RONALD MANN: I have a general idea that people that are really tight for money know a lot more where their next dollar is coming from and going than the people that are not particularly tight for money. So, I generally think that the kinds of people that borrow from payday lenders have a much better idea of how their finances are going to go for the next two or three months because it’s really a crucial item for them that they worry about every day. So that’s what I set out to test.
In a vicious cycle, the higher the permitted fees, the more stores, so the fewer customers each store serves, so the higher the fees need to be. Competition, in other words, does reduce profits to lenders, as expected—but it seems to carry no benefit to consumers, at least as measured by the rates they’re charged. (The old loan sharks may have been able to charge lower rates because of lower overhead, although it’s impossible to know. Robert Mayer thinks the explanation may have more to do with differences in the customer base: Because credit alternatives were sparse back then, these lenders served a more diverse and overall more creditworthy set of borrowers, so default rates were probably lower.)
“For the many people that struggle to repay their payday loans every year this is a giant leap forward. From January next year, if you borrow £100 for 30 days and pay back on time, you will not pay more than £24 in fees and charges and someone taking the same loan for fourteen days will pay no more than £11.20. That’s a significant saving.
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DUBNER: Well, Christopher, that defense sounds, at least to me, like pretty weak sauce. I mean, the university writing center doesn’t have as much vested interest in the outcome of my writing as an industry group does for an academic paper about that industry, right?
The President was promoting some proposed new rules from the Consumer Financial Protection Bureau that would change how payday lenders operate, or perhaps put them out of business. Which, if payday lenders are as nasty as the President makes them sound, is a good thing, isn’t it? Isn’t it?
STANDAERT: These payday loans cost borrowers hundreds of dollars for what is marketed as a small loan. And the Center for Responsible Lending has estimated that payday loan fees drain over $3.4 billion a year from low-income consumers stuck in the payday-loan debt trap.
DEYOUNG: Studies that have looked at this have found that once you control for the demographics and income levels in these areas and these communities, the racial characteristics no longer drive the location decisions. As you might expect, business people don’t care what color their customers are, as long as their money’s green.
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When Britain threw out 23 Russian diplomats in response to an assassination attempt on Russian agent Sergei Skripal, Vladimir Putin, the president of Russia and current bad boy of modern geopolitics, shrugged it off. With relations between London and Moscow so strained, the embassy didn’t have all that much to do, anyway. The cost, Putin no doubt felt, was predictable and bearable. Then on Monday, 20 additional countries, from Albania to Ukraine, joined in a coordinated expulsion campaign, with the United States accounting for 60 of the Russians sent packing. On Tuesday, NATO announced it would expel seven Russian diplomats in response to the poisoning. Suddenly, the Kremlin isn’t looking quite so comfortable. With the Skripal hit, it looks as if Putin may have finally overreached.
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In 2014 several firms were reprimanded and required to pay compensation for illegal practices; Wonga.com for using letters untruthfully purporting to be from solicitors to demand payment—a formal police investigation for fraud was being considered in 2014—and Cash Genie, owned by multinational EZCorp, for a string of problems with the way it had imposed charges and collected money from borrowers who were in arrears.
The payday lending industry argues that conventional interest rates for lower dollar amounts and shorter terms would not be profitable. For example, a $100 one-week loan, at a 20% APR (compounded weekly) would generate only 38 cents of interest, which would fail to match loan processing costs. Research shows that on average, payday loan prices moved upward, and that such moves were “consistent with implicit collusion facilitated by price focal points”.
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DUBNER: Hey Christopher. So, as I understand it, much of what you’ve learned about CCRF’s involvement in the payday research comes from a watchdog group called the Campaign for Accountability, or CFA? So, first off, tell us a little bit more about them, and what their incentives might be.
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WERTH: I was, and what he told me was that even though Hilary Miller was making substantial changes to the paper, CCRF did not exercise editorial control. That is, he says, he still had complete academic freedom to accept or reject Miller’s changes. Here’s Fusaro:
It begins like this: “Except for the ten to twelve million people who use them every year, just about everybody hates payday loans. Their detractors include many law professors, consumer advocates, members of the clergy, journalists, policymakers, and even the President! But is all the enmity justified?”
Diane Standaert is the director of state policy at the Center for Responsible Lending, which has offices in North Carolina, California, and Washington, D.C. The CRL calls itself a “nonprofit, non-partisan organization” with a focus on “fighting predatory lending practices.” You’ve probably already figured out that the CRL is anti-payday loan. Standaert argues that payday loans are often not used how the industry markets them, as a quick solution to a short-term emergency.
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A more nefarious theory is that banks currently make a lot of money on a payday-lending alternative that already exists—namely, overdraft protection. One study done by the Consumer Financial Protection Bureau found that most debit-card overdraft fees are incurred on transactions of $24 or less, and yield a median fee of $34. Why would banks want to undercut such a rich source of profits?
WERTH: It’s hard to say. Actually, we just don’t know. But whatever their incentive might be, their FOIA requests have produced what look like some pretty damning e-mails between CCRF — which, again, receives funding from payday lenders — and academic researchers who have written about payday lending.