Counterculture McGoverniks don't bounce checks
Hector Becerra's recent Times story on Baldwin Park's efforts to stamp out payday lending businesses contains a pretty interesting reality-check passage:
Officials in some cities, including Baldwin Park, argue that the proliferation of such businesses reinforces their reputations as poor communities.
State regulators say that there are "bad apples" but that the number of complaints from consumers against these businesses are relatively low, especially considering the volume of transactions.
The amount customers can borrow at payday lending stores is limited to $255. To do so, a customer might walk in and sign over a check for $300. The payday advance store agrees to defer deposit of the check for two weeks or more. The rates are usually clearly laid out for customers, regulators say.
"The industry may not be very popular, but it's very transparent," said Mark Leyes, a spokesman for the California Department of Corporations. "Why ever risk penalties by cheating somebody out of an extra $5 when you can just do it" legally?
I take all that to mean this is another solution in search of a problem, more aesthetic disapproval disguised as public interest. Government is almost as good at quashing economic activity in the hood as it as at complaining about the lack of opportunity in the inner city.
OK, so that's just my opinion. But it also appears to be the opinion of George McGovern, the onetime repository of hope for the American left and Democratic presidential candidate back in 1972. Here's McGovern in an eye-opening Wall Street Journal op-ed, defending sub-prime lending, check-cashing shops and other favorite targets of what he calls "economic paternalism"...
With payday lending, people in need of immediate money can borrow against their future paychecks, allowing emergency purchases or bill payments they could not otherwise make. The service comes at the cost of a significant fee -- usually $15 for every $100 borrowed for two weeks. But the cost seems reasonable when all your other options, such as bounced checks or skipped credit-card payments, are obviously more expensive and play havoc with your credit rating.
Anguished at the fact that payday lending isn't perfect, some people would outlaw the service entirely, or cap fees at such low levels that no lender will provide the service. Anyone who's familiar with the law of unintended consequences should be able to guess what happens next.
Researchers from the Federal Reserve Bank of New York went one step further and laid the data out: Payday lending bans simply push low-income borrowers into less pleasant options, including increased rates of bankruptcy. Net result: After a lending ban, the consumer has the same amount of debt but fewer ways to manage it.
Since leaving office I've written about public policy from a new perspective: outside looking in. I've come to realize that protecting freedom of choice in our everyday lives is essential to maintaining a healthy civil society.
Why do we think we are helping adult consumers by taking away their options?
I've never made a study of McGovern's career, but I wonder if he isn't pointing too fine a point on it with that "Since leaving office" bit. In economic terms, it wasn't altogether clear that he was the left-leaning alternative to Nixon in 1972; a president who thought wage and price controls were the way to manage the American economy had pretty much renounced any serious claim to being a laissez-faire capitalist, and even at the time McGovern was less a statist than a maverick the hippies could grok. In any event, McGovern's defense of economic freedom is a welcome antidote to the surge of do-goodniks looking to impose one-size-fits-all fiscal solutions on people who already have few enough options.
The problem with payday lending stores is not their business practices, but the population they serve. They are likely to be poor, (im)migrant, and transient. If you are a city councilperson, trying to move your town up in the world (or prevent it from moving down), you are probably going to want to keep that population relegated to a low percentage of your overall population. Having a bunch of payday loan stores in your town pretty much says, 'we have a large, migrant population, the schools are crowded with ESL children, life is "vibrant" (noisy) here, and we have a large amount of pretty crime and vandalism". (On the plus side, it also says you can find a nanny and gardener in the area for real cheap) Of course its hypocritical to say you are trying to 'help' the poor when you are really trying to move them along. But hey.
The more troubling thing about this post is the way the sort of petty and marginalized libertarianism serves the needs of a distinctly corporatist ideology at the times. I'd say providing HUD section 8 subsidies, emergency room health care, and free school lunches for immigrant households (through their kids) distorts markets far more than cracking down on nuisances like payday lending. They enable some businesses to shift the cost of their (largely) imported workforce on to the public at large. In the absense of such subsidies we'd probably see some businesses relocating to Mexico etc, and that's a good thing. There is, for example, no reason on God's earth that LA should have a garment industry -- it is made possible by subsizing the workforce.
The resulting taxes are real limits on my freedom to do what I want with my own money-- and the time it takes to earn that money. Complaining about regulation of payday loans in a welfare state is really straining at the gnat while swallowing the camel.
Posted by: Mitchell Young | March 11, 2008 at 04:44 AM
You are exactly right when you state "more aesthetic disapproval disguised as public interest." The most amazing part of this whole fight against Payday Lending is the group who claims to be consumer 'advocates' fighting for the people. The so called Center for Responsible Lending or CRL is no more an advocate group than Starbucks would be if they complained about Dunkin Donuts' coffee. The CRL is the public relations machine putting all of this misinformation out there and the reason is because if they get rid of payday lenders, the Self-Help Credit Union that they run TAX FREE will make huge profits. Self-Help... they (the CRL) sure are helping themselves. The fact is that there are very few complaints about payday lenders reported each year to the department of commerce and attorney generals' offices (far fewer than most industries). People make the choice to get a payday advance. Hats off to McGovern and you for setting the record straight.
Posted by: Claire | March 11, 2008 at 07:17 AM
There are too many myths about the payday lending industry. For example, they serve the poor. Independent studies conducted by the Cyprus Research Group and Georgetown University debunk the myth that the poor are using these services. The average customer has an annual salary of $42,000. Not a high income, but also not poor by any measure of the word.
Most anguish for this industry is based on stereotypes that people develop (flashy storefronts, neon signs, old pawn shops) and are confirmed and made “reality” by pro-credit union groups like the Center for Responsible Lending. CRL and others have been spread open falsehoods and been getting away with it because people wanted to believe whatever CRL reported.
There are a string of published and upcoming studies by academics that show that fees charged by payday lenders are cheaper than those imposed by credit unions and banks for overdraft protection and bounced check charges. These studies show and will continue to show that payday lending is an important and necessary segment of the financial services continuum.
To McGovern's point, people are smart and hence they vote with their feet and utilize the best financial choice available. There are a good number of instances where a payday loan is not a good idea. However, when facing the reality of not being able to pay a bill, bounced check fees, or credit card cash advance charges, the option to borrow from a payday makes sense.
Posted by: Kyle Wilson | March 11, 2008 at 03:43 PM
This is absolutely right! When did we become a bunch of whiners in this country? Is this not the Great United States of America? What do you do when you don't like something? Should we go tell our mommies? NO! We should compete against it and beat it! That is what the payday lenders did, and they were winning until someone told mommy on them. If people don't like the payday loan industry, then they should compete against it. Beat them at their own game. Offer a better solution. The problem is, there may not be a better solution, so why take the best solution away? Leave it alone and hold the borrowers accountable for their actions. We need our government to worry about the war going on, and gas prices, and the thousands of other big issues, not this piddly $45 payday loan issue.
Posted by: Grant | March 12, 2008 at 02:34 PM
We need to stop blaming the payday lenders for everyone else's irresponsibility! If I borrow 100 bucks from a friend, and am not able to pay it back, I don't blame my friend for lending me the money! That is just stupid. So why are we blaming our payday lender friends for providing a great service? In a recent article by ex senator and presidential candidate George McGovern, he says, "[p]ayday lending bans simply push low-income borrowers into less pleasant options, including increased rates of bankruptcy," Mr. McGovern rightly poses the question: "Why do we think we are helping adult consumers by taking away their options?"
Later in the article, he says, "[t]he nature of freedom of choice is that some people will misuse their responsibility and hurt themselves in the process. We should do our best to educate them, but without diminishing choice for everyone else."
This is how we need to look at this topic. Leave the payday loan stores alone and look for other options. Instead of taking away payday lenders, beat them at their own game by giving consumers even more alternatives!
Posted by: Grantalupous | March 13, 2008 at 01:37 PM