A Break for Payday Lenders?

Thursday, December 01, 2016

Conservative blog Hot Air takes note of some good news, in the form of a "legal snag" in an ongoing lawsuit challenging President Obama's fascistic "Operation Choke Point" program. The program entails government banking agencies pressuring banks to refuse service to industries the government deems undesirable. One such industry is the payday loan industry:

Payday lenders asked a federal judge in Washington, D.C., for emergency relief to stop what they called a coordinated effort by U.S. regulators to stop banks from doing business with them, threatening their survival.

In Wednesday night filings, the Community Financial Services Association of America (CFSA) and payday lender Advance America, Cash Advance Centers Inc said a preliminary injunction was needed to end the "back-room campaign" of coercion by the Federal Reserve, the Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency.

Advance America said its own situation became dire after five banks decided in the last month to cut ties, including a 14-year relationship with U.S. Bancorp, putting it "on the verge" of being unable even to hold a bank account.
The blogger at Hot Air properly expresses optimism about this news because of the precedent an unchallenged campaign against payday lenders would set for other industries that happen to be out of favor with whoever is in power.

That said, I must express concern about the massive success the left has had in demonizing this industry, which economist Thomas Sowell has written about on at least two occasions. Sowell has noted that the press has both misrepresented the fees charged by such lenders, and completely ignored the fact that they perform a necessary service.

Regarding fees, Sowell wrote:
Let's take this one step at a time. Whatever the merits or demerits of the rest of the argument, $45 is not going to trap anyone in a never-ending cycle of debt, even if they are making only the bare minimum wage. Personal irresponsibility in managing money can trap anyone, but that is regardless of whether or not they take out payday loans.

Now to the 460 percent rate of interest. You don't need higher math to figure out that $45 is 15 percent of $300. How did we get to 460 percent? Very simple: By distorting the actual conditions of most payday loans.


The 460 percent figure comes from imagining that the borrower is not just going to borrow the money for a couple of weeks, but is going to keep on borrowing every couple of weeks all year long.

Using this kind of reasoning -- or lack of reasoning -- you could quote the price of salmon as $15,000 a ton or say a hotel room rents for $36,000 a year, when no consumer buys a ton of salmon and few people stay in a hotel room all year. It is clever propaganda, but do people buy newspapers to be propagandized?
And regarding the service, Sowell writes elsewhere:
The alternative to getting a payday loan may be having the electricity cut off or not having money to buy some medication. It is worse to borrow from illegal loan sharks, who have their own methods of collecting.

While $15 per hundred dollars may sound like a high rate of interest, it is not all interest. The finance company incurs costs just to process a loan, and these costs are a higher proportion of the total cost for a small loan than for a large loan.

When Oregon imposed a limit of 36 percent annual interest on what a finance company could charge, that meant charging less than $1.50 for a hundred dollar loan for a couple of weeks. A dollar and a half would probably not even cover the cost of processing the loan, much less the risks of default.

Not surprisingly, most of the small finance companies making payday loans in Oregon went out of business. But there are no statistics on how many low-income people turned to loan sharks or had their electricity cut off or had to do without their medicine.
Sowell not only shows the payday lenders to be benefiting their customers, but rightly casts doubt on the whole idea of the government being the one to "save" people from them. He ends the first piece by noting the following:
Franklin D. Roosevelt's son extorted a $200,000 loan from a grocery chain that was under federal investigation -- and he never repaid the loan. Moreover, FDR spoke directly to the head of the chain to seal the deal.
And I'll end mine by recalling a government policy that essentially forces people into the leftist stereotype of payday loans:
Perhaps the best example of the [Capital Appreciation Bond] issue is suburban San Diego's Poway Unified School District, which borrowed a little more than $100 million. But "debt service will be almost $1 billion," [California State Treasurer Bill] Lockyer says. "So, over nine times [the] amount of the borrowing. There are worse ones, but that's pretty bad."
I am glad to hear of this lawsuit, but a positive resolution will be but the beginning of what we need to "drain the swamp" in terms of government interference in the economy alone. And, as the Hot Air blogger's repeated protestations that he is no fan of the payday loan industry show, we have similar swamps to drain in the minds of the public, including those sympathetic to capitalism.

-- CAV

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