The Paradox and Problem of Payday Lending

A customer enters a Payroll Advance location in Cincinnati. (Al Behrman / AP)

A customer enters a Payroll Advance location in Cincinnati. (Al Behrman / AP)

New Orleans  Here’s an irony that is stark, yet impossible to really appreciate or enjoy. The Atlantic billed its most recent issue as “The Money Report.” The cover article was built around the premise that almost half of the American people have trouble coming up with $400, when there is a financial bump in their road. There was another article called “Loan Shark, Inc.” which was a probing and somewhat sympathetic article about the payday lending industry that mentioned that the average payday loan is $350, about the same number repeatedly cited in “The Shame of the Middle Class,” yet of all the tales of woe from its author, there was no mention of his ever going so low as walking through the doors of a storefront payday lender or the portals of one online.

Without a word of warning or explanation, it was assumed that clearly payday lenders were all about exploited lower income families, not the presumptuous middle class. The real line of demarcation they were unwilling to draw is that even if half of the middle class finds themselves in dire straits from time to time, it’s not catastrophic since they still have other informal places to go with family and friends or selling assets or reducing their footprint, while the poor are forced into predatory fringe financing once there is no place else they can go.

In the classic dilemma of neoliberalism, the payday lending article worried around the issue of alternatives between the devil and the deep blue sea. The polarity was presented as either payday lenders or worse, loan sharks, shysters, and gangsters. The role of government was limited only to regulation, and regulation was presented as problematic because when government stepped up to protect consumers from predatory practices, the marginal and inefficient payday lending industry shut its doors. In the USA New York and other states were given as examples of the industry fleeing when interest rates were reduced, and rather than applause there was handwringing. In Canada, where ACORN has been a dog on a bone chasing predatory lenders for over a dozen years, a 30% limit on interest rates in Quebec saw the payday people fleeing like rats on a sinking ship. ACORN has backed caps, though not that low, and industry record sharing that prevents multiple loans to one customer in the same period, as well as restrictive zoning limits in our neighborhoods among other reforms. ACORN also backs postal banking which The Atlantic gives short shrift.

Their best recommendation comes from what they admit are “more-modest reforms” in Colorado in 2010 that were achieved “by reducing the permissible fees, extending the minimum term of a loan to six months, and requiring that a loan be repayable over time, instead of coming due all at once.” Half the payday lending operations closed, but the ones that stayed open ended up with more than the average 500 annual customers and borrowers paid “42 percent less in fees,” and defaulted less “with no reduction in access to credit.” One hand clapping, I guess.

The author was right to understand that the real problem for families is desperately needing $350 with no other alternatives. Why are we wringing our hands about a predatory industry rather than stepping up and understanding that this is a collective responsibility? These are the kinds of problems that emergency assistance grants in welfare offices used to try to meet. The absence of a continued public response makes these private problems, increases hardship and inequality, locks people in a debt trap, and has led to the creation and growth of an industry where competition is irrelevant, inefficiency is rampant, and even reformers wring their hands and settle for sorry solutions.

Public welfare is exactly that, faring well for the public. When are we going to stop embracing the 19th century and start building the 21st?

Facebooktwittergoogle_plusredditpinterestlinkedinmail