Regular readers of my column should recognize the name of Uber-Doofus Dr. Stephen Graves. I eviscerated his clumsy attack on payday lenders months ago. Now, he is back for an encore along with two asylum escapees from GWU in a brand new working paper: “Does Fringe Banking Exacerbate Neighborhood Crime Rates? Social Disorganization and the Ecology of Payday Lending”, which I have lovingly subtitled, “3 Buffoons in the Land of Make-Believe”.

The paper’s credibility should be immediately suspect for several reasons beyond Graves’ involvement. A scan of sources quoted for data within the paper would yield a list of biased papers with poor methodology riddled with sampling bias. Out of the numerous truly independent, non-biased, methodologically sound studies available, not a single one was utilized in the paper. The reason for avoiding these sources is clear: all of the real studies done contradict the biased and predetermined ideological positioning of this paper’s authors.

And make no mistake — Graves has already proven himself to be a clueless ideologue. That none of the truly great studies were cited only proves the point further.

Bias Within

One need go no further than the title to find the bias inherent in the paper. The use of the term “fringe banking” should tip readers that the authors are entrenched in an elitist mindset. They attribute legitimacy to traditional banking institutions simply by default — ignoring the fact that overdraft protection is three times more expensive than payday loans, do not have the level of disclosure associated with them that PDLs do, and that banks are the very entities that drove our economy into the ground — not PDLs.

Thus, anyone who chooses not to use a bank is relegated to the “fringe”, effectively classified by the authors as a second-class citizen. The commonly accepted definition and perception of the word “fringe” is “on the periphery” — a word that seems poorly chosen considering that some 6 million people use payday loans, and that 28 million U.S. citizens are unbanked and use check-cashing stores.

It seems the authors are more interested in marginalizing those who have made these choices, with the express purpose of setting them up as victims — and the unwitting samples for their excursion of folly.

But back to the inherent bias, evident from the beginning. On Page 2, they state, “Payday lenders provide services but at a heavy cost to some of the most financially vulnerable families.”

The costs are reasonable and appropriate for the risk involved to the lender, to meet overhead, and to account for a default rate that averages 6%. The cost is also considered acceptable by PDL customers, as evidenced by the millions of PDL transactions that occur annually in the U.S. If the cost were too high, consumers would choose other alternatives. That’s how markets work. In point of fact, bank overdraft fees are three times more expensive, yet the authors make no mention of them.

Bias…and Ignorance

“The Center for Responsible Lending reported that payday lending costs U.S.
families $4.2 billion in excessive fees, that is fees which exceed the risk posed by borrowers and the costs of similar services provided by conventional financial institutions (King et al. 2006:2,7).”

Preposterous. How can the CRL determine what fees are appropriate and present reasonable compensation for the risk undertaken? The CRL isn’t in the business of payday loans. One glance at any profit & loss statement from any payday lender would show that if fees were any lower, they wouldn’t have any profits to show. The fees, when combined with consideration for overhead and default rate, unequivocally demonstrate that they are reasonable.

“Ironically, over 75 percent of these fees cover the costs of loans taken out by
borrowers to repay debts incurred from previous payday loans, which they were unable to pay when the debt originally came due (Parrish and King 2009:11)”

False. 94% of all loans paid on time per SEC filings. This data is readily available, demonstrating author ignorance at a minimum, or willful denial of exculpatory evidence at worst.

The authors trot out the flotsam of biased and poorly conducted surveys in an effort to establish that payday lenders cluster in minority and poor neighborhoods: “Several case studies concretely demonstrate that these services are concentrated in low- income and minority-neighborhoods, though they are starting to grow in many working and middle-class neighborhoods…Minority and low-income families are more likely than other families to use fringe banking services (Caskey 1994; Hudson 1996; Karger 2005)…Alternative financial services are disproportionately (though not exclusively) located in low-income, minority neighborhoods and disproportionately serve minority customers (Fellowes 2006; Graves 2003; Li et al. 2009; Logan and Weller 2009; Temkin and Sawyer 2004)…In Denver neighborhoods where the median income is below $30,000 there is one check-casher for every 3,196 residents compared to one for every 27,416 residents in neighborhoods where the median income is between $90,000 and $120,000 (Fellowes 2006:26-28).2…In California they are eight times as concentrated in African-American and Latino neighborhoods as in white neighborhoods. Even controlling on income, poverty rate, population, education, and other socio-economic factors the racial disparity persists at 2.4 (Li et al. 2009:2). ”

None of these sources, however, conducted comprehensive studies across all U.S. cities. All demonstrated extreme degrees of sampling bias. Dr. Thomas Lehman has repeatedly demonstrated that these studies have no validity.

Poorly Chosen Data Points

So keen are the authors to make their point that they haven’t even bothered to fact-check the studies they cite. “In North Carolina there are three times as many payday lenders per capita in African American neighborhoods as there are in white neighborhoods (King et. al, 2005).”

Not only have they quoted a study from the Center for Responsible Lending (King), which has a history of touting blatantly false data to serve its own dubious agenda, but payday loans were banned in North Carolina in 2006. Why mention it at all?

And we haven’t even gotten to the study’s results yet! But wait, there’s still more to parse. The authors attempt to build a foundation for their study by suggesting that payday lenders target specific low income and minority neighborhoods — an assertion which has also been repeatedly debunked.

“Pay-day” location is negatively associated high-income zip-codes and with zip-
codes having a large proportion of full college degree holders.” Duh. Why put a store in a neighborhood that doesn’t have a need for PDLs? PDL stores go in neighborhoods where citizen are most likely to need short-term credit. That those neighborhoods have a large % of any type of population, whether it be ethnicity or number of circus performers, is irrelevant.

One must read closely to note that even though the authors state that, “In the state of Washington, the site of the current study, they are twice as likely to be located in African-American as white areas and they are also concentrated in poverty zip codes (Oron 2006)”, they bury the next line, “The analysis did not explicitly estimate geographical correlations between zip-codes and other grouping effects. However, grouping effects are indirectly accounted for in the model.”

Indirectly accounted for? What does that mean? Hint: they made it up.

Clumsy Conclusions

“There is evidence that payday lending also increases the odds of bankruptcy, difficulty making mortgage and rent payments, having to move out of one’s home, and delaying medical and dental care as well as purchasing prescription drugs (Melzer 2007). ”

Complete rubbish. If someone were in enough financial trouble so as to be in danger of defaulting on mortgages or rent, or declaring bankruptcy, a payday loan is not the item that sends them over the edge. If anything, PDLs assist people in obtaining medical care and prescriptions, which would otherwise require some other form of credit. In addition, the paper “Payday Holiday” from the NY Fed, unequivocally disputes the authors’ claim. It is the banning of PDLs that harms consumers.

“At a minimum, the availability of cash in distressed neighborhoods at readily
identifiable businesses, often open during evening and weekend hours, suggests a probable link between crime, particularly violent crime, and payday lending. Residents who use payday lenders leave these establishments often with great sums of cash in their wallets, a fact likely not overlooked by potential criminals.”

So this is the grand conclusion of this study? I’ve got a few I can share, too.

If you dress up as an ATM Machine in a bad neighborhood, you’ll get mugged.
If you operate a Burger King at an interstate exit, you’ll get a lot of truckers.
If you work at a university and never set foot in the real world, you author meaningless studies.

Have the authors even considered that all their regression analysis, spatial fiddle-dee-dee, and trivariate stupidity might have resulted in the same exact conclusion, if they simply replaced the word “bank” with “payday lender”?

Put a bank in a bad neighborhood, with cash readily available, and there just might be an increase in violent crime. Guess what? That’s one reason why banks have avoided bad neighborhoods!

Not Done Yet…

“Moreover, a concentration of payday lenders may constitute a visible sign of neighborhood decline and signal to potential troublemakers that informal social control is weak at best. ”

There is no correlation between PDLs and “visible neighborhood decline”. In point of fact, the storefront payday loan marketplace is saturated. As the market reaches maximum penetration, PDLs have started cropping up in all kinds of neighborhoods. A payday loan store opening up is no more a signal of neighborhood decline than a government grant to 3 morons suggests taxpayer dollars being put to good use.

“It is also reasonable to believe that some of the increase in crime could be attributable to
the manner in which payday lenders may lubricate the cash-only drug trade.”

Are we supposed to believe that this is a conclusion from the brainpower of not one, but three, university professors? Do they believe that the academic community, much less average people, are reading these sentences and not staring in slack-jawed astonishment that this is supposed to be a working paper of academic integrity? Does anyone else here think that these guys have never set foot in a neighborhood over-run by the drug trade?

“It is also easy to imagine that hopelessly indebted persons might turn to other forms of crime to compensate for the debt incurred to payday lenders.”

This statement is a complete myth, utterly lacking in common sense, not to mention scientific evidence. The authors seem to forget the economic devastation caused by real job loss by real people from real companies that have suffered in the economic downturn.

The Fallacy of Generalization

The lunacy of this entire study is that the authors took one major city — one¬ — and extrapolate their findings to the entire country by inference. They did not do a comprehensive survey of the entire nation and, given their rudimentary methodology, we’d expect the results to be skewed anyway. Even if the study had been conducted correctly, any conclusion would only be relevant to Seattle. There is absolutely no evidence whatsoever that Seattle’s data would in any way be representative of any other city just because the authors say it is.

For heaven’s sake, look at this sentence: “Payday lenders in Seattle do not exhibit any unusual spatial pattern as one might find in heavily ghettoized cities or cities with a significant military presence.”

There are no payday lenders in towns with military presence! The 36% rate cap instituted by Congress resulted in all those stores being shut down. That alone should indicate the laziness of these university professors.

Selectively Chosen Data? No!

Furthermore, the authors deliberately excluded any census tract that included more upscale neighborhoods, such as the neighborhood around the University of Washington — where there are 3 payday stores. It’s as if the authors think that readers are stupid — that we’ll just take their word for it that they excluded various census tracts for good reason. I’d also add that the census data they used is from 2000, rendering it obsolete.

Thus, their use of controls is faulty, limiting them to 3 models that are unrepresentative of every data point they are collecting.

“In the downtown and inner-city areas where payday lenders are more numerous (as indicated by x’s on the map), the violent crime rate is also highest (as indicated by the darkest shading on the map). The safest neighborhoods in Seattle have no payday lenders in them. The map also shows moderate violent crime rates in areas with lower densities of payday lending. Clearly, payday lenders have become a barometer of violent crime in Seattle. Where you see payday lenders, you are also more likely to witness violent crime.”

Anybody wonder if these three zeroes managed to check any of the specifics of the violent crimes in these neighborhoods? In 2006, the year they used for their study, six people were shot dead in a rampage at an upscale Capitol Hill home — not that far from 4 PDL stores. There were also the one dead and five wounded in the shooting at the Jewish Federation, right in the Central Business District where 5 PDL stores are located.

Gee, ya think maybe the data these knuckleheads used kinda maybe didn’t take into account those violent crimes? Ya think maybe those crimes had nothing whatsoever to do with payday loans?

Ya think? Just maybe?

But, hey, we’ve driven this far down Lunatic Boulevard. May as well follow it to its dead end.

“A critical public policy challenge is to preserve access to small consumer loans on an
equitable basis, and to do so in a way that does not enhance the danger to those in the community where these services are being provided.”

Since I’ve already dismantled the entire wacky conclusion, we can discount this statement as well. The solution of these three dingbats, of course, is to ban payday lenders. But as if expecting someone like me might challenge them on this absurdity — again — they offer the brilliant solution of other financial institutions providing small consumer loans. They mention that in 2001, the North Carolina State Employee’s Credit Union (SECU) created the Salary Advance Loan (SALO)”. The product has a net margin of 0.4%, and that “Michael A. Stegman concluded that this experience “shows that large institutions can market more affordable payday loan products to high-risk customers at interest rates that are a small fraction of prevailing payday loan rates”.

Well, if SECU was so effective at this plan in 2001, where’s all the other entities providing this credit?


This model doesn’t make any money, you nitwits. That’s why it’s hardly a substitute — not to mention SECU is a state employee credit union. Most people don’t belong to it. Nor do they mention that this credit union also levied ODP fees far in excess of any savings that customers realized during the same period from payday loans.

Clunky Conclusions

To conclude, the three wise men pronounce, “We suspect our findings are not unique to Seattle. But there may be variations associated with the size, demography, regional location, industrial structure, and other city characteristics that affect the linkage between payday lending and crime. Unfortunately, uneven crime data and even poorer data on payday lenders constitute a key challenge. ”

No kidding. Considering how easy it was to stick a fork in this rancid pig, doing so with any other study with equally incomplete data should be child’s play.

“The link between payday lending and neighborhood crime should, in fact, come as no surprise. How we choose to respond to that connection, if we choose to respond at all, remains to be determined. ”

Before I put an end to this exercise in foolishness, I wonder if the three caballeros ever checked out a list of Money Magazines “100 Best Places to Live”. One criterion used for this survey was a low crime rate — of 1 incident per 1,000 residents. In about ten minutes, I ascertained the following town rankings, and the number of payday loan stores in each town:

Papillion, NE (6 stores; #3 Best Place to Live)
Keller, TX (4 stores; #7 Best Place to Live)
Lake St. Louis, MO (2 stores; #9 Best Place to Live)
Mansfield, TX (9 stores; #24 Best Place to Live)

All of these towns have a higher number of payday stores per capita than Seattle.

Policy Suggestions

I call on Cal State Northridge and George Washington University to fire these three individuals. They are a rank embarrassment to the halls of advanced academia. Never mind the fact that they have attempted to pass off a blatantly biased study, with some of the worst methodology seen, as a study of academic value. The conclusions reached are those that a 7th-grader might grasp at straws for, after recognizing that nothing they’ve argued makes a lick of sense.

Charis Kubrin, Gregory Squires, and Stephen Graves represent the absolute worst of the modern-day American university. These are people who are being paid good money to conduct lazy, phony research in an attempt to buttress an ideological agenda that has absolutely no basis in fact.

That the National Science Foundation was in any way involved with this study is a travesty, tarnishing its name, and demonstrating another waste of taxpayer dollars.

I call for the immediate removal of these three individuals from their academic posts. Let them find a real job and if they come up short on bills one month, let’s see how they’re attitude towards payday lenders change when nobody else will give them a loan.

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