Wednesday, March 10, 2010

The U.S. Senate Exempts Payday Loans from Regulation

Today’s New York Times reported that “Payday loans get exemptions in Senate bill”. No surprise there. That was/is par for the course. Just a few comments on the subject:
  • In a payday loan, you receive an immediate cash loan against your employment paycheck. The rate, according to the Times, is generally around 400%. But if you count late fees and rollover fees, the rate is about 600%.
  • Who borrows under these conditions is clear: the absolutely, totally desperate. The Times said that payday lenders charge “exorbitant fees for low income consumers with little financial sophistication.” But that is The Times maligning the poor. I’ll match the financial knowledge of any payday borrower against any Madoff “investor” any day. It is just that the poor are desperate. They have no option, no choice. So they yield.
  • The Times made it sound like one senator, Bob Corker of Tennessee, was the culprit behind the exemption. Don’t you believe that spin. Everyone was involved. Dodd of sophisticated Connecticut, the chairman of the Senate Banking Committee, “went along in an effort to reach a bipartisan deal.”
  • The name of the lobbying organization on behalf of the payday lenders is the Community Financial Services Association. I like the name, especially the way the word “community” is used. Reminds me of that old Twilight Zone episode when the main book of aliens, titled “To Serve Man”, turned out to be a cookbook
  • ”Steven Schelein, a spokesman for the Community Financial Services Association, said the industry should not be dragged into regulatory reform.” Of course not. God forbid.
  • ”In 2006, Congress adopted a bill ... to cap at 36 percent ... on loans to active-duty members of the military and their families ... The industry says a cap would be devastating to its profitability”. Note the wording. The cap would be devastating not to the industry, but to its profitability. Also, a 36 percent loan to “active-duty” members of the military is considered fair and reasonable. Imagine the Fed raising the interest rates to 1/2 of that, or a mere 18%. The entire financial system would come to an immediate halt.
Finally, the payday loans are not risky loans to bad credits, where the high interest rate would compensate for the potential high default rate. That is the junk bond business model. The payday borrowers have an iron-clad collateral: their employment paycheck, which they will receive at most in two weeks. So charging these borrowers 600%, now with the blessing of the U.S. Congress, is beyond simple robbery. It is also rape.