Wrong Number
Statistics can be powerful. That's why I was struck to see a new study reporting that low income families do better in states that permit payday lending. If families can't get short term cash, says the study, they are more likely to encounter other expenses like bounced checks. So swallow hard and let payday lenders charge 400% interest rates, because in the long run people will be better off. Wow.
The only problem is that the numbers are wrong. A report from the Center for Responsible Lending points out that the study's claim is based on the rate of bounced checks, but the study mixed togethercustomers from states that permitted payday lending and states that prohibited it. That makes the data useless for testing the effects of payday lending. But that doesn't stop the payday lenders from cranking up the press machine.
The University of North Carolina put together a detailed analysis of payday lending by studying low-income households after the ban on payday lending went into effect. Their conclusion? Payday lending had no discernible effect on the availability of credit. In addition, twice as many borrowers reported they were better off without payday lending than they had been with it.
The payday loan study is written by a researcher at the federal reserve and a grad student. (That makes it sound like a study from the federal reserve, but the fed says it is not.) There is no reason to believe the mistakes in the study are intentional, but they are severe. This isn't one of those academic interpretation questions. Instead, the study relies on an analysis of the rate of bounced checks, but CRL points out that it draws data from a source that mixes payday and no-payday states together. The study also looks at the number of FTC complaints filed, but the higher reporting rate in North Carolina was true both before and after payday lending was banned. (I'm not sure what a higher rate of filing FTC complaints means anyway--maybe just more activists in the state who urge prople to write the FTC?) These data problems aren't quibbles. They go right to the heart of the support for the claim that payday lending is beneficial.
Let me be clear: hot check charges are out of hand, and some fancy banks have used them to recreate their own form of payday lending. But the solution to that problem is not to let payday lenders and banks compete to see who can squeeze consumers the hardest. The solution should be to put some limits on out-of-control charges from both sources.
The Pentagon went to Congress to say that payday lending was interfering with troop readiness, and Congress outlawed payday loans to military families. Payday lending costs hard-working American families an estimated $4.2 billion every year. State legislatures should be looking hard at exending the same protection to their citizens that Congress extended to military families--and they should do so without being fed bad numbers.
Long-time TPM readers will remember the claims the credit industry made as they lobbied for the bankruptcy bill: Bankruptcy costs every American family $400. The number was pure fabrication, but it had a powerful effect. It was repeatedly quoted in newspapers, magazines and in Congress. So now there is another number. This one isn't made up by the industry, but it doesn't have any data to back it up either. The industry can quote it in every press release and pass out copies to every newspaper as it fights off any consumer-led effort to rein in payday lenders.
Numbers are powerful. But we need a way to get wrong numbers out of circulation.
I am sick at heart to live in a country with so little regard for the poor. Where people with few means pay higher costs. And people with greater means get discounts.
Soak the poor. And help the rich. That seems to be the motto of today. It just gets worse and worse. And honestly I can hardly bear it.
February 3, 2008 2:35 PM | Reply | Permalink
Have you even been to another country? The separation between the rich and poor in this country is nothing compared to England, and that is not even the best comparison. Why don't you do some research before you humiliate yourself?
February 12, 2008 4:48 PM | Reply | Permalink
What do you expect? This study is a perfect example of the need for the corporate elite that demand all attention to the economic realities be swept under the rug, or be shoved in a sack and drowned. Here's an article by Tom Hamburger of the LA Times.
Chamber of Commerce vows to punish anti-business
candidates AP
“We plan to build a grass-roots business organization so strong that when it bites you in the butt, you bleed,” chamber President Tom Donohue said.
The group indicates it will spend in excess of the approximately $60 million it put out in the last presidential cycle.
By Tom Hamburger, Los Angeles Times Staff Writer
January 8, 2008
http://www.latimes.com/news/politics/la-
na-chamber8jan08,0,4301350.story
By Tom Hamburger, Los Angeles Times Staff Writer
January 8, 2008
WASHINGTON -- Alarmed at the increasingly populist
tone of the 2008 political campaign, the president of
the U.S. Chamber of Commerce is set to issue a fiery
promise to spend millions of dollars to defeat
candidates deemed to be anti-business.
"We plan to build a grass-roots business organization
so strong that when it bites you in the butt, you
bleed," chamber President Tom Donohue said.
The warning from the nation's largest trade
association came against a background of mounting
popular concern over the condition of the economy. A
weak record of job creation, the sub-prime mortgage
crisis, declining home values and other problems have
all helped make the economy a major campaign issue.
Presidential candidates in particular have responded
to the public concern. Former Sen. John Edwards of
North Carolina has been the bluntest populist voice,
but other front-running Democrats, including Sen.
Hillary Rodham Clinton of New York and Sen. Barack
Obama of Illinois, have also called for change on
behalf of middle-class voters.
On the Republican side, former Arkansas Gov. Mike
Huckabee -- emerging as an unexpected front-runner
after winning the Iowa caucuses -- has used populist
themes in his effort to woo independent voters,
blasting bonus pay for corporate chief executives and
the effect of unfettered globalization on workers.
Reacting to what it sees as a potentially hostile
political climate, Donohue said, the chamber will seek
to punish candidates who target business interests
with their rhetoric or policy proposals, including
congressional and state-level candidates.
Although Donohue shied away from precise figures, he
indicated that his organization would spend in excess
of the approximately $60 million it spent in the last
presidential cycle. That approaches the spending
levels planned by the largest labor unions.
The chamber president is scheduled to announce the
broad outlines of the organization's plans for the
2008 election and beyond at a news conference here
today. Donohue also plans to fire a rhetorical warning
shot across the bow of candidates considered
unfriendly to business.
"I'm concerned about anti-corporate and populist
rhetoric from candidates for the presidency, members
of Congress and the media," he said. "It suggests to us that we have to demonstrate who it is in this
society that creates jobs, wealth and benefits -- and who it is that eats them."
In advance of today's news conference, Donohue told The Times of his plans to be active in 140
congressional districts this year, as well as the
presidential contest.
At the state level, Donohue said his organization
would be active in nearly four dozen contests for
attorney general and state supreme courts. Both state courts and attorneys general are involved in decisions affecting business, including consumer protection and a wide range of litigation.
The chamber has become a significant force in state and national politics under Donohue's decade of leadership. Once a notably bipartisan trademassociation with a limited budget and limited influence, it has hugely increased its political fundraising and developed new ways to spend money on behalf of pro-business candidates.
Under Donohue, the organization has also frequently aligned itself with GOP priorities.
Since he took over the chamber, contributions by
businesses have soared, often to pay for political advertising known as "issue ads," which are exempt from many of the Federal Election Commission limits.
Under a system Donohue pioneered, corporations
contribute money to the chamber, which then finances attack ads targeting individual candidates without revealing the name of the businesses involved in the ads.
In 2000, drug companies paid the chamber to run
advertisements in Michigan to help elect
then-Republican Sen. Spencer Abraham. Pharmaceutical companies that year gave the chamber additional
millions to run issue ads attacking mostly Democratic House candidates. And large corporations paid $1 million or more to support advertising campaigns against judges deemed too friendly to plaintiffs.
There has been pressure from lawsuits and government activist groups to require the chamber to reveal the source of its political funds and more details on its spending.
Donohue is not inclined to do so.
"I will disclose any funds I am legally required to disclose -- and not disclose any others," Donohue said. "We are exercising our constitutional right to petition the government and we will continue to do so."
In 2004, the chamber also helped defeat Senate
Democratic Leader Tom Daschle, flooding his home state of South Dakota with money, ads and more than 50 on-the-ground organizers.
This year that kind of ground tactic is going to be more prevalent, Donohue said, noting that the chamber plans to make use of its ability to communicate freely with its 3 million member companies located in every congressional district.
In the interview Monday, Donohue said he was unhappy with anti-corporate rhetoric coming from candidates in both parties and he wanted candidates to know about the chamber's ambitious plans.
Donohue is not likely to name names at his news
conference, but there is no doubt he is unhappy about Huckabee.
The concerns Donohue expresses reveal apprehension that Republican pro-business candidates may lose favor with voters and that the GOP's important but fragile alliance between economic and social conservatives is showing signs of strain.
Even more than Republicans, Democratic candidates have boosted the volume of populist messages as the economy softens. Edwards, whose trial lawyer past has been openly criticized by Donohue for years, launched new advertisements that warn against the danger of
replacing "corporate Republicans with corporate
Democrats."
The middle class, Edwards says in the new ad, is
"losing ground while CEOs pocket million-dollar
bonuses and corporate lobbyists get their way in
Washington."
Donohue, in effect the nation's leading business
advocate, kicked back hard at some of the leading
Democratic proposals on taxes, labor law and the
courts.
If that agenda succeeds, he said, Democrats "will be gone from power for at least 40 years," though he acknowledged that the political rhetoric might moderate after the primary season.
"People on the other side have been very strong in the way they play in legislation and elections. We intend to do the same," he said.
tom.hamburger@latimes.com
February 3, 2008 2:39 PM | Reply | Permalink
Price fixing and usury limits do not have the intended effect of forcing legal lenders to lower their fees. Instead, legislating price caps simply forces legal lenders to stop offering loans to certain consumers.
If legislation caps the fees on short term loans or bounced check fees, then lenders and banks simply stop offering credit to a large segment of the market. If a lender can only charge $3.60 on a $100 loan, then for every loan that defaults, a lender would need to successfully recover full repayment on about 27 loans, just to recoup the money it handed out on the defaulted transaction. To actually make enough money to run a storefront, pay employees, etc., the lender would need to sucessfully recover even far more loans. So lowering rates to a 36% per annum amount, in this context, would not justify running the business at all. This is why lenders don't offer these services in states with low rates.
Such rate caps are not a solution. When states institute these caps, persons living paycheck to paycheck will resort to traveling across state lines or using “unregulated” offshore Internet lenders. Consider the failure that resulted in alcohol prohibition. When legislators resorted to prohibition, despite market demand, consumers find unlawful providers. Likewise, when states eliminate payday lending, consumers turn to unregulated foreign based Internet payday lenders.
It would be far better to have consumers use a service that is regulated by state officials. It would be far better to regulate and monitor short term loans, and to find ways to encourage competition, then to simply legislate these consumers into the hands of unregulated, offshore Internet lenders.
February 6, 2008 1:17 PM | Reply | Permalink
Even if this study were correct, it assumes the naturalness and inevitability of such devices as exorbitant bounced check fees and exorbitant late fees for rent and utilities. It is these that drive people to usurious lenders: people risk pay checks or pink slips to their cars rather than face eviction or living in the cold and dark.
About economic rationality: somehow banks, lenders, property owners, utilities, etc. seemed to get along just fine until about ten years ago, when some clever people managed to find more ways to extort money out of the poor. There are thousands of little pumps that lift money from the bottom to the top.
February 10, 2008 2:04 AM | Reply | Permalink
Oh, the greastest country in the world....
Encourages it's citizens to spend, spend, spend...
then when they get in trouble, their are so few protections!
I don't get it!
February 11, 2008 11:03 AM | Reply | Permalink
Of course, the CRL will dispute and oppose any report that even suggests a favorable reaction to the payday loan industry and the CRL will not be content until the industry is completely abolished. Also, the detailed analysis conducted by the University of North Carolina is full of numbers that are completely irrelevant considering the majority of those surveyed had never used a payday loan product in addition to not having been in a situation in which supplemental means were needed to make ends meet. Obviously, there will be no discernible effect on the availability of credit when surveys contain the opinion of those who have not needed to seek additional credit sources. If payday loans were such an undesirable product there wouldnt be such a great demand for them
February 12, 2008 4:36 PM | Reply | Permalink
Payday loans help people. That is the bottom line. When I am in trouble, and I have no where else to turn, I go get a payday loan and I am saved. You people who are against them, either got burned by yourself because you don't know how to manage your money well enough to get a payday loan and then pay it back in two weeks, or you are not living paycheck to paycheck and, therefore, don't know what you are talking about. I use payday loans because they are the best option that I have. These payday loan stores are willing to give me a high risk loan in order for me to make ends meet. Credit cards won't do it, banks won't do it, so if you take away payday loan stores, who will do it? You?
February 12, 2008 4:53 PM | Reply | Permalink
This is what Reason magazine had to say about payday loan bans:
Reason, March 2008, Page 10-11, Katherine Mangu-Ward
“A new report finds that banning payday lending, makes customers worse off.”
“Authors Donald P. Morgan of the federal reserve and Michael R. Strain of Cornell University found that the citizens of those states (the states where payday lending is banned) bounced more checks, complained more about lenders and debt collectors, and filed for chapter 7 bankruptcy more often. The correlation between reduced payday lending and increased credit problems, they write “contradicts the debt trap critique of payday lending, but is consistent with the hypothesis that payday credit is preferable to the substitutes such as the bounced –check ‘protection’ sold by credit unions and banks or loans from pawn-shops.”
There are all kinds of proof that payday lenders are providing help to people who need it. The problem is that some compulsive borrowers are screwing it up for the rest of us. I use payday loans responsibly and I know many others who do as well. Leave the service for us, and teach the others who don't know how to use them responsibly so that all of us don't have to suffer.
February 29, 2008 6:46 PM | Reply | Permalink