I‚??ve done it myself. More than once.
I‚??ve borrowed money online. I went on my computer, entered the required data, got an email within an hour that said I had been approved and had my money the next day.
I was just starting out as an independent writer and editor, and expenses were arriving before payments from clients. It was borrow a few hundred bucks or pay a ton in hot check fees. I did it three times in all. Twice I paid it back within days. Once, I made payments for the full six months.
Yes, it is expensive, but less than a bounced check fee and it didn‚??t¬†destroy my credit. It was a lot of interest, and those payments served as a tough lesson in the importance of getting and keeping the books in order.
But what‚??s important is the product was there. I needed cash quickly, and I got it even though I was just starting out on my own and had little to offer as collateral.
The people who always know what‚??s best for us are trying to put a stop to this. They say it would be better if these loans were not available since those who use them obviously don‚??t know how to manage their money or they wouldn‚??t be in this situation.
But the average loan is $388, the average customer is all paid up in three months or less, almost three-quarters of the loans are paid on time and fewer than 11 percent are charged off. Would any bank out there go for doling out $388 loans that are paid up in three months or less?
In other words, these are loans for the kind of people the people who always know what‚??s best for us profess to help. These are mostly for people who earn $35,000 to $75,000 per year. About a third are between 45 and 54, and nearly half are married. About half are white, a fourth African American and about 10 percent Latino. Two-thirds of the customers are women.
So what is the problem here?
Could some politically connected industry be losing money over these loans?
The business of providing credit to those on the financial edge is a big one. It generated $61 billion in 2012. Banks collected $12.6 billion of that through overdraft fees and deposit advances. The rest went to Internet payday lenders ($18.6 billion) and storefront lenders ($30.1 billion).
If Big Bank could get the government to knock out the payday lenders, it could collect a lot more of that remaining $48 billion.
So Big Bank turned to its best friends in Washington ‚?? the party of Elizabeth Warren‚??who responded to the ‚??financial crisis‚?Ě of 2009 with the Dodd-Frank financial services law, which made banks whole at significant taxpayer expense, enshrined the concept of Systemically Important Financial Institutions and designated for protection too-big-to-fail banks.
The same friends also created, within Dodd-Frank, the Consumer Financial Protection Bureau. And it is through the Consumer Financial Protection Bureau that the government is putting the squeeze on payday lenders.
The bureau, whose budget and officers are, by law, not allowed to be subject to congressional review, is proposing rules that could put as many as 80 percent of payday loan outfits out of business.
In the name of ensuring borrowers could repay, the new rules would require payday loan outfits to collect as much data from customers as banks do for home loans.
But the business model of these companies is to charge higher rates of interest to take on higher-risk customers. If 89 percent are paying and 71 percent are not a day late, these firms, unlike banks, can make a profit.
The bureau also wants payday lenders to have to notify borrowers before withdrawing money from their accounts to satisfy debt requirements. Banks don‚??t have to do this, and only a moron would. Provide 72 hours‚?? notice, as CFPB wants to require, and the worst customers simply would draw down their accounts to keep from paying.
Other rules would restrict borrowers to three loans per year and impose a mandatory 60-day cooling-off period between loans. The market has worked out decisions on loan frequency, with the result that the industry is thriving ‚?? or was.
The rules are not yet in effect, but harassment of the industry is well under way through what is known as Operation Choke Point. It is the Obama administration‚??s effort to make trouble for industries of which it does not approve, including payday lenders, gun shops, coin sellers and ammunition dealers. It urges banks to suspend or close the accounts through which these firms do business and otherwise makes it hard for them to do business.
This is on top of the routine trashing of the industry to the public and Congress. Richard Cordray, who himself was appointed illegally to head the CFPB, goes before Congress regularly to denounce ‚??debt traps‚?Ě allegedly sprung by the small-dollar lenders. A Federal Deposit Insurance Corporation official was caught on email insisting the agency always mention pornography when discussing payday loans ‚?? as in, ‚??high-risk industries, such as pornography and payday lending,‚?Ě which investors, it says, should avoid.
This has all the makings of a government-assisted plot by one industry to put another out of business. People want payday loans available. They prefer them, in fact, to lines of credit or hot check protection at their banks. Normal bank loans are not an option for most of these borrowers. Wiping out 80 percent of their loan availability will not help and could drive them to underground lending ‚?? another business that has not fared well against payday lending.
It‚??s time for common sense to take over, payday lenders to be left alone and Americans to be free to access the credit they need when they need it.