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Making sausage

Wednesday, May 28, 2008

* Getting a legislative agreement on stuff like this can be tough

With painful fuel prices and a slumping housing market some say the draw to borrow money from cash advance places like these is strong.

“The average income of a person who goes to pay day lenders is probably that 25 to 35 thousand-dollar income range,” says Tony Pierce.

As Vice President of the Central Illinois Organizing Project, Pierce is a warning consumers to avoid payday loan business until loopholes in the Pay Day Reform Act of 2005 are changed. […]

But Pierce says even if it’s an emergency situation payday lenders charging upwards to 400 percent interest on a loan is equivalent to loan sharking.

* Here’s the problem with the way our recent state law was written…

The current law limits fees and interest rates on loans and how much customers can borrow, but that only applies to loans lasting 120 days. Consumer advocates claim the payday lending industry skirts the restrictions by directing customers to loans lasting 121 days and longer to charge up to 700 percent in annual interest rates.

* All they did was find another financial instrument. The House has a bill that caps annual interest rates at 70 percent and removes the time limit. But one element of the payday loan industry says that’s not the right way to go

Steve Brubaker of the Illinois Small Loan Association said borrowers won’t necessarily benefit from a lower interest rate. Customers most at risk are ones that can’t repay the debt and face staggering attorney and court costs, he said.

Brubaker favors a plan payday lenders discussed with the Senate that allows them to charge up to a 400 percent annual interest rate but restricts them from collecting attorney, court and triple damage costs. […]

“We haven’t really solved anything,” Brubaker said. “The process that we started with has been thrown out with the trash and now we have the same problem because we have consumers that have too much debt piled on top of them and lenders can still take them to court.”

* It’s easy to just say let’s do both: Cap interest rates and free borrowers from attorney and court costs.

But the reality of legislating stuff like this (in any state, not just Illinois) is that it’s always easier to kill something than it is to pass it, so you have to deal with the interest groups. There are just too many chokepoints along the way that opponents can use to stifle any change. That last reform bill was the end product of years of effort, and now it’s mostly worthless.

Often, a slow-moving system that works against change isn’t a bad thing. You wouldn’t want a completely unfettered legislative process, believe me. Lots of “change” ain’t so good.

But it’s stuff like this payday loan monster that drives some observers and participants up a wall.

One argument used on behalf of the payday loan companies is that a whole lot of people don’t have any other access to credit. So, the argument goes, we shouldn’t go so far as to put the payday loan companies out of business. The other side, of course, is that there’s plenty of money to be made in that business so there needs to be a reasonable but firm solution. 400 percent interest doesn’t look all that reasonable.

- Posted by Rich Miller        

  1. - Greg - Wednesday, May 28, 08 @ 9:20 am:

    Although perfectly accurate, it’s a bit problematic to discuss extremely short term loan rates in annualized fashion. If I borrow $500 for 2 weeks and pay 400% interest, my interest expenses are a bit under $100. Brought down to say 20%, the interest wouldn’t buy the lender a sandwich. So the rate on the loan starts looking much more like a fee-substitute than a rate (of course, if you allow this loan to go unpaid long-term, God help you.) Anyway, that’s just my “I don’t like quoting small-principal hyper short-term loans in annualized rates” message.

  2. - jj - Wednesday, May 28, 08 @ 9:24 am:

    I thought we just should let the markets decide!

  3. - Belle - Wednesday, May 28, 08 @ 10:17 am:

    What kind of business plan calls for knowingly making loans that are not recoverable? 400 - 700 isn’t an interest rate : it’s vig

  4. - cermak_rd - Wednesday, May 28, 08 @ 10:56 am:

    If the customers of these places had somewhere to go where they could get lower rates, wouldn’t they? I think legislators make a mistake when they think people are stupid and so must be protected from themselves. People are making a free choice to patronize these places. And the costs for running these places must be high otherwise wouldn’t banks and credit unions be into this market?

  5. - Dawn Dannenbring, CIOP - Wednesday, May 28, 08 @ 11:11 am:

    Cheryl Merkel of the Central Illinois Credit Union reports they have a pay day alternative with a fixed interest rate of 21%. She reports it is their _biggest money-maker_ and that includes losses. The difficulty is that it is available only to individuals who have been members for six months and whose accounts have automatic deposits. Most borrowers who find themselves in a situation needing a short term loan, don’t have six months to wait. And many individuals who work for small businesses don’t have automatic deposits. That being said, the important part is that it IS profitable to offer short term loans at interest rates proposed by SB1993 (36%) and it is purely greed on the part of lenders that translates into 400+% interest rates.

  6. - Anon - Wednesday, May 28, 08 @ 11:20 am:

    Apparently Hamos found out this is a complicated issue —- no dance in, do presser —dance out —- and will go on to her next cause. Look out Tamms

  7. - wordslinger - Wednesday, May 28, 08 @ 11:28 am:

    Phil Leotardo from the Sopranos is still in town — 3 points a week is a lot better than 700% annually.

    Since the state can regulate this, I say knock the interest down until they scream. Don’t give me the free-market static — it’s usury, and it’s been a role of organized societies all over the world since the crust cooled to control or eliminate it.

    Folks, you’re better off bouncing a couple of checks at Dominicks and riding it out. Payday loans would make an Old Testament money-changer blush.

  8. - Yellow Dog Democrat - Wednesday, May 28, 08 @ 11:37 am:

    This is a big issue, let’s take the payday loansharks’ arguments one at a time.

    Steve Brubaker of the Illinois Small Loan Association said borrowers won’t necessarily benefit from a lower interest rate.

    Um, Steve, good luck with that argument, because I don’t know anyone who believes consumers are better off paying 700% APR instead of 70% APR. I’m not sure what they taught you in economics class, but if you actually believe the words coming out of your mouth, you should call your bank today and ask them to add a zero onto your mortgage rate.

    Brubaker favors a plan payday lenders discussed with the Senate that allows them to charge up to a 400 percent annual interest rate but restricts them from collecting attorney, court and triple damage costs. […]

    “We haven’t really solved anything,” Brubaker said. “The process that we started with has been thrown out with the trash and now we have the same problem because we have consumers that have too much debt piled on top of them and lenders can still take them to court.”

    The problem with the payday loansharking industry’s argument here is that if a family can’t afford to repay the loan, then the chances of the lenders recouping the amount owed on the loan plus attorney’s fees, court costs, and punitive damages is pretty slim.

    On the other hand, if interest rates are capped at a very generous 70% — more than twice what credit card companies are allowed to charge for virtually identical loans — consumers are much more likely to be able to repay the loan and not end up in court in the first place.

    One argument used on behalf of the payday loan companies is that a whole lot of people don’t have any other access to credit.

    A whole lot of people shouldn’t have access to credit, and 700% interest isn’t really “credit”, its extortion. North Carolina banned payday loansharking back in 2001, and last time I checked, North Carolina hasn’t imploded.

    The top reason that people go to payday loansharks, and the top reason people go bankrupt, is because of health care expenses. The sharks are making outrageous profits at 700%, feeding on desperate people. At 70%, they’ll still be making a healthy profit, and if they don’t like it, they can pack up and leave. I know lots of folks who’d be happy to earn 70% interest on their investments.

  9. - Greg - Wednesday, May 28, 08 @ 11:41 am:


    Why would they be profitable at 70%? Because that rate sounds high? That’s about a buck per $100 on a typical loan. Some are public; you can read their financials.

  10. - Pot calling kettle - Wednesday, May 28, 08 @ 11:50 am:

    The irony is that the state has been doing this with its creditors for years (70 days to pay medical bills, talk of putting off the last school payment until July, etc.). The gov. and leg. leaders can relate to the need for these short term loans, they are addicted to them. The difference is that the state has a much better rate! Maybe they should tie short term loan rates to what the state pays for its short term “borrowing.”

  11. - Greg - Wednesday, May 28, 08 @ 11:52 am:

    Also, I’d like to meet these people who’d be thrilled to earn $5 on a $200 unsecured loan to someone who can’t otherwise borrow. If they like that, they must love Keno.

  12. - Ghost - Wednesday, May 28, 08 @ 12:47 pm:

    If you look at the stattistcs payday lenders have somthing like a 1% default rate. That means they have no need for 700% or 400% loans to protect against loss from the failure to pay.

    they keep saying they need to charge more do to the risk, but fincially they are not having default issues. The repyament problems they run into are long after the principal plus a lot of interest have been repaid, the victim, er borrower, has trouble repying the hug interest.

    They pray on the desperate and should be stopped. Illinois needs a real usery law. Cap interest at 20% for loans, credit cards etc. If they think the person is not worth the risk don’t loan the money. These folks are in fincaicl distress, the loan does not help them, it just exploits and piles on; high interest loans guarntee they can not get out of debt.

  13. - Fan of the Game - Wednesday, May 28, 08 @ 12:59 pm:


    It’s already regulated by the state, and the state does not define it as usury. The free market has indicated a need for such places. People go to them when they need cash. They are told the charges up front. They know what the interest rate means to them financially. They choose to accept the loan. No one has forced them to walk through the doors.

    People have the right to make their own mistakes.

  14. - Rich Miller - Wednesday, May 28, 08 @ 1:18 pm:

    ===The free market has indicated a need for such places===

    The same argument could be made by the outfit lenders.

  15. - CG - Wednesday, May 28, 08 @ 1:20 pm:

    payday loans are just another example of how low-income, working folks without positive access to mainstream banking products get fleeced. the problem of unregulated payday loans is that these usurious financial products provide payday lenders exorbitant profits, benefiting when low-income folks try to get themselves out of difficult situations. free market or not, this is unethical and state government should protect folks from this. the proof that payday lenders benefit a great deal on the backs of the working poor: in Illinois, there are 3 payday lenders to 1 every McDonald’s.

  16. - wordslinger - Wednesday, May 28, 08 @ 1:21 pm:

    Fan, the free market has identified a desire for crack, meth, child pornography, prostitution, etcetera ad finitum. Should the state step aside and let the market work its magic? Does that build a better society?

    C’mon, laissez faire? I’m sure you’ve noticed that a great number of laws — governmental and religious — and societal norms are designed explicitly to stop people from screwing up badly and yes being taken advantage of by amoral hustlers.

    The state may not define it as usury, but it is. Since we can regulate them, I repeat, beat them down to the bare minimum. They’re lucky they can do business here. As Yellow Dog pointed, the wild-eyed anti-capitalist radicals of North Carolina won’t let them.

  17. - Rich Miller - Wednesday, May 28, 08 @ 1:26 pm:

    As you can plainly see by this debate, forging a consensus on this issue ain’t easy.

  18. - Greg - Wednesday, May 28, 08 @ 1:27 pm:

    Shocking, a bunch of knee-jerk political responses…

    I picked a lender at random and looked up its cash flows:

    2007 Revenues: 410M versus 328 2006
    Net income: -32M versus 7 2006

    My God! Stop the fleecing!

  19. - Rich Miller - Wednesday, May 28, 08 @ 1:31 pm:

    Greg, the lenders’ profitability isn’t the entire point. There’s also a legit consumer protection argument.

  20. - Greg - Wednesday, May 28, 08 @ 1:35 pm:

    Rich, multiple commenters here said that these companies would be quite profitable at far-lower rates, and waxed about their profits. Neither is true. I’m just trying to keep all you politicos grounded.

  21. - Rich Miller - Wednesday, May 28, 08 @ 1:37 pm:

    Understood, but there’s more than one side to this.

  22. - wordslinger - Wednesday, May 28, 08 @ 1:42 pm:

    Greg, they’re not making money at 400% to 700% interest? Really? Perhaps they need a law to protect themselves from entering into this unprofitable business.

    Good accountants can cook the books so that it never looks like you make money. Even President Bush pointed that out the other day.

    I have to wipe off my shoes — and it ain’t raining.

  23. - Greg - Wednesday, May 28, 08 @ 2:08 pm:

    Well I can’t argue with that.

  24. - Tell me how to live - Wednesday, May 28, 08 @ 2:09 pm:

    No money bounce a check to you’re food store
    great advice! Crack meath,child pornography,prostitution,sounds like wordslinger is lost in space!Bounce a check for $100.00 you will have a fee of $27.00 from the bank and $20.00 from the merchant and the daily over draft fee for aprox. $5.00
    If you make the check good in 1 day your cost is $52.00 what does that compute to in the
    apr. world.Yellow dog has a great idea tell people
    how to run their life and if that does not work ?
    Send all who need money to New Orleans,Im sure they can recive all the help they want there.

  25. - Truthful James - Wednesday, May 28, 08 @ 2:10 pm:

    First, payday loans should be payday loans. Short term, unsecured with no more than thirty days until maturity.

    The maximum amount (including interest due at maturity) should be set at the size of the borrower’s monthly paycheck. Second, all loans should be reported over an intrnet connection among all payday loan companies. No excuses for serial payday loans (using the same pay stub over a multitude of lenders.)

    Ready credit is not a personal right under the Constitution.

    We have “pawn shops” to do secured short term loans.

    The biggest fault with Payday Loans is that it cuts into individual savings rates. No more do we use the Bohemian Payment Plan — 100% doen, nothing every month.

    The net effect of payday loans is to keep the borrower entrapped, unable to reach for the American promise of interclass mobility.

  26. - wordslinger - Wednesday, May 28, 08 @ 2:20 pm:

    Tell Me, the bounced check reference was an exaggeration meant as a joke. I’m not sure what else you’re trying to say, but believe me, I want nothing to do with running your life.

    Greg, I’m glad you see things my way now. Any time I can help, let me know. And if you ever find yourself short, I could probably float you a short-term loan at 400% to 700% interest. I know I won’t make money on it, but that’s just the kind of guy I am.

  27. - Fan of the Game - Wednesday, May 28, 08 @ 2:45 pm:

    The difference between “outfit” lenders, crack, meth, and prostitution is that none of those activities is sanctioned and regulated by the state. Payday loan comapnies are. Being regulated, they operate under the stipulations the state has set. If they can get 400% interest under those rules, then they should be able to get all they can. If the state decides to tighten those regulations, then that is OK, also.

    However, none of that negates the fact that these companies exist because people want them. Getting such loans may not be good financial judgment, but it’s their money, and they should be able to manage it as they wish under the rules. Again, no one forces them through the doors at the point of a gun. They make a decision, and they have to live with the responsibility of that decision.

  28. - Long-time Lurker - Wednesday, May 28, 08 @ 2:49 pm:

    Have any of the posters ever taken out a payday loan or even been inside a payday lending store? The employees are helpful and non-judgmental. The transactions take about 15-20 minutes the first time a borrower takes out a loan and even less time when the borrower goes back for subsequent loans. The borrowers are aware of the interest rates and the terms of the loans as the information is clearly posted inside the facility as well as in the loan documents. It is quick and easy and virtually painless, that is until it comes time to pay back the loan.

    A typical payday loan for $300 costs the borrower about $45 in fees to get $255 in cash. That’s assuming the loan is paid back in a couple weeks. Many borrowers intend to pay off the loan right away, but life interferes and it takes them longer than anticipated.

    While $45 in fees for $255 in cash is steep, for many borrowers, this is their only option and they are willing to pay the price. The borrowers don’t have another choice, like a credit card, and they don’t want to risk bouncing checks because they need to keep that account in good standing. They need to buy gas for the car so they can get to work and to purchase food for their families. It becomes a vicious cycle that is difficult to end.

    Originally, my impression of people who used payday loans was people who were living above their means, buying unnecessary items (big screen TVs, name brand clothes, etc.). Having learned more about the industry and the people it serves, I learned I was wrong. Yes, in some isolated cases there are people who take out payday loans for things most others would consider frivolous. In most instances, this is not the case.

    Likewise, I used to think the payday borrowers didn’t have access to traditional financial institutions. I have learned people who use payday lenders have accounts at financial institutions. In order to get a payday loan, the borrower must have a checking or savings account where the funds will come from when the short-term loan is due.

    Is education (of payday borrowers) the answer? Yes and no. Yes, some people need assistance with money management skills like budgeting and planning. However, simply having this knowledge will not add more money to a paycheck that is stretched to the limit.

    Here are some statistics from a Utah Consumer Lending Survey regarding payday loan borrowers:

    * All have an account with a financial institution
    * Middle class - 52% have incomes between $25,000 - $50,000
    * 94% have a high school diploma or better; over half have some college education
    * More apt to rent
    * Military families are often targeted
    * 2/3 are under age 45 - median age is 32
    * 62% are females with children under age 18 living at home
    * Employed - 50% in current job less than 3 years, 23% in current job over 5 years

    There is a need for small, short-term loans. As has been proven in Illinois, regulations simply breed creativity (e.g. terms of 121 days to skirt the limitations placed on 120 day loans). I think we need to be asking the people who use pay day loans for their input rather than guessing what they want is a lower rate or dictating what is best for them. Are regulations necessary? Yes. Does the state need to put payday lenders out of business? No. It would not solve the problem, it would just force Illinois residents to seek these type of loans on the internet or by crossing the state borders. I don’t have the answer…I wish I did.

  29. - Abe Frohman - Wednesday, May 28, 08 @ 9:37 pm:

    The payday loansharks are a cancer. But there is a market out there for legitmate and fair microlending. The Treasurer’s Office might be able to incentivize some banks to create non-usurious microlending products that are more humane and better-regulated. And we already have LINK cards out there for the really poor folks; adding some kind of microloan ability to that existing network might be a possibility. Microloans are a well-established mechanism in third world countries: one of the developers of it (in India I think) recently won a Nobel or some other huge humanitarian prize for it. In those cases, it was dirt poor women borrowing small amounts to start their own local businesses, we’re talking like 20 and 50 bucks, maybe as much as two hundred. And a phenomenal number of the loans get repaid in full! Why can’t we figure this out here in Illinois? Greed is why. Greed and grease.

  30. - Arthur Andersen - Wednesday, May 28, 08 @ 10:49 pm:

    Abe- the developer of the India microloan program (known as Grameen Bank), Muhammed Yunus, won the Nobel Peace Prize. His book, Banker to the Poor, is fascinating and a quick read.

    Long-Time Lurker has a very thoughtful post on this subject. As with a number of other things governments try to regulate by clamping down on the supply, payday loan regulations are ineffective and can move the demand elsewhere, cause the price to increase, or force suppliers and users to be “creative.” (Exhibit A: Marijuana)

    With all the self-labeled “progressives” in the GA, AA wonders why they don’t consider a progressive approach to this issue instead of the continued back-and-forth with the industry.

    For example, instead of beating Cellini over the head with a salacious audit report or selling junk jewelry on EBay, why doesn’t Alexi put his lending experience to work and design a microloan program run by banks- with State deposits as the incentive to participate.

    Insert your own joke here.

    PS: wordslinger, keep it simple with “greg.” You’ll just be frustrated otherwise.

  31. - Truthful James - Thursday, May 29, 08 @ 7:19 am:


    1. The whole microloan program is based on a sense of community. It is like a local credit union at the community level. They are vetted by local people absolutely familiar with the basis for the microloan and the borrower.

    2. Microloan programs are for mini-investments not for mini-consumption purposes. And therein lies the rub. Consumption/gratification is not a sound basis for a loan, especially when the proceeds are used to purchase fast depreciating or indeed invisible assets.

    3. Microloans are generally longer term than the “payday loan.” and have a rate of interest at or below the market for larger commercial loans.

    Let us not get into the car title payday loan business which is the eqivalent of the pawn shop business, except that the the borrower retains use of the vehicle, unless he fails to pay, of vourse.

    It is not that I frequent yjem, but I have noticed recently in my local pawn shop that the items up for sale (loans defaulted) now have shifted from tape recorders and stereos to commercial grade power tools, which tells me something about employment and the economy.

  32. - Greg - Thursday, May 29, 08 @ 7:51 am:


    Appreciate it. I do follow these companies, among others. I know you’re upset that I consider the pension repayments a bond stream, but that’s just my style. But then again, I am a simpleton.


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