Ellen -

Please re-read the comments on your previous blog by Mehitabel, who brought up some valid points. Limiting interest rates or the number of times the payday lenders can roll over loans is reasonable. It's also true that they serve needs in the community, and it could get worse if desperate people borrowed from true loan sharks. From a public policy standpoint, don't just mow the lender's profit lawn to get rid of the dandelions - pull them out at the root. Here are just a few factors policymakers need to consider.

Basic consumer finance education is missing more and more. I and bank staff counseled hundreds of customers about basic skills such as balancing a checkbook and budgeting. (The big banks don't do this at all - this is a service only found at community banks.)

I learned in the course of my banking career that many students don't ever take personal finance courses, which were a graduation requirement when I was in high school. Most people don't bother to even keep a check register, or do a monthly or annual budget. Most people seem to live from paycheck to paycheck - which is where Mehitabel's living wage argument comes in, but that is only part of the answer.

The second part is America's abysmal savings rate. Customers at the bank who had more than a month's salary in a savings account were rare. My great depression-era grandparents and others of their generation keep much, much more - and a minor auto accident won't send them to the paycheck lender. Can we find a way to teach that lesson without going through another depression?

The third part is easy credit. It's currently still simple to get credit cards. Only those with the worst credit are shut out of this system, and it's yet another way people dig themselves into a deep hole (like financing a TV over 10 years). We have to be careful here, because 47 million people don't have health care coverage - and credit cards are sometimes their only option - so we also need to fix health care while we're at it. Relaxing bankruptcy laws might work once health care is fixed, because lenders facing higher losses might actually underwrite credit card borrowers rather than just issuing based on credit scoring.

It's our consumer culture itself - purchasing things we want, and want right now, rather than encouraging budgeting, self-restraint, and planning. (Education again).

Finally, when republicans call for greater personal responsibility, they are correct - though it's only part of the story - you must address the lenders too, who gain much more than ordinary people ever lose.

People need to do the work - do a budget based on take home pay, actually save money - and skip more impulse purchases. Which means saying "no" to ourselves, partners, and children sometimes.

So here are a few serious proposals:
Every (high school?) student is required to take and demonstrate competence in a consumer finance skills course that includes basic banking skills, loans and lending, budgeting, and saving. (Maybe more than one class!)
Eliminate taxes on interest earned in banks for low-to-moderate income earners.
Reform health care. (easy, right?)
Require banks and payday lenders to provide free counseling to whoever requests it.

Any other ideas?

Stuart - you're absolutely correct - my post was already getting too long!

One of the principal proposals I've heard to diminish our consumer culture is a consumption tax ("the Fair tax" for example) rather than income taxes. There are major pros and cons for these, and it would be tougher to implement than health care, I think.

There is more news here than just the payday loans bill - Strickland is a serious contender for a VP slot, as several large midwest states (check www.pollster.com) are in contention - Ohio, Michigan, and Indiana. And I doubt you'd see McCain try to take this issue like he tried to borrow climate change.

these payday lenders are nothing but loan sharks.

seriously. and here in ohio, they've been running a campaign portraying themselves as the "victim of big government" whos policies will cost "thousands of jobs".

these people have no shame.

Ms. Weis,

Was my post too long, in which case I'll submit an abbreviated one, or do you only post comments from people who agree with you?

Sincerely,

Jon Schultz

Apparently Ms. Weis has the comments set to post immediately up to a certain number of characters, otherwise it goes for moderation as my previous post apparently did, and she either rejected it or isn't available to moderate.

In any case, the APR of a payday loan tells you nothing about how profitable the loan is for the lender, because it ignores his cost in making the loan, and it tells you nothing about how wise the transaction is for the consumer, because it ignores his other alternatives. The APR of small-dollar short-term loans must be high compared to other types of loans, due to the high ratio of the cost of making the loan to the amount being lent. But that doesn't mean a payday loan isn't a valuable option for people who don't qualify for cheaper forms of credit. Researchers from George Mason University and Colby College recently found that "access to payday loans in their environment, all else fixed, increases a borrower's probability of financial survival by 31%."See http://www.reuters.com/article/pressRelease/idUS164798+06-Feb-2008+PRN20080206

If a 365% APR was "outrageous" then the statement "I will lend you $100 today if you will pay me back $101 tomorrow" would be outrageous, but it obviously isn't. In fact most people would not make that statement because they wouldn't want to risk losing $100 for just $1 in profit. And that doesn't even consider any cost whatsoever in making the loan!

Of course some people take out too many payday loans and get themselves into a bind. Many people overeat desserts and make themselves sick, but does that mean we should place a cap on the percentage of fat and sugar allowed in ice cream? Of course not. The answer is proper education to warn people of the dangers of being irresponsible, not curtailing what should be the inalienable right of a merchant or service provider to set his own price (if the business isn't receiving government assistance or making use of limited public resources) and the inalienable right of a consumer to make his own choice with regard to which offerings he wishes to avail himself of. If the government can tell a lender how much he can charge, then why can't it tell every doctor, lawyer, and free-lance secretary how much they can charge as well? Then we have a state where politicians govern every aspect of our lives based on all kinds of dubious motivations.

That's typical of the type of arguments being put forth by payday loan industry opponents. Take one example or a relatively small number of cases and apply that to the industry as a whole. Totally fallacious. Then they talk about "predatory lending" which is completely hypocritical because a predator is a creature which leaves its prey no choice, whereas payday lenders only make loans to people who choose to use the product and in fact come to them. It's the opponents of payday lending who want to take away choice, and thus they are the ones who are predatory. And when they call payday lenders loan sharks that is outright libel or slander as loan sharks are people who use violence to collect on illegal loans, which is hardly the case with payday lenders.

Payday loans save lives in emergency situations and more generally save people money they would otherwise spend on bounced check fees, credit card late-payment and overlimit fees, and other such charges. That's why it's a very popular product and in fact very few complaints are made. It's an important option for people who don't qualify for cheaper forms of credit. Despite their success convincing numerous journalists, politicians and other professional critics who are looking for targets to criticize, the opponents of payday lending are really just rebels without a cause.

See also http://www.bloggernews.net/115609 and George McGovern's piece at http://online.wsj.com/article/SB120485275086518279.html

Thank you, Wade, now I've gotten my original comments posted in their entirety.

In case your last post was a reference to my argument, Mr. Schultz, I'd like to underscore that I was primarily advocating for "choice," something many neighborhoods don't have when it comes to financial services providers. Secondly, I think you should calm down a bit. You're quite rabid.

I tried to post this comment earlier and it hasn't made it up yet so I will try again - it may not be as brilliant as it was when the content was fresh in my mind ;) By way of disclosure, I am involved in the payday loan industry in Canada and I maintain a blog on the status of the industry up here.

In my view, there is an inherent contradiction in policy objectives when governments that seek to stimulate the economy by encouraging consumers to spend on credit (by lowering interest rates) choose to reduce the credit options available for consumers who have exhausted their access to traditional sources of financing.

This exhausting of credit options is inevitable under the monetary policies of both the U.S. and Canadian governments and this is where payday lenders come in.

To understand the value (or lack there of) of a payday loan, it is important to consider the cost of the alternatives that are available to those who use the product. Facing an unexpected bill or a check (cheque in "Canadian") that may bounce, an individual can choose between bank overdraft protection at 4,000% APR, the equivalent of paying $153.42 to borrow $100 for 14 days, a loan from an illegal lender at $200 for a $100 loan or a payday loan that costs $15 to $20 per $100.

The studies that support the above numbers are available on my blog if you are interested (I am concerned that too many links was the reason my first comment didn't make it up).

Payday loans are certainly not a cheap source of credit, but they are more affordable than the other options available. Unless our governments have a drastic plan to reduce our reliance on credit and improve our savings rates, Americans and Canadians are better off with this source of credit than without. Opponents of payday loans need to look past the sticker shock of the APR and focus on the actual dollar cost of the product versus the available alternatives.

This was long overdue.
Even the Repubs in the Ohio Legislature saw what a sham the payday loan industry is in Ohio.

The last gasp for the lenders was: "this will cost Ohio 1,500 jobs."

Please.