Payday Loans: More From Congressional Hearing

[Apr 12, 2009.]

 

The congressional hearing of April 2nd into payday loans provided such a great forum for lively debate that this blog is visiting it again this week.

Payday Lenders Accused
The House Subcommittee on Financial Institutions and Consumer Credit held the payday loans hearing in order to gain evidence for the proposed Payday Loans Reform Act of 2009 (H.R. 1214). Last week's pay day loans news blog covered some of the statements read by committee members. This week's examines evidence on payday loans from two key witnesses, one from each side of the debate.

The first witness of the day was Ms Jean Ann Fox, who is Director of Consumer Protection at the Consumers Union. She said: "The essential features of a payday loan meet all the definitions of predatory lending, making them hazardous to borrowers. Loans are made without consideration of the borrower’s ability to repay. Interest rates are exorbitant, starting at around 400 percent annual interest. Loans come with balloon payments, due in full on the borrower’s next payday, not in affordable installments."

Payday Loans Critics Fail Math Test
Earlier, Ms Fox had pointed out: "Recent analysis of state regulatory and industry data by the Center for Responsible Lending found that 24,803 payday loan outlets made over $28.2 billion in loans in 2005, up over 100 percent in five years. Consumers paid almost $5 billion for loans."

These figures do not sit well with a press release about payday loans, which was issued after the hearing by the Center for Responsible Lending, the very source that Ms Fox quoted. It says: "Many states have banned rollovers, a practice that nets payday lenders repeated interest payments of about $50 on a $300 loan, without ever reducing the principal the customer owes. But the average borrower ends up paying about $500 in interest on top of the original $300, whether or not rollovers are banned."

Those figures for an 'average borrower' have been picked up already in at least one blog advocating greater regulation beyond the provisions of the Payday Loans Reform Act,

However, if, as Ms Fox asserted, payday lenders lent $28.2 billion in 2005 and collected nearly $5 billion in revenue, that makes a return of less than 18 percent. How can the 'average borrower' be paying 167 percent, which is what $500 on a $300 loan comes to?

Payday Lenders Disadvantaged?
Indeed, if the payday loans industry charges less than 18 percent interest on the loans it makes over a full year, how fair is it to require it to say that its APR (annual percentage rate) generally starts at 390 percent?

Payday Loans: Just Another Form of Rental
Another witness at the congressional hearing--this time representing payday lenders--was Mr. Troy McCullen, president and CEO of Finance America of Louisiana. He acknowledged that payday lenders have been a mixed bunch. He admitted: "There have been good and bad operations, just as in any industry."

Seeking to justify payday lenders' rates, he continued: "I compare our business to an AAA Rent-All store. You can buy a hedge clipper at Home Depot for $100, or you can rent it from AAA for $20. Our customers rent in the same way. It's just that our product is money.

Payday Loans Can Save Money
Mr. McCullen went on: "An example of how someone might use our service is if they bounced three $50 checks. The total fee would be over $150. If the same person borrows $150 from one of our stores [to avoid going overdrawn], the fee is around $30. One hundred-and-fifty dollars versus $30. It's that simple."

Opposition from All Sides to Payday Loans Legislation
Meanwhile, in a statement sent to this blog, the Community Financial Services Association of America (the CFSA), which is an industry body representing payday lenders, has condemned the proposed Payday Loans Reform Act.

D. Lynn DeVault, the CFSA's president, commented: "CFSA has a long-standing record of advocating for responsible regulation of the payday advance industry and strong consumer protections for our customers. But this bill goes too far, most notably in establishing a national fee cap for payday loans, one small segment of the short-term credit market. We're aware of no other short-term credit product that has a national fee cap, certainly not bank and credit union NSF and overdraft protection fees or credit card late fees."

 

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.