Lobbyists for payday lenders gained the support of the Chair of the Democratic Party in their efforts to rip off the poor and keep them in debt servitude.

Many lenders are contemptible scum, particularly those who make consumer loans to poor people. Payday lenders are the worst of the worst. They provide no value to the society, and they leach the financial lifeblood out of people who foolishly use their products. They are a small step above loan sharks.

What’s so bad about payday lenders? Don’t they serve their customer’s needs? Why do they exist at all?

The need for payday lenders

Poor people are poor because they either don’t have the income to cover their basic needs, so they have no opportunity to save (See: Raising minimum wage enriches landlords in low-supply housing markets), or they don’t have the financial skills to understand the importance of saving for a rainy day.

In a recent post titled Should evictions be banned to stop hurting people’s feelings?, the reporter relayed the story of a woman who was evicted from her trailer park because she spent her entire monthly budget on a single meal of lobster at a fancy restaurant. The stunned observer of this drama quipped “What do I do with this?”

While that story is extreme, what about the low-income worker who can barely pay rent and buy food who has car problems? If this worker doesn’t keep his car in working order, he will lose his job, but he lacks the money needed to fix it. What does this person do?

Since many people live paycheck-to-paycheck with no emergency savings, situations like those crop up all the time, and most of these people use credit cards as proxy savings accounts. Rather than earning interest on their emergency savings, they pay interest on the savings they borrow from someone else. Many in the middle class live this way.

However, the poor often don’t have credit cards, and many have atrocious credit scores because they aren’t particularly careful with money. These people are high risk borrowers, so lenders charge them exorbitant fees and interest charges to solve the problems that occur when people don’t have savings. This is why payday lenders exist.

So if these lenders merely respond to the market and price risk appropriately, what’s the big problem?

The payday loan cycle

In one of the properties I manage in Las Vegas, the tenant used to consistently pay late. Each month for eight consecutive months, he paid 20+ days late. He never missed a full month, and he always paid before we had to evict him. He ended up paying 20% more in rent than he would have if he had merely paid on time. After contemplating this situation, it became apparent to me that I had become a payday lender.

Each month by the time this tenant got the money together to pay his rent, generally on the second pay period of the month, he paid it, but then he didn’t have enough money to pay again 10 days later, so he missed the next payment, and the cycle repeated. I offered him a way out.

I told him I would only charge him half a month’s rent next month if he signed an agreement that said he would forfeit his security deposit in full if he failed to pay on time, and I told him he would be promptly served an eviction notice if he was late. This was costing me half a month’s rent, but I reasoned that if he finally imploded, I would lose two month’s rent while I evicted him and found a new tenant, so it was worth the cost to help rehabilitate him. Plus, I had a little more leverage by getting him to agree to forfeit his security deposit (this probably wasn’t enforceable, but it had the desired psychological effect.)

This tenant got back on schedule, and I renewed him for another year, and he dutifully made all the payments. It could have easily gone the other way, but he made the most of his chance to catch up. Many payday loan borrowers are not so lucky or disciplined.

Once many payday loan customers fall behind, they never get out of the payday loan cycle. They end up turning over 20% or more of their income to payday lenders in perpetuity — and payday lenders like it that way. In my opinion, this is a clear example of exploitation.

I don’t know what the answer is to help these people. Some aren’t willing to help themselves. Perhaps the consequences of being trapped in perpetual debt servitude are superior to what might of happened otherwise, but I have my doubts.

Ordinarily the political left and the Democratic party would be the ones fighting against the financial interests who condone payday lending. It was the political left that passed the Dodd-Frank financial reform law that set up the Consumer Financial Protection Bureau, an organization cracking down on payday lenders. That’s what makes it astonishing that the Chair of the Democratic National Committee is in bed with payday lenders.

by Alan Pyke Mar 1, 2016 2:58 pm

Payday lenders fearing modest federal regulations will cut into their vast profit margins have a new, high-profile ally in Washington: The chairwoman of the Democratic Party. Rep. Debbie Wasserman Schultz (D-FL) is co-sponsoring legislation to delay and permanently muffle pending Consumer Financial Protection Bureau (CFPB) rules to rein in small-dollar lenders that are currently able to levy triple-digit annual interest rates on the nation’s poorest, the Huffington Post reports. The bill would force a two-year delay of the CFPB’s rules, which are still being drafted. Last spring, the agency set out a framework for its rulemaking process that indicates it is taking a more modest approach than industry critics would prefer. But the bill Wasserman Schultz signed onto would both delay those rules further, and permanently block them in any state that enacts the sort of ineffectual, industry-crafted regulatory sham that Florida adopted in 2001.

Dante doesn’t have a specific level of hell for politicians who sell out the people they represent, but perhaps we can find parts of their souls with the panders and seducers, the flatterers, the hypocrites, the falsifiers, or perhaps they earn the lowest level of traitors to their kindred, country, guests and lords. What do you think?

That bill featured “compromise language heavily influenced by industry players,” the Florida Alliance for Consumer Protection notes. Rather than a model for robust oversight that still allows low-income people to access emergency credit when they need it, the group describes the Florida approach as a series of “well-disguised loopholes” that preserve the industry’s abusive patterns. Those patterns are indisputable. While concerns about how current payday lending customers will meet emergency financial needs under the CFPB rules are sensible enough — no one can be certain how the financial industry will respond to restrictions on the current model, though advocates for the CFPB’s modest approach are confident lenders will still issue such loans at a healthy profit — there is no disputing the data motivating the agency to act. The industry often notes that a slim majority of all borrowers repay their debt on time, an indicator that many customers are taking an expensive deal and getting back on their feet quickly. But those people aren’t where lenders make money. A full 80 percent of all payday loans are renewals or rollovers of a previous loan. And the real cash comes from customers who get trapped in the near-endless “debt trap” reborrowing cycles. While only 22 percent of borrowers end up rolling their loan over seven or more times, loans in such misery cycles account for 62 percent of the industry’s business. Trapping people in lengthy repay cycles is literally the primary source of industry income.

What do you say about an entire industry that makes it’s money by keeping poor people perpetually in debt servitude? How would you feel if members of your family were caught up in this cycle?

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