The editorial “California Shouldn’t Expand Payday Lending” (8/27/12) 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 Mercury News hews to misrepresentations and mendacities that have been repeatedly debunked.

The Mercury News claims that the loans, “trap vulnerable people in a cycle of debt”. 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 Mercury News 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 won’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 Mercury News also commits the logical fallacy that because Congress passed a law restricting this credit option to the military and that San Jose has voted to prohibit new stores from opening that this is “proof” that the loans are “bad”. Government passes many laws. It is fallacious to assume that if a law is passed it is automatically both moral and good for the people.

Finally, the Mercury News trots out the mistaken suggestion that a rate cap, which would effectively ban payday lenders, is a good idea. The Mercury News is apparently unaware of a study by Donald Morgan at the New York Fed, that 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 2010’s George Mason University paper by Todd Zywicki, and also defy an indirect claim by the Mercury News that by forcing lenders out of a state that consumers are better off. The Mercury News does not understand that eliminating payday loans sends customers back to the product they used before such loans existed – 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 Mercury News 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 – loans from friends or employers, credit cards, pawnbrokers, and overdraft fees – yet they repeatedly and consistently vote with their feet. Opponents are desperate to create a solution for a problem that simply does not exist.

The Mercury News 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.

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