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Aren’t We All Consumers?
Consumer advocates and consumer protection groups, just like any other special interest group serves a purpose and believes whole-heartedly that their points of view are the correct ones and should be considered. What I don’t understand is how consumers can be made to look like a completely separate population – but aren’t we all consumers? Anyone who has a penny to spend is technically a consumer. Have consumer advocates spawned because, collectively, we don’t have a voice, or are the laws of supply and demand not enough to offer protection? Consumer education seems to be a need, but the problem is knowing where to draw the line. Some groups that are dedicated to lobbying in the best interest of consumers also suggest that limits be placed on the costs of some products/services and in some cases they even suggest that particular products be eliminated. Unless you can somehow produce 100% of everything you use, you’re a consumer and consumption benefits us all whether or not we’re willing to admit it. Increased consumption allows for advancements in technology, greater conveniences, greater variety of choice(sometimes too great), lower unemployment rates and more. So, I would be inclined to believe that in many cases, placing additional restrictions and limitations on products and services is more likely to effect us negatively in another respect rather than providing greater protection us.
An example of that currently is the way banks have been reacting to their anticipated loss in fees from fewer overdrafts. There’s even been considerable speculation about the end of free checking accounts in an effort to reduce the costs of financial institutions. My checking and savings accounts are linked and I still get charged $7 for any automatic transfers that occur between the two accounts so I’m certainly not a fan of all the different fees associated with owning a bank account. However, banks do exist to make money and I’ve since learned to transfer the money myself instead of having my bank do it. As I’ve argued before, the best protection against fraud and abusive practices is education, however, I think there are exceptions for fee capping. In my opinion, those exceptions have to do with products and services that are basics for even the most simple of lifestyles or circumstances in which there is no choice of service provider. Most utilities, for example, are basic necessities that provide us with water, gas, electricity etc. and some of us find ourselves having to pay large balances each month just to maintain these services. I don’t feel that other, non-essential products and services should be subject to a multitude of restrictions because as consumers, we are able to choose based on likes, dislikes and preferences.
Main Street v. Wall Street
Main street versus wall street is probably one of the most overused analogies of present day. I’m not particularly a fan of the abundance of exaggerated and unnecessary comparisons of main street and wall street and how the the creation of rules to monitor one may not be beneficial to the other. The development and progression of the Consumer Financial Protection Bureau will most definitely have varying immediate effects on businesses, small and large. I also believe that big financial institutions will either inadvertently or purposefully penalize smaller companies and individuals that do business with them. On the flip side, we’ve witnessed the overwhelming influence that big banks have had over government as well as their audacity to attempt the absurd. As you’re probably aware, after the bailout, some banks opted to use our money to distribute huge bonuses and have meetings in extravagant places instead of lending it or using it to increase the employment rates. Of course, the unemployment rate is still around 10%, so I’ve certainly been wondering how exactly the new regulations placed on financial institutions will effect us all? How many businesses won’t survive “re-regulation,” further increasing the unemployment rate in the United States? I also do understand that the creation of new regulatory forces and the enforcement of rules is necessary to some extent, but this new agency will have the power to mold every type of financial and lending institution in some way, with the exception of auto dealers. This includes banks, mortgage companies, private education lenders, installment lenders, payday lenders, rent to own facilities and more. Let’s just hope that the agency which is designed to protect consumers doesn’t become the burden of those same consumers.
The Results Are In
I actually commend the FDIC for its efforts in creating a banking product that is less expensive than accumulating overdraft fees as well as attempting to accommodate those with short-term and temporary lending needs. Of course the perceived success of the program is most definitely relative, especially since the goals and focus were abruptly changed when the program was still in its infancy. There was no way that the FDIC would let the program fail by their definition and thus recreated their descriptions relating to the Small-Dollar Loan Pilot. In the most basic sense, the Small Dollar Loan Pilot was not profitable and seemed to be considerably higher maintenance than its traditional counterpart the payday loan. The pilot program is labeled as being safe, affordable and feasible but based on the requirements and approval procedures what it is not is convenient, practical or non-invasive.
In summary, the Small Dollar Program allows individuals who are in need of small amounts of cash to apply for loans of $2500 or less at a maximum APR of 36%. However, there were several requirements which I believe made the program inconvenient, impractical and invasive, not to mention the forced relationship building aspect of it which, according to the FDIC warrants it being labeled a success. One of the most unattractive components of the Small-Dollar Loan Program is that applicants are subject to a credit check for this short-term loan, so if you’re not fortunate enough to have a fair credit score, this product wouldn’t even be an option for you. If the product is truly intended for cash-strapped individuals with few other credit options, then it seems unfair to base denial or approval on credit worthiness. The typical small dollar payday loan provides more ease because it does not require a credit check.
Another potential flaw with the design of the Small-Dollar Loan Program is that it is assuming that those who are in need of short-term credit don’t understand their finances and aren’t financially literate. This is not always the case and the applicant’s need may be a result of sudden reduction in income, unexpected increase in expenses for the month or a family emergency. It may not be because of financial neglect or misunderstanding. The hoops that potential customers had to jump through for a small loan may not have been worth the effort.
In addition to financial literacy classes and having to submit to a credit check, it was also procedure for some of the participating banking institutions to require applicants to open a savings account which is probably more for the purpose of solidifying the relationship than for customer security. It would be interesting to know what percentage of customers actually kept a balance in the savings account or made additional deposits to them.
It is also quite possible that the needs of those consumers who took advantage of the small dollar loan are different from those who take out payday loans. There were two loan categories that were created; the SDL or small dollar loan and the NSDL or nearly small dollar loan. SDL’s are principle loan amounts for less than $1,000 and NSDL’s are principle loan amounts for more than $1,000 but less than $2,500. The average SDL loan amount was around $700, which is about two times more than what payday loan customers take out. Check out the report at http://www.fdic.gov/bank/analytical/quarterly/2010_vol4_2/FDIC_Quarterly_Vol4No2_SmallDollar.pdf
My Alternatives Part II
Throughout the years of payday loan bashing, the alternatives proposed by the opposition have not been very realistic or comparable to the original product. They’re not convenient, consumer friendly, inexpensive nor cut and dry. Now, it’s been brought to my attention that some individuals consider borrowing from your 401 (k) as an alternative to taking out payday loans. Although there are some payday loan customers who regularly invests in their 401 (k), it is not representative of that population. Someone who has a sizable, vested 401 (k) is not the typical payday loan client. I would also assume that most people who invest in retirement plans also have some form of liquid savings to use in case of emergencies. In my opinion, suggesting such an alternative that doesn’t meet the needs of most payday loan consumers is certainly absurd and diluted, but Don Griffin of Action 9 news in North Carolina believes it to be worth mentioning. It’s also amusing when there are tips made by consumer advocates that are similar to those made by the industry and the tips are easily dismissed and shrugged off until they are noticed by an industry outsider. The article also mentions that payday loans should be paid back right away and that you shouldn’t take out a second payday loan to pay back the first. However, these are also tips that any reputable lender would advocate and suggest to ensure responsible use of the product.
My Alternatives
Occasionally, a journalist or consumer rights activist will have a “revelation” and decide to share their thoughts on all of the great alternatives there are to payday loans. These alternatives are supposed to be comparable or more preferable to taking out payday loans. Perhaps this question is in rhetoric…but, if these alternatives are so great then why is the demand for payday loans so high? There are a handful of alternatives to payday loans but they’re hardly comparable.
The most common advice that I’ve seen blogged about and suggested is to appeal to your friends and family. I’m sure that this is an options for some but may not be a consideration for others for a number of reasons. Primarily, asking a friend or family member for a loan can be a recipe for disaster. Personal finances are just that…personal and confidential. If I am a private person, I certainly would not be comfortable doing such. If I’m unable to pay the loan back within the time frame agreed upon then there is a risk of straining, damaging or destroying that personal relationship. Or, perhaps the person who was gracious enough to loan the money also feels as though they now have the right to give input into how my finances are run. I certainly wouldn’t want my finances to become the burden of a friend or relative in any capacity.
Another alternative that I’ve been hearing more frequently are credit union loans. However, if I’m not already a member of a credit union it’s not an option for me at all. Or maybe I need the money immediately. My credit may not be the best because I’ve just had a rough couple of months or years. This option is only useful if 1)my credit is still decent 2)I have an active account at a credit union 3)I don’t necessarily need the money immediately and 4)I don’t mind opening a savings account at that institution. It doesn’t sound very convenient if all of the above conditions have to apply for it to be an option for me.
Here’s an alternative that I heard for the first time today. Get a part-time job or a second job in lieu of taking out a payday loan. Yes, because finding a part-time job in an economy where the unemployment rate is near 10% is a piece of cake. Yes, I’m being facetious. It’s even less likely to happen if you’re a single parent or if you’re also in school. How are you to find someone to care for your children 12-16 hours a day or find the time to work a second job if you have numerous other responsibilities? In theory a part time job is a good idea if I’m perpetually cash strapped but not an option for urgent matters and emergencies.
Credit card cash advances are also assumed to be preferable to payday loans but like a payday loan, it has to be something that’s used in moderation and used responsibly in order to be beneficial. It would be absurd to take out a $500 credit card advance and make the minimum payment on it for 6 years at a higher APY. A credit card advance should be paid off as soon as possible just as a payday loan should be paid off immediately.
Responsibility is Underrated
Personal responsibility and accountability seems to be a notion of the past. Why not take any responsibility for your own actions when you can so easily blame someone else for your mistakes, miscalculations or ignorance? We blame fast food businesses when we get fatter, we blame schools when our kids are failing, we blame the lender when we borrow more than we can pay back., we blame cigarette companies for our declining health, we sue McDonald’s because their mascot entices children to eat their food…seriously…what gives? Blaming others for our mishaps is so common place it’s practically a cultural phenomenon. The government can require all regulated industries to post every possible warning and combination of warnings that can be considered and you’d still have activists and politicians claiming that people are being unfairly charged or forced to consume 5000 calories a day in sweet, sugary treats and sodas. They’d also have you believing that gluttony isn’t a personal choice and borrowing is an illness or personality disorder. While temptation does exist, as human beings, we have the ability to problem solve and the capacity to educate ourselves for the purpose of making what we believe is the best decision. Instead, we take what’s known as the path of least resistance. Just do it…and blame someone else when you don’t receive the desired outcome. Then we’re relieved of all guilt, shame, accountability, and liability. Great! Right? I would say most certainly not. How long before we become this litigious, self-consumed, finger-pointing society or are we there yet?
Senator Hagan in all of her infinite wisdom had a method of persuasion that included telling the story of a woman whose $200 payday loan escalated into $8,000 in fees and six different loans. Of course this is probably the most extreme example that Hagan could find in her repertoire but it’s still a “true” story. Unfortunately, my thought wasn’t,”oh poor woman…how dare those lenders lend her the money that she asked them for because her husband was unemployed.” I’m sure this is the reaction she was hoping to get from her audience. Instead, my first thought was, “why would anyone take out five different loans if they didn’t have the means to pay back the first one?” My second thought was,”where would she have gone if payday loans weren’t available?” This story only proves that there is a need for short-term credit and it’s unfortunate that people will use payday loans when they need them but scream bloody murder when they get themselves in over their head.
In all honesty, how concerned would politicians be about consumer access to credit (or lack thereof) if there weren’t any institutions offering short-term services? I’m not saying that political interests influence all decisions but more often than not, in my opinion.
Fabricating and Sensationalizing
Apparently, there is an entirely new extreme that payday loan “haters” have established in an attempt to validate their opinions. Okay, maybe it’s not so new, but it’s certainly extreme. Creating false associations and spewing misinformation for the sole purpose of making the industry look undesirable is as low as it gets. If you’re a consumer advocate and you maintain that the industry is despicable, then why is there a need to create falsehoods in order to prove your point? It certainly wouldn’t make your points any more valid and in fact would make you the lesser reliable source. Comedic relief-yes…reliable source-most definitely not.
The Predatory Lending Association, which, by the way isn’t a real organization, appears to have spent a lot of resources developing a website to mock the Community Financial Services Association of America. I’m kind of disturbed that they didn’t focus any of their resources on actually educating individuals on how not to get into a bind or offering information on general financial literacy topics. Instead, the website calls payday loan customers “poor” and claims that lenders disproportionately target minorities. Nevermind the historically uneven distribution of wealth stemming from once acceptable discriminatory practices such as redlining. But I’m sure the topic of why the distribution of wealth is so uneven will never be revisited or discussed by “organizations” such as the Predatory Lending Association. The website doesn’t appear to have been updated in three years. You should check out the site at http://www.predatorylendingassociation.com/ and let us know your thoughts.
“Haganism”
Ha-gan-ism n. 1. -the state of being Hagan 2. -to support or believe that the extreme limitation of short-term credit will result in an improved lifestyle for consumers. 3. -to insist that banking overdraft fees should not be limited, as they are a greater alternative than short-term loans.
Most of us who stay abreast of the happenings on Capitol Hill and the shenanigans relating to financial “reform” are aware of the Hagan Amendment 3744 which proposes to limit short-term loans to 6 or fewer in a 12 month period. The need to protect consumers in light of the financial crisis and continued lack of confidence from consumers is completely understandable. However, I have an increasing concern that politicians have no knowledge of the complexities of business…profit, loss, risk, cost-benefit, supply and demand etc., nor an understanding of consumer wants and needs. Further restricting access to credit in my opinion isn’t meeting anyones needs and will benefit no one. Of course, that doesn’t mean that reform isn’t welcomed by the payday industry as you’d probably be lead to believe by consumer advocacy groups founded by the Sandlers-whom-by the way-were on Time’s list of 25 people to blame for the financial crisis. But I’m sure I’ve mentioned that before. Again, the opposition stems from every reform measure involving either dramatically decreasing the availability of credit (which hurts the consumer) or drastically decreasing the APR of short-term loans. The irony is that no resources are being dedicated to the mandatory availability of financial education resources to consumers. In addition, no matter the limit placed on loans, there will still be an applicable APR per federal guidelines. Since much of the hoopla about payday loans is based on the associated APR and not fees, I have a feeling that the opposition will still not be satisfied.
That being said, are these amendments just for show and tell or are there actually considerations as to how they will affect the current financial climate and economic atmosphere? Or maybe there is some consideration but an absence of sincere concern unless there is a major stakeholder in the senate. Why is 6 the magical number in a 12 month period? If Hagan’s goal is really to protect consumers then shouldn’t the number of overdraft services extended per customer, per year be included in her definition of covered loans?
36% “Small-Dollar Loan” Not Profitable For Banks…No Kidding
The FDIC small dollar loan pilot program was a development which was launched as a trial to determine the feasibility of banks offering a short term, small-dollar loan alternative at a 36% annual percentage rate. For many of us who are in the financial services industry, especially those who understand the costs and risks associated with offering small-dollar loans, the preliminary results were no surprise. The FDIC decided to change its focus of the program to observing and reporting how banks can successfully offer affordable small-dollar instead of assessing the profitability. If for-profit lenders are only able to gross $1. 38 for every $100 lent, there is absolutely no way the businesses would be able to stay afloat.
With the FDIC pilot program, there were a number of items and reporting which suggested that a full-fledged program wouldn’t be sustainable long-term in the banking environment. In addition, the program doesn’t seem to appeal to the same customer base as those of payday lenders. In the first year, participating banks originated 16,027 and nearly half of those loans were in amounts in excess of $1,000. The average amount of all loans made under $1,000 was still $659.42, which is about twice the average of loans made by traditional payday loan institutions. Another problem with the pilot program is that banks were pulling FICO scores to determine eligibility which is not a procedure commonly found within the payday loan industry, making it more difficult for individuals to qualify. One of the participating banks only approved 14% of the applications in the first two months of the program, denying 493 of the 574 received.
The preliminary results prompted the FDIC to encouraging the banks to use it as a relationship-building tool in which to suggest other products and services. The FDIC also considered the loans as part of the banks Community Reinvestment Act lending activities. In other words, the service will be used to help expand relationships and expand credit to low and moderate income neighborhoods but is not necessarily considered a profitable product.
Payday Loan Reform In Canada? How About Us?
We don’t all have to agree on every regulatory detail pertaining to short-term lending but can we at least agree that payday loans are such a popular product because there is a demand for them? Why are so many consumer advocates dead-set on eliminating the industry in its totality, especially without any solutions for a comparable replacement product? Time and resources would be better spent by coming up with legislation that will better meet lawmakers concerns as well as determining why so many Americans are finding themselves in a situation in which short-term credit is now a must-have.
After much debate and discussion, the Canadian Province of Ontario legitimized the payday loan product by coming up with terms that were both consumer friendly as well as profitable for businesses. Although there are some parts of the legislation that may not be preferable to lenders in the states, it should be noted that the guiding principles are to be desired and Canada has made huge strides in the right direction. The principles that aided in guiding the legislation include 1)providing access to credit that will provide reasonable consumer protections while allowing a viable market to exist 2)harmonization to ensure consistency in legislation 3)moving slowly and cautiously to be sure that reasonable measures are implemented and assessed and 4)clear objectives with a documented understanding on an issue before decisions are made.
The Canadian Payday Loan Association or CPLA touched on a number of other subjects pertaining to the industry. One of the subjects highlighted is the limitations placed on the amount of money advanced. In the States, many laws and regulations that take effect focus on limiting how much a borrower can obtain during a specific time frame and some states have even created databases for the purpose of keeping track of PDL activity. The CPLA see’s this as a declination of access to credit and suggests that the burden of risk is the lenders and not the borrowers if the loan isn’t paid. The CPLA goes on to say that no lender can afford to make loans that are not repaid and should therefore be capable of creating their own lending criteria.
See http://cpla-acps.ca/english/submissions/CPLA%20response%20to%20Ont%20consultation%20paper%20July%206%2020 07.pdf for the full paper.