Payday Loans: Fight Hots Up

[Apr 20, 2009.]

 

Like a drunken brawl, the scrap between consumer groups and payday lenders this week rolled down the steps of the Capitol and into the opinion columns of the press. The New York Times and the Wall Street Journal both published payday loans comment pieces, and each took the side it obviously would.

Payday Loans Attacked

First up was the New York Times. In an editorial last Monday, entitled 391 Percent Payday Loans, it called payday loans 'burdensome' and 'pernicious'. And it accused those who back the bill currently under consideration by Congress (the Payday Loans Reform Act of 2009 (H.R. 1214)) of sponsoring 'an ersatz reform'.

It continued: "The overdraft fees that some banks charge are scandalous and deserve more Congressional scrutiny. That does not mean an industry that makes $50 billion a year in loans should be touted as an alternative."

Payday Loan Statistic May Be Dubious

Where does that figure of $50 billion come from? It's not a widely available statistic. In fact, when Ms Jean Ann Fox, who is Director of Consumer Protection at the Consumers Union, recently gave evidence to a payday loans Congressional hearing, she said that in 2005: "Consumers paid almost $5 billion for loans."

According to page three of Ms Fox's payday loans hearing testimony, which is published online, her five billion dollar figure came from a 2006 report from the Center for Responsible Lending, perhaps the leading campaign organization against payday loans.

One Thousand Percent Inflation in New York?

So where did the New York Times come up with $50 billion? Did it really just add a zero by mistake? The trouble is, its army of fact checkers is legendary, and its reputation for accuracy lends authority to every figure it quotes. Stand by for all anti-payday loan campaigners and bloggers to start quoting that number whenever fees and interest rates are mentioned.

Payday Loans In Free Market

The Wall Street Journal's op-ed piece was by Robert DeYoung, who teaches finance at the University of Kansas, and was called Congress Takes Aim At Payday Loans. Predictably, it took a more free market line on payday lending.

Mr. DeYoung quoted a George Washington University study that was published in January of this year. He said that its author, Gregory Elliehausen, "…found that payday borrowers make informed choices. About half of the 1,173 payday borrowers he surveyed considered other credit alternatives -- such as bank, credit card, or personal loans -- before taking out a payday loan. Over 80% lacked sufficient funds in their bank accounts to meet their expenses, so by taking out a payday loan they avoided expensive checking account overdraft fees. Nearly 90% said they were either very or somewhat satisfied with the transaction."

Payday Loans a Question of Choice?

Mr. DeYoung concluded: " Being a paycheck behind on our bills is a situation none of us wishes to find ourselves. But when that situation occurs, the more options we have at our disposal, the better. So long as both sides of the deal have full information, these choices are better left to households and their creditors."

 

About Author:

Peter Andrew has been writing about -- and for -- business for more than two decades. For the last couple of years, he has found himself increasingly specializing in the U.S. financial sector.