New Orleans We have been fighting payday loans hammer and tong for years now, particularly under the leadership of ACORN Canada, but increasingly in the USA as well. The problem for our lower-income constituency defines the nature of what it means to have a predatory product. There is nothing good about a payday loan, except that it may be a necessity for the family that needs the cash and has no other way to get the credit. These are not products that are bought based on any calculus of rational self-interest, but instead speak to survival or immediate need and crisis. In Canada there are ACORN studies that establish an average user goes back to this well more than a dozen times and that is at the heart of the financial model in the industry.
Several months ago ACORN leaders met with Sheila Bair, the head of the Federal Deposit Insurance Corporation (FDIC), and listened to her explanation of a new advisory that she had issued encouraging other financial institutions to provide competition on more reasonable terms to the avariciousness of the payday lending industry. Bair is right on this one. You have to have a horse to beat a horse. Just saying payday lending sucks is not enough to reform the market.
It is a short story then, and we have also been on the prowl for alternatives including some creative conversations we are having with Working Assets on a web-based partnership we might be able to use and H&R Block on utilizing their new bank as a way to offer real products and competition in this market. Last week H&R Block sent a notice over that they are taking the plunge and rolling out another set of product features on their debit card that would allow short term credit response at 9%. Mark Ernst, H&R Block’s CEO, had given me advance warning that something like this might be coming, so we’re going to take a hard look and see if this represents simply a response or a real alternative. Either way we are desperate.
The Times ran a piece the same day almost on an experiment called GoodMoney that seems to be a joint venture between Goodwill and Prospera credit union in Wisconsin. The families featured shared horrific tales of interest rates at an annualized rate of over 500% and payments to service a loan of $1200 running in interest and fees almost $600 per month. Get a gun or pass a law — this can not be allowed! The GoodMoney thing may be allegedly non-profit but only seemed to reduce the effective rate to about 250% per year and though lowering the load, still was leaving a steep road to climb. Prospera was claiming that costs were so high because of bad loan write-offs and other items like database work, that God knows is a pain in the back quarters but still hardly justifies the fright at these rates.
The best news is that finally we may be getting closer to a place where we can really leverage this industry because as soon as we can prove there is a real horse that will run in this area, these predators are going to be out of business.