The editorial â€œPayday Profitsâ€ (7/27/12) is riddled with inaccuracies regarding payday lenders. It perpetuates myths regarding the mechanisms, value, customer satisfaction rate, and repayment rate of short-term cash advances, and mischaracterizes the intent of the legislation cited in the editorial. Instead of relying on countless non-partisan, unbiased studies of the cash advance product, and the data available in the public filings of public companies in the space, the Times hews to misrepresentations and mendacities that have been repeatedly debunked.
The Times claims that, â€œStruggling workers who borrow a few hundred dollars at a time are frequently unable to pay on timeâ€. SEC filings of public lenders overtly state that 94% of loans are paid back on time, a statistic confirmed by dividing bad debt by total principal. Furthermore, the Community Financial Services Association (of which even modestly sized lenders belong to) requires members follow their Best Practices, which limits rollovers to four (or less if required by state law) and provides for an extended repayment plan with no additional fees.
The Times statement further defies market mechanics. Consumers who get burned by a product do not use it again, yet payday loans scored a 90% satisfaction rate in a 2008 George Washington University study and complaint rates so low that opponents wonâ€™t even cite them in their own studies. Were consumers deceived and misled as often as opponents claim, payday loans would not have survived twenty years in the market, as the pool of customers would long ago have been dried up. Instead, some 12 million Americans continue to use payday loans every year.
The Times also commits the logical fallacy that correlation does not equal causation, when it states, â€œstudies have shown that payday-loan customers are more likely than others to default on credit card debt, file for bankruptcy protection or lose bank accounts for abusing overdraft policies.â€ These consumers operate on the unstable edge of financial solvency to begin with, and they would experience these occurrences whether they used payday loans or not.
In fact, a study by Donald Morgan at the New York Fed showed that states that prohibited payday loans actually have a higher incidence of Chapter 7 bankruptcy filings, and that consumers were forced to more expensive credit options. These findings are consistent with other studies, such 2010â€™s George Mason University paper by Todd Zywicki, and also defy an indirect claim by the Times that by forcing lenders out of a state that consumers are better off. The Times does not understand that eliminating payday loans sends customers back to the product they used before such loans existed â€“ bank overdraft fees. These fees are more expensive and a 2010 FDIC study shows that banks take deliberate measures to increase the frequency of these fees.
Because the Times builds its editorial premise around repeatedly debunked myths, its conclusion is fruit of the poisonous tree. Payday loans are used by ordinary Americans, provided with ample disclosure and consumer protections, who understand loan terms, and who know how to comparison shop when it comes to credit. Other forms of credit exist â€“ loans from friends or employers, credit cards, pawnbrokers, and overdraft fees â€“ yet they repeatedly and consistently vote with their feet. Opponents are desperate to create a solution for a problem that simply does not exist.
Most egregious, however, is that the Times is so intent on attacking payday loans that it misses the fact that payday lenders are not even covered by the legislation. In fact, CFSA has publicly disavowed itself from advocating for the federal charter under H.R. 6139, in a 7/23 press release.
Regrettably, the Times doesnâ€™t even mention that the charter is actually designed to provide access to credit at a time when credit has been restricted. This even includes $25,000 small business lines of credit (HR 6139, Sec. 3(f)(1)(b)), a product with underwriting criteria so restrictive under the Small Business Lending Fund that it only disbursed 13% of allocated funds. If youâ€™ve ever tried to get an SBA loan, you know just how ridiculously obstructive the requirements are in order to obtain one.
The Times is years behind in its understanding of the facts behind short-term consumer credit. I encourage the editors to make use of the ample amount of research in this area and to educate its readers, and support increased credit access, rather than perpetuate myth.