Why don't payday loans violate usury laws? [ed.]

[Renob]

[QUOTE=elbows]
Isn’t the real question why doesn’t anyone care that the weak and vulnerable among us are being preyed upon by the strong and the mighty?

Perhaps we’re all savy enough to avoid this trap but what of the less savy? It seems like the usury laws were there to protect them from this very thing.

Is it really okay for us to just stand by and watch? We see the trap, how cold and heartless it is and do nothing to change it. How is that okay?
[/QUOTE]

Ah, modern liberalism at its core. “We, the smart and moral, need to make laws because other people are too stupid or immoral to run their own lives.” How paternalistic.

You may think you are smarter than the people who use payday loan places, but I guarantee you that at the very least, those folks know more about their own financial situation than you do. They are also adults, who are capable of making a decision on their own. They go into these places and are fully aware of what they are getting into. They know the fees, they know the payback period. They willingly make a decision to enter into this arrangement. But you think that you are so much smarter than they are that they should be prevented from doing so. Well, since you are sitting there with your high IQ, what’s the alternative? These people go to these places for a reason. If payday loan places aren’t allowed to exist, what do you propose to replace them with?

[Ludovic]

And it’s my understanding that microloans are expensive but not as expensive as payday loans. At the most microloans are %100 (although I’ve never heard of one that was, and some can be in the 30’s) whereas payday loans can exceed %300 and are typically never below %100. So microloans are in the same league as payday loans in the same way that credit card interest is in the same league as microloans, i.e. not very much.

[Anachronism]

[QUOTE=Renob]
Ah, modern liberalism at its core. “We, the smart and moral, need to make laws because other people are too stupid or immoral to run their own lives.” How paternalistic.

You may think you are smarter than the people who use payday loan places, but I guarantee you that at the very least, those folks know more about their own financial situation than you do. They are also adults, who are capable of making a decision on their own. They go into these places and are fully aware of what they are getting into. They know the fees, they know the payback period. They willingly make a decision to enter into this arrangement. But you think that you are so much smarter than they are that they should be prevented from doing so. Well, since you are sitting there with your high IQ, what’s the alternative? These people go to these places for a reason. If payday loan places aren’t allowed to exist, what do you propose to replace them with?
[/QUOTE]

[QUOTE=KidScruffy]
I hope I’m not bringing back a thread that pretty much ran its course, but I used to work as an office manager of a payday lending store here in California. Our max loan was $255, and $300 was paid back (next payday, but no more than 15 days), and we would refer to the $45 as a “fee” rather than interest. We would also allow people to pay $45 on the loan due date to extend the loan another 15 days. We had one person who borrowed $255 and paid the $45 “fee” religiously every two weeks for over two years.

[/QUOTE]

Anyone who pays the equivalent of 400% annual interest is either in a horrible situation or has very poor financial management skills (or if you prefer ‘Stupid’). Anyone who does this for a long period of time is defiantly in the second category like example given by KidSkruffy. Do you think someone who pays $2340 over two years on a $255 loan is intelligent and knows what he’s getting in to? (And he still owes the original $255)

I don’t claim to have the answer but if these kind of rates where illegal either they would charge more reasonable rates or not exist. If they didn’t exist perhaps it would force people to be more responsible with their money since they didn’t have the option of a loan on very poor terms.

Personally I consider myself a libertarian but I am torn with the feeling that some people need to be protected from themselves.

[mangeorge]

I understand that the real default rate, where the loan company never recovers it’s money, is very low. Due to new bankruptcy laws, it’s almost impossible for someone to get out of repaying the loan. The loaner simply goes after any source of income the borrower might have, and collects the loan amount plus more fees. In the end they almost always get the money.
True?

[Renob]

[QUOTE=mangeorge]
I understand that the real default rate, where the loan company never recovers it’s money, is very low. Due to new bankruptcy laws, it’s almost impossible for someone to get out of repaying the loan. The loaner simply goes after any source of income the borrower might have, and collects the loan amount plus more fees. In the end they almost always get the money.
True?
[/QUOTE]

I’m doing some research on the payday lending industry now, so perhaps I can answer this. For one, payday loans are unsecured loans. If they can’t cash the check, the payday lenders (from what I understand) write off the loan. According to one analysis, the default rate for these loans is around 15.1%. For newer stores, it was 24.8%. That seems to be much higher than the loan default rate of other lending institutions.

[Gfactor]

[QUOTE=Renob]
If they can’t cash the check, the payday lenders (from what I understand) write off the loan.
[/QUOTE]

Obviously not right away (I’m sure you didn’t mean it like that). Most of them have in-house collection people who will start calling references listed on the loan application; some will threaten borrowers with criminal prosecution (“you bounced a check–that’s a crime!”); some report the bad debt to credit reporting agencies; some will sue the borrower and take a judgment.

Regarding the default rates, some claim they are overstated, but even if they are, they’re probably still higher than many other kinds of loan:

Credit quality data for specialty payday lending entities is lacking since most payday lenders are small, non-publicly traded firms. Review of publicly traded company reports indicates that some specialty payday lenders have recently recorded quarterly annualized net charge-off ratios as high as 83 percent,3 far higher than the typical annualized net charge-off ratio for subprime credit card lenders. Recent charge-off ratios for subprime lending institutions’ credit card portfolios, while still high, typically do not exceed 20 percent. Higher default rates for payday loan portfolios indicate that loan loss reserves and capital levels that may be adequate for some other forms of subprime lending may not properly cover the greater risks associated with payday loans.

FYI: An Update on Emerging Issues in Banking | FDIC.gov

*But see, * http://www.responsiblelending.org/issues/payday/briefs/page.jsp?itemID=29557872

[Carnacki]

[QUOTE=mangeorge]
I understand that the real default rate, where the loan company never recovers it’s money, is very low. Due to new bankruptcy laws, it’s almost impossible for someone to get out of repaying the loan. The loaner simply goes after any source of income the borrower might have, and collects the loan amount plus more fees. In the end they almost always get the money.
True?
[/QUOTE]

I wish I could remember off-hand, but my recollection is similar to what Renob said - a pretty high default rate, around 25-30% sounds right for my store.

I did collection calls as well. If a customer failed to come in on their due date, we would deposit the post-dated check they had given us, and many would bounce. Then I was to call the person and every reference he had given us, everyday, until he agreed to come in and pay. This was to continue until either a) we no longer had any useful contact information, b) they paid, c) we would sell their loan to a collection agency, or d) they would get written off (c or d usually only after 6-9 months of collection attempts).

I only remember ever receiving a couple of bankruptcy letters, they were pretty rare. More often, I would get a few "Oh, I’ll be in next week"s, and then a disconnected number, then a “he no longer works here” from his employer, and increasingly tight-lipped friends (they were probably as annoyed with the defaulter as they were with me calling them).

I’m pretty sure I was told never to threaten criminal prosecution, but I’m not sure why. We also never did any credit reporting, or lawsuits, although we probably did use those as threats.

I’m starting to feel like the bad guy now, I hope I don’t get run out of this thread on a rail. But I did quit the job mainly because I was sick of seeing people trying their hardest to ruin their lives.

On an amusing note, there were a large number of customers who would drive up in their current year BMW or Mercedes to take out a loan, because after making their car payment they didn’t have enough cash to put gas in the tank (brings to mind some scenes in “Boiler Room”).

[Gfactor]

[QUOTE=KidScruffy]
I’m pretty sure I was told never to threaten criminal prosecution, but I’m not sure why.
[/QUOTE]

In most (I say most because I haven’t looked it up, but it’s probably all) states, bouncing this type of check isn’t a crime. Threatening criminal prosecutioncan is sometimes barred by the rules that govern payday lenders, state collection laws (the Fair Debt Collection Practices Act doesn’t apply when the creditor collects it’s own debts). In some cases threatening criminal prosecution can violate criminal laws, too. It’s not a smart thing to do, but I’ve seen cases where it has happened.

For example, they will be threatened with jail for passing a bad check, even though the law specifically says they cannot be prosecuted if the check bounces.

How We Work for Marketplace Change

Attorney General Darrell McGraw recently secured a “payback” from an Ohio payday lender that threatened criminal prosecution and committed other debt collection violations when pursuing West Virginia consumers who defaulted on loans. As a result of a recent settlement agreement secured by McGraw’s office, Ohio Valley Check Cashing and Loan of Gallipolis, Ohio, issued more than $42,000 in cash refunds and debt cancellation to 81 West Virginia consumers harmed by the company’s practices.

Office of the WV Attorney General John B. McCuskey

You can be threatened with prosecution for “hot” or “bounced” checks, even though the lender knew at the time you wrote the check that you had insufficient funds in your account—that was the reason for the loan. This is not allowed in Indiana.

http://www.in.gov/dfi/education/payday_loans.htm

[Gfactor]

Here, by the way, are a couple of state-by-state summaries of payday lending laws:

http://www.ncsl.org/programs/banking/paydaylend-intro.htm

How Do Payday Loans Work? | Credit.com

http://www.paydayloaninfo.org/states.cfm

[britisko]

If someone makes you a loan that’s illegal, either because they don’t have a license or they violate usury laws, you’re not under any obligation to pay it back.

[DrDeth]

@bob_co

My girlfriend is in the car title / payday loan business. She received a memo from corporate stating that they will risk a jail term if they do not have a waiver in every loan they make stating that the debtor is not in military service nor related to anyone that is.

Geez. I mean she can’t get honest work as a bank robber, or even Telemarketer?

[Czarcasm]

@britisko

If someone makes you a loan that’s illegal, either because they don’t have a license or they violate usury laws, you’re not under any obligation to pay it back.

The problem with not paying back an illegal loan is it usually comes with a heavy illegal penalty.

[kaylasdad99]

@britisko

If someone makes you a loan that’s illegal, either because they don’t have a license or they violate usury laws, you’re not under any obligation to pay it back.

NOW he tells me!

[septimus]

I did note that this was a zombie thread but Atlantic Monthly has published several articles on payday loans, for example, this one.

One problem with the payday-lending industry—for regulators, for lenders, for the public interest—is that it defies simple economic intuition. For instance, in most industries, more competition means lower prices for consumers. That maxim surely helped guide the deregulation of the fringe lending business in the 1990s—and some advocates still believe that further deregulation is the key to making payday loans affordable. Yet there’s little evidence that a proliferation of payday lenders produces this consumer-friendly competitive effect. Quite the contrary: While states with no interest-rate limits do have more competition—there are more stores—borrowers in those states (Idaho, South Dakota, Texas, and Wisconsin) pay the highest prices in the country, more than double those paid by residents of some other states, according to Pew. In states where the interest rate is capped, the rate that payday lenders charge gravitates right toward the cap. “Instead of a race to the lowest rates, it’s a race to the highest rates,” says Tom Feltner, the director of financial services at the Consumer Federation of America.

The small loans have large overheads and aren’t particularly profitable.

[Common_Tater]

Even credit card companies get around this by incorporating in Delaware or South Dakota, and then are able to do their business in other states. This seems scurvy. I think 23% interest sticks in my mind as a typical gouge rate. This is legal, somehow, despite many states having or had, usury laws. My USAA card has charged 6% for many years, and I get a nice rebate every year. I am a “deadbeat”. I did pay exorbitant rates to other sharks, er, card services years ago. I went all Dave Ramsey before Dave came along.

[Bryan_Ekers]

Go to pbs.org and look for a Frontline episode called “The Secret History of the Credit Card”. It touches on payday loans as well as describing why interest rate limits were abandoned in the early 1980s.

It also features a not-yet-famous Elizabeth Warren.

[Doug_K]

What if the illegal loan is nearly 9 years old?

[Corry_El]

This is a good non-preachy article about the current state of the payday loan industry.

The End of Payday Lending

There’s federal cap of 36% on loans to members of the military since 2006. Various states have (re-) tightened their usury laws so that payday lenders only operate in 36 states now v 44 in 2004, according to the article.

The article goes through various strange aspects of the economics of the industry and its interaction with regulation. If the capped lending rate is low enough and/or other regulations favor the kind of borrowers who use payday loans enough, then the business just disappears. Then those people are left with borrowing from relatives, actual loan sharks, getting the lights turned out etc.

OTOH if regulation doesn’t result in the industry shutting down, the prevailing rate tends to converge to the maximum allowed. IOW it doesn’t seem that any kind of continuous price competition occurs, there’s just a set of conditions where the industry will exist, and others where it won’t. And it seems one condition that might be necessary for it to exist is people who roll one loan over to another and get stuck paying large amounts of interest relative to what they borrow ($1/day on $500 is ~100% APR, not that bad if it’s a few day advance a few times a year, but quite bad if it’s compounding for a whole year), which the industry nominally agrees borrowers should be avoiding.

The article also mentions attempts to make regular banks cater to the needs of the same borrowers. It hasn’t worked in general as of yet. It’s a culture clash v what banks normally do to just lend without credit research and hope high credit losses are less than high rates. Plus banks make money on people not that far up the economic totem pole from payday lending customers with products like overdraft protection fees which come to be very high rates too if you calculate them as interest. Regulators can demand banks do unprofitable business with certain sectors of the public because of what the public as a whole arguably does for banks, but the history of that regulating approach is controversial.

[Some_Call_Me.Tim]

@Doug_K

What if the illegal loan is nearly 9 years old?

Alas, there’s no statute of limitations on thread necromancy.

[foolsguinea]

Wow. I thought the Marquette decision struck down all the state-level usury laws, but apparently not. It just made interstate banking immune to them.
https://en.wikipedia.org/wiki/Marquette_National_Bank_of_Minneapolis_v._First_of_Omaha_Service_Corp.