew citation, which provides interesting data that informs the debate.

    The document says, “If faced with a cash shortfall and payday loans were unavailable, 81 percent of borrowers say they would cut back on expenses. Many also would delay paying some bills, rely on friends and family, or sell personal possessions.

    “When presented with a hypothetical situation in which payday loans were unavailable, storefront borrowers would utilize a variety of other options. Eighty-one percent of those who have used a storefront payday loan would cut back on expenses such as food and clothing. Majorities also would delay paying bills, borrow from family or friends, or sell or pawn possessions. … Forty-four percent report they would take a loan from a bank or credit union, and even fewer would use a credit card (37 percent) or borrow from an employer (17 percent).”

    If Payday loans are so onerous, why don’t borrowers avail themselves of the above-stated options anyway? Why don’t they just cut back?

  13. they don’t cut back because they think the payday loans are a reasonable alternative and they do not truly understand the consequences.

    As I had said earlier – we have all kinds of consumer protections that one could say are not needed if people were more informed or would inform themselves better -but we have those laws anyhow and we do not oppose them but we oppose consumer laws for those on the lower end of income and it just seems to me to be a double standard aimed at lower income people.

  14. There appears to be an assumption that the poor are paralleled to the middle class but they just have less income. Poverty is multidimensional. From “Voices of the Poor” published in 2000, “Poverty never results from the lack of one thing, but from many interlocking factors that cluster in poor people’s experiences and definitions of poverty.” They talk about “assets” rather than “income” and they rely heavily on “social capital”. The idea of an emergency is dependent on their culture, location-specific phenomena, and other factors. They will borrow for the short-term because they have exhausted their social capital (i.e. friends and family) and they believe they actually have an emergency when maybe they don’t, or don’t understand the alternatives. And of course, for many, it’s an easy fix. This is a super-oversimplification of a very complex issue that has more to do with culture, history, mistrust of institutions and government, including humiliation (especially for those who fall in the Sudden Poverty category rather than the Generational Poverty category. There is an acceptance of the behavior within many communities – it’s a way of ‘managing money’ and being in debt doesn’t feel as burdensome to some as it would to others.

    So to my original point, they don’t have regular consistent income for the most part, for legitimate and illegitimate reasons; they think in terms of having ‘assets’ that they can sell if its a true emergency; rely heavily on their community for support; and do not work within a framework of a traditional budget a middle class person would. They also take greater risks with money because historically there is always a “way out”. Again, this is an oversimplification, but trying to keep it somewhat succinct (too late?).

    The benefit of NGO’s programs such as GoodChoice is there is an education piece attached to it that includes learning to think about ‘value’ rather than ‘money’. Traditional financial institutions don’t do that. They will not break the culture of short term loans, especially when they don’t charge the exorbitant fees. They encourage it.

  15. worth noting if for no other reason to expand the perspective:

    this is an article on returning service members who are said to be vulnerable to a number of scams of which payday lenders are included.


    ” Beware of Scams Aimed
    At the Recently Returned
    Regardless of whether a soldier stays in the military or leaves, financial experts warn them to beware of schemes targeting members of the armed forces coming home from deployments. In particular, Finra and the Better Business Bureau advise service members to be wary of payday loans, identity theft and investment schemes touted by scam artists who claim to have ties to the military.”

    It just appears to me that if there is concern about service members being taken advantage of – and steps suggested to better inform them – that NOT taking the same steps with others especially those who are at the lower financial margins and who are equally disadvantaged by their lack of awareness about business schemes that could take advantage of them – that we seem to be using different standards for informing consumers, i.e. it’s okay for the poor to not be informed but not okay for returning service members.

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