Payday Loans have become a bit of a hotbed of discussion of late. Legislation wending its way through the Ohio Legislature would certainly kill the industry. Lawrence Meyers is deeply involved with the industry from the financing standpoint and agreed to talk to me about the industry and the challenges that they are facing.
Thanks for taking time to talk with me, I certainly appreciate it. As I understand it your background is journalism, but now you are involved with the Payday loan industry as part of an investment company? Maybe you could tell us a little about what your company does?
We originate and broker loans for US-based payday lenders, check cashers, and auto title lenders. Most recently, we are beginning to fund Credit Union Service Organizations, which seek to provide short-term lending solutions to credit union members at more competitive prices than traditional payday lenders do. We also offer consulting services for Texas Credit Service Organizations. We can be contacted at firstname.lastname@example.org
The type of payday lender we like to deal with are people of honesty and integrity.
By the way, we have a standing offer to any group opposed to payday loans that if they can offer a competing product for less, we will fund it. We have never received a single proposal.
The legislation currently being considered in Ohio is pretty restrictive (28% apr, 30 day term, 4 loans per year) if it gets passed into law will any Payday loan company survive?
No storefront lender in Ohio will survive. This is not fear-mongering. This is the truth. The average payday loan store lends out $75,000 every two weeks and earns $15 per hundred. However 7% of those loans default, or about $5300.
Revenue collected = $75,000 – $5,300 = $69,700 x .15 = $10,455 every two weeks, or about $21,000 per month.
Against that revenue, they lose that $5300 in defaults, and spend about $9000 on overhead, or $14,300 total. So their net profit for the month (before owner salary and taxes!) is $6,700.
A 28% APR rate cap means 28% divided by 26, or 1.07% every two weeks. Thatâ€™s $1.07 per hundred instead of $15 per hundred. That is a 93% revenue cut.
Revenue collected drops to $750 every two weeks! I donâ€™t know of any business that can survive on that, especially when defaults alone amount to $5,300.
I offer actual profit and loss statement from a variety of payday lenders to anyone who wishes to see them.
In addition, you should ask what would happen if payday loans were banned. The demand will still exist, Simon. And the only place people can go are to unregulated offshore internet lenders who charge $25 â€“ 30 per hundred, or to bounce checks at a cost of $48 â€“ 60 per check. Or people can elect not to pay a bill and suffer the consequences such as having utilities cut off.
Donâ€™t believe me? This report from the NY Federal Reserve proves that consumers fare much worse when payday loans are removed as an option.
And before you think that credit unions will fill the gap, letâ€™s remember that not everyone is able to join a credit union and that, to date, no credit union has been able to meet the demand that exists. Furthermore, even the charitable Goodwill Industries, in alliance with a credit union, has found they cannot even break-even when offering a payday loan at $10 per hundred (and that doesnâ€™t include taxes).
When I am not wearing my journalists hat I actually work with the homeless and working poor in Calgary, Alberta. A recent report claimed that something like 30,000 people here in Calgary are one paycheck away from being on the street. The Payday loan is their financial crutch, they have no credit cards, in fact they have no credit at all. If the Payday loan disappeared they would be in trouble. The Canadian system works a little different from the US (I think). Here, the deal is you borrow $100, interest is $1.50 (ish) however there is a ‘processing fee’ of $15 (ish) would this system work in Ohio? What would be your preferred resolution?
I donâ€™t think it matters whether you call it a fee or you call it interest. The point is that lenders needs to earn $15 per hundred borrowed just to make a reasonable profit based on the average default rate and overhead.
One of the criticisms leveled at the Payday loan industry is that you are ‘enablers’. As I said I work with the homeless. Many have jobs, but also have addictions, gambling is a serious one. The Payday loan gets them into a vicious cycle. They borrow, because they have just paid back the last loan and are broke. $100 becomes $200, becomes $300, etc. The chronic borrower may be good for the loan industry, but I doubt it is good for society as a whole. Any thoughts?
Well, you open up a very interesting topic here. There are several aspects to this issue.
There are philosophical and pragmatic angles to explore. Letâ€™s take them one at a time and try to formulate reasonable public policy from them.
Philosophical: I happen to be a free market Libertarian. As Milton Friedman said, and Iâ€™m paraphrasing, â€œPeople know what is best for themselves, so they should be free to choose what to do based upon what they think is bestâ€. Government should step in to curb abuses, and when the market is not behaving efficiently. Government cannot legislate behavior. They tried that during Prohibition and it didnâ€™t work at all.
One of the bogus arguments from payday loan opponents is that borrowers are â€œunsophisticatedâ€ and are â€œbeing ripped off by high APRâ€™sâ€. This group philosophically believes that government must protect them in a paternalistic manner. The problem is they base their philosophy on false premises which invalidates their position.
If thereâ€™s one thing Americans understand, itâ€™s how to shop for the best deal! To quote Dr. Thomas Lehmann from his must-read article, â€œâ€¦the borrower cares not what the “effective APR” is. The real price signal to which he responds is the flat feeâ€¦ If the value attached by the borrower to the immediate cash advance exceeds the value of the principle plus the fee two weeks hence, then the borrower will undertake the transaction, pure and simple.â€
So we conclude from a philosophical viewpoint that reasonable people are smart enough to do what they think is best for themselves. Their life, their credit, their choice.
Pragmatic: First, the chronic borrower is not necessarily good for the loan industry. It depends on your definition. If by â€œchronicâ€, you mean, â€œrepeatedly take out loans which they repayâ€, then that is a great client for the loan industry. If they have to take out a lot of loans, then they need to adjust their income or expenses in order to reduce the loans they take out, and that is THEIR responsibility. However, if you mean â€œsomeone who rolls over/renews loan repeatedly and eventually defaultsâ€, that client is NOT good for the loan industry. Hereâ€™s why:
A client who borrows $100 pays it back on time generates $15 for a lender.
A client who borrows $100 and who will eventually default would have to renew that loan seven times for the lender to generate $20 in revenue (because they lose the $100 of principal). Ask any lender which borrower he wants more. Theyâ€™ll say the first one.
Now, what is good for society? I say it is, â€œThe availability of short term credit by responsible lenders to responsible borrowersâ€. Letâ€™s parse this. A responsible lender is that lender who loans no more than a reasonable person could expect to repay in two to six weeks, to someone who does not have an unusually large number of other loans outstanding, at a rate permitted by law (or the market) where the lender makes an appropriate risk-adjusted return.
A responsible borrower is that borrower who understands these loans are intended for emergencies, who have chosen to enter into the transaction because cheaper alternatives were not available, who will alter their budget accordingly in order to pay back the loan on time, and will not claim they are a â€œvictimâ€ if they find themselves in an untenable situation.
The recent mortgage crisis is a perfect example of what happens when irresponsible borrowers meet irresponsible lenders. The borrowers foolishly decided they could buy a house with no money down using a variable interest-rate. It is THEIR fault that they took out loans they could not afford. However, it is the lenderâ€™s fault for selling them loans that they very likely knew the borrower would run into trouble on. The result is that both parties are in big, big trouble and in this case, it took the economy and a few investment banks down with them.
The people you cite in your question are in a tiny minority â€“ a group of irresponsible borrowers who are also dealing with irresponsible lenders. A responsible lender would be able to use various software tracking tools to determine how many loans a borrower had out. That lender should not only have denied them a payday loan, but 1) directed them to seek financial counseling (or offer it themselves) or, 2) consolidate those payday loans into a longer term installment loan at a lower rate to help that person out of debt (if they felt the risk-adjusted returns permitted).
But letâ€™s not forget the borrower here. They got themselves into this mess. If they couldnâ€™t pay back the loan, the solution was not to take out another one. The solution was to tell the lender they needed a payment plan. I can guarantee you that 99% of lenders would rather agree to a payment plan and hope to recover their loan, rather than go through the path of greatest resistance of going to court and garnishing wages.
So what should public policy be? I think there is an argument that says to leave the free market alone. Prices range from $15 in storefronts to $30 on the internet (per hundred). In unregulated states, we see prices settle in around $20, because thatâ€™s all consumers are willing to pay, so I think that works. Customers who end up in a cycle of debt have brought that on themselves. But once they have that bad experience, you can bet thatâ€™s the last payday loan theyâ€™ll take out, so the market weeds out the bad borrowers. It also weeds out the bad lenders, because they will bleed their own customer base dry and be forced to change their business strategy. The problem with this free market approach, though, is that it will take years to wring out the excesses.
So we need more pragmatic public policy, the cornerstones of which I think should be:
1) Payday lenders permitted in every state.
2) The fee, or interest, is a minimum of $15 per hundred. That amount could be higher and should be left to the states to decide, and should be adjusted for inflation.
3) Borrowers are permitted two rollovers/renewals of a single loan, or a maximum of 3 loans out at any time. (This will account for people who have longer term emergencies or can only pay off part of the loan come their next paycheck; it also keeps lenders from over-lending)
4) Loans cannot exceed 25 â€“ 35% of a customerâ€™s net pay.
5) After the second renewal, the client may have a 30 â€“ 60 day payment plan, but may only have that option once per year. (If they can pull the payment plan ripcord every time, then they will. That lengthens the loan maturity and cuts revenue. Plus, if they know they always have an out, they will not learn that every action requires responsibility).
6) Every state should have a mandatory class in personal finance offered in the senior year of high school.
You clearly know a lot more about the industry than I do. What am I missing?
Ask what the agenda is behind those who are opposed to payday lending. Most opponents fall into two camps.
There are some who oppose payday lending because they are uneducated and have some kind of ideological axe to grind. They place independent, analytical thought where it is subservient to unsupported, indoctrinated ideology. They have given up freedom of thought and are doing what they were once told to do. The facts are not on their side and when confronted with them, they have no rebuttal. In fact, they suspend the conversation and literally run away.
Reporters and op-ed writers are the worst offenders. Clowns like Thomas Suddes and Warren Bolton not only cite false data in their screeds, but use arguments so utterly fallacious and incomprehensible that they make the Mad Hatter seem like a brilliant logician. Unfortunately, even religious groups think they have the moral high ground. Yet when I pressed the Virginia Interfaith Center for details on why they oppose payday lenders, they fell back on the tired arguments that have already been debunked by myself and others. â€œItâ€™s usury!â€, they cry, never once understanding that the definition of usury (whether Scriptural or secular) does not support their position.
The other opponents are far more insidious because they cloak themselves in the guise of a â€œcharityâ€, when in fact they are only interested in stealing the business away from payday lenders and treating their customers worse than payday lenders do. This paper exposes the so-called â€œCenter for Responsible Lendingâ€ for what it is, and legislators should stake heed.
Hereâ€™s a question for John Paulson, a hedge-fund manager who funds the CRL: â€œHow many shares of payday lending companies are you currently holding short?â€. Hereâ€™s a question for George Soros: â€œWhat is your total investment in US Banks that charge overdraft fees?â€
Finally, if you get the chance to discuss these issues with a payday loan opponent, please ask them these questions. I guarantee they will not answer them. If they do, press them to provide proof to back up their assertions. They wonâ€™t have it.
1) Does a rate cap of 36% put payday lenders out of business?
2) If payday lenders were banned, where would people go for short-term loans?
3) If payday lenders were banned, would you loan money to people who provide you with a post-dated check? If so, at what interest rate? If not, then how can you fight to ban them yet not offer an alternative?
Lawrence, thank you for taking time out to explain the industry to us.