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Saturday, August 16, 2014

Pay Day Loans and John Oliver

I loved John Oliver on the Daily Show, and kept meaning to catch up with him on "Last Week Tonight With John Oliver."  This morning, I went to the youtube video on payday lending -- from last Sunday night's show (8/10/14) that his site steered me to.  I found it mostly annoying.

Googling it, I see a number of articles from the mainstream press that express their joy that someone big has finally shone a spotlight on this issue.  E.g. LA Times, Huffington Post.

I gleaned the following facts from the video:

-- A payday loan is supposedly to be a short term loan for an emergency, where you agree to pay the money back on your next payday.

-- There are more payday loan places than McDonalds restaurants in the U.S.

-- They use attractive pitch-people, including Montel Williams

-- They often charge several hundred percent interest (on an annual basis).  He mentioned an example where the rate was 1900%.

-- They have a strong lobbying arm.

-- Oliver had an interesting clip of a Texas legislator defending the payday loan industry, and another Texas legislator calling him out because he happened to own a dozen or so payday loan outlets.  The punchline was that the second legislator -- Vicki Truitt -- very soon thereafter turned around and became a lobbyist for the payday loan industry.

-- A majority of people who use payday loans say that they felt taken advantage of, but a majority also said they really needed it (that's not an exact quote, but it was something like that).

-- Legislating against it (per Oliver) is like whack-a-mole -- Ohio banned payday loans, but in stepped something called mortgage loans.  In other states, legislation is circumvented by places that sell short-term auto loans.  Other payday lenders have managed to affiliate themselves with Indian tribes, and thus benefit from sovereign immunity.

-- A large percentage of loan-taker are NOT able to pay the loan off by the next payday, and end up taking out a new loan (I guess to pay off the old loan).

-- A payday loan employee training manual portrays the business as a cycle -- the customer gets the loan, can't pay it off, and then gets another loan.  In the end, the debt (including interest and fees) is a multiple of the money that was actually borrowed.

-- Often, the cycle goes out of control, and the debt-taker needs to find other means -- e.g. pawning stuff, going to family members -- to pay off the loan.  The implication is that this is what the people should have been doing in the first place.

Sarah Silverman came on at the end in a "counter-ad" where she suggested doing "Anything Else" rather than get a payday loan.  That included getting paid to urinate or defecate on people.

That's what I remember from one viewing.  But it's stuff that we middle-class and rich people already know.  I've noticed those places, and never in a million years would go to one.  If I need money, I'll take out a loan on my house, I'll borrow money from my retirement plan, I'll accept another low interest introductory rate credit card offer, I'll dip into the line of credit at my bank (on a very short term basis) or (if for some reason none of these work out, which has never happened), I'll ask one of my relatively rich or middle class family members for short-term help.  And I suspect that John Oliver and Sarah Silverman are even more removed from the problem than I am.

So it's easy for us rich and middle-class people to hate payday lenders, because they take advantage of people who are less fortunate than we are.  It's all the more troubling because this is the "working poor" we are talking about -- people who have paychecks and might be supporting families, but are nevertheless poor.  It's easy for us to run around yelling about how it must stop.  But I didn't hear any real solutions.  "Anything else" is not a solution.  Obviously, the people who take out payday loans have made that calculus -- they have their pride, and they hope that they will be able to pay the loans off without having to go to family members.  Often, they've already done that.  Yes, if they realized that they would have to pay $700 on a $200 loan, they would have gone to their families for the $200 in the first place.  But they had their dignity, and hoped it wouldn't come to that.  And dignity is probably why they don't go out and try to get paid for defecating or urinating on people, Sarah.

This is the first time I've ever thought about these issues, so rather than write out all of my thoughts, I'll just link to economist Tom Lehman's defense of  payday lending here, and then say a few things about what I think it probably says (I don't have time to read it myself, but I'm sure it's worth reading). 

The bottom line is that if we believe in the free market, payday lending should not be a problem.  The solution is not "anything else," but it's for rich do-gooders like Sarah Silverman and John Oliver to open up their own payday lending shops and run the business the way they think it ought to be run.  The fact is, payday loans make a lot of sense -- if you know you'll get some money next paycheck, and you're willing to sign that over to me, I'm willing to lend you money.  There must be a reason that they are so ubiquitous and profitable -- they are filling a need.  A need that was formerly filled by loan sharks.  There was a reference to "loan sharking" toward the end of the video, but it contained the implicit assumption that loan sharking was no longer around because we had made it illegal, and the suggestion that payday loans are just legalized loan-sharking.  In fact, I'd have to guess that the rise of payday lending can be credited with the decline of loan-sharking.  If we end up regulating payday lending out of business, you can bet that loan sharking (yes, *gasp* -- illegal loan sharking!) will rise to meet the need.   

The funny thing is that this is clearly a market where the barriers to entry are very low.  The competition are a bunch of people who are hated for their usurious rates, and it should be easy pickings for the good guys to come in and start a chain that would put them all out of business, by simply charging lower rates.  If Oliver is to believed, charging a mere 100% (APR) might well make you the best deal in town, and should ensure a healthy profit margin as well. 

There are a lot of "markets" where I support government intervention.  Pharmaceuticals, for instance, where the government has intervened, although not in a very smart way.  There are places where consumers just don't have and can't get enough information for the free market to really work (although the internet is making things better for most consumers and most products on that score).  But payday lending is one where consumers really should be able to watch out for themselves.  There were no allegations in the video (or if they were I missed them) that there were hidden fees and that the consumers weren't told exactly what they were getting into.  Yes, the business takes advantage of people who are in dire straits, but it also provides relief for those people.  The people have done the math, have considered the alternatives, and are choosing the most palatable option.  Yes, it sucks for them, but if it's the most palatable option for them, what business do the rest of us -- who never find ourselves in those circumstances -- have trying to take that option away from them?

It seems to me that there is an analogy to be drawn between payday lending and the pharmaceutical industry.  Patented drugs often costs patients thousands of times what they cost to produce.  The patients (or their insurance companies, or medicaid, or medicare) have no choice but to buy the drugs, at the prices that pharma charges.  But those prices are outrageous, you say.  The drug companies are preying on the fact that paying those prices is more palatable than getting sicker and sicker and dying.  I hope John Oliver's next "expose" is on that system.

I wish I had a bit more time or money -- I'd get into the payday lending business myself.  It really could be a very beneficial to a lot of people.  And since I'm a nice guy, I'd only charge reasonable rates, and would have reasonable payback plans, etc etc.  And if I had a LOT more money, I'd go into the pharmaceutical business.

After writing all that, I found this, which makes some of the same points, quite eloquently.  I don't think I'd ever heard of The Washington Free Beacon before, but I see now that it's a deeply conservative publication.  I hope that doesn't mean I am becoming a conservative.  If you're a liberal, and understand why John Oliver and Sarah Silverman went too far on this one, please let me know.  And if you want to start a campaign to get them to start a humane payday lending business, I'll be there to help out.

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If you've gotten this far, maybe you would be interested in my views on other matters, like free speech and Charlie Hebdo and Charlie Hebdo and Boko HaramSony's "The Interview, as well as my question "Why Should I be Charlie?" (featuring a hilarious clip from The Daily Show).

  

2 comments:

  1. Did you know that even though you have written a personal check for a payday loan, a lender cannot arrest you for writing a bad check if you don't have the money in your bank account to cover that check or electronic debit. See Consequences Of Not Paying Back A Payday Loan to learn how to give these loan sharks a taste of their own medicine!

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    Replies
    1. Thanks, it's true that the payday loan company does not have an immediate remedy, but in the end this is not all that helpful, because the debt is still there, and the loan company can still turn it over to a collections agency. Here's a quote from the linked article:

      "Generally, most states in America don’t consider a postdated check to be a deceptive act or an issue that falls under the bad check laws after the check is cleared on the date it was intended for. Due to this, if your payday loan was founded on a postdated check and, due to unforeseen conditions you don’t have the cash for it to clear on the date agreed, then the loan business cannot lawfully file any deceptive charges against you. Instead, they must go through the services of a debt collection agency to redeem their loss.

      "However, not paying on this debt can eventually result in a suit in the long run. If they happen to win, a ruling will subsequently be set against you which will contain the the sum you’d owed along with the collector being able to seek a garnishment order notifying your bank to concede the funds to them."

      I still think the best solution would be for do-gooders like Sarah Silverman and John Oliver to go into the payday loan business. There are clearly people out there that need that kind of help (i.e. there's a market), and if someone can do it without all the charges and ridiculous interest rates, then they should.

      That would be an area where decency and capitalism could intersect.

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